Are you scared to invest? FEAR is your friend

Monday March 18, 2013

Are you scared to invest? Billionaire Warren Buffett's tips on how to overcome it

Financial Snacks - By Joyce Chuah

“If you’re going to be this way each time your shares drop by one sen, you might as well just sell them off!”

Fear is a common emotion in our lives and in many instances, it protects us from danger.

However, investors' fear may be more punishing than protective, writes JOYCE CHUAH.

I HAVE often said this in my seminars: “Many of us want to invest but a few of us are NOT prepared to be investors.”

The common question among investors is often “How much are we making?” True, profits are after all the benchmark we set for a successful investment plan. However, many often choose to forget that in the process of seeking profits, there will be times of unrealised losses and times of unfavourable returns due to events beyond anyone's control.

Even if it is an event which one tries to predict (such as the general election date!), many forget that such events are just temporary and not catastrophic, where total and irrecoverable loss cannot happen. The test of a successful investor is when the rubber hits the road' − that is, when faced with a loss position, can you prevent yourself from reacting and allowing fear to push you to sell your loss positions?

Fear protects us from danger, as in a fight or flight situation. But investors' fear may be more punishing than protective because it prepares us to react and changes our perspective of the external events.

Joyce Chuah

I have often said that the acronym F.E.A.R. stands for “False Evidences Appearing Real”, as fear deletes, distorts and generalises events which may are not as adverse as they seem or as we are told.

It is no wonder that Warren Buffett is one of most successful investors in the world. He practises what he termed as “inactivity” as an investor. Instead of reacting to fear, Buffett says, investors should learn to be calm and inactive.

His thoughts are best summed up in four of his famous wise quotes:

“The stock market is designed to transfer money from the active to the patient.”

“Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for 10 years.”

“My success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”

http://biz.thestar.com.my/news/story.asp?file=/2013/3/18/business/12815616&sec=business

Some of the Sage's less well-known sayings are perfect advice for times like these.

Published on 24 May 2012

Without doubt, Warren Buffett, the boss of Berkshire Hathaway (NYSE: BRK-B.US), has said some very smart things. Which, when you think about it, isn't surprising.

Because he wouldn't have made so much money in the first place if he wasn't smart, and -- let's face it -- he's a gregarious chap who's very happy to share his thoughts with those investors who have put their money into Berkshire Hathaway.

At this year's investor-fest in Omaha, for instance, Buffett and co-investor Charlie Munger once again held the stage for several hours, fielding questions from all and sundry.

Sage words

The trouble is, when it comes to the answers, many of us have selective hearing. One result of this is that some of his best known quotes are only partly reproduced.

Take, for instance, Buffett's famous remark that "our favourite holding period is forever". What it doesn'tmean is cling like a dog with a bone to the dross in your portfolio. Because Buffett can, and does, sell.

The full quote is this: "When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever."

And that, I think you'll agree, is a rather different proposition.

Another problem, frankly, is wishful thinking. Personally, I think that this famous quote is one of his worst quotations, devoid as it is of anything that an investor can actually do or influence: "Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1."

What does it mean? What are you actually supposed to take away from it? It might be a worthy aspiration, but it certainly isn't actionable advice.

Cometh the hour

But, interestingly, it turns out that three of his less well-known quotes are loaded with actionable advice. And it's advice, what's more, that plays perfectly to today's turbulent and nervous markets.

And without further ado, here they are:

• "The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they're on the operating table."
• "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces."
• "The stock market is a no‑called‑strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"

The common refrain running through all three? It's perhaps best summarised by yet another Buffett quote: "You pay a high price for a cheery consensus."

In short, you'll make the most money by sitting on your hands in the good times, and then buying good businesses in the bad times.

And if that doesn't sound like a recipe for success in today's turbulent times, I don't know what does.

Wired for failure

Now, human nature being what it is, many investors do the exact opposite.

When they're feeling buoyant and bullish, they pile in to the stock market. Look no further than 1996-1999, for instance. Or 2005-2006.

Then, when stock markets crater, they sell -- as they did in 2008 and 2009, to choose another example.

And they certainly don't buy when the market is at rock bottom. Which led to an awful lot of investors getting caught out by the meteoric rise of the FTSE 100 in the months that followed March 2009.

Looking for bargains

Hopefully, you'll already have your eyes on stocks priced at bargain levels.

Personally, I'm looking at topping up my holdings in BP (LSE: BP), BAE Systems (LSE: BA) and GKN(LSE: GKN). The news surrounding the first two, in particular, is gloomy. But the basic businesses are sound.

Or I may just throw some money at the index, via one of my tracker funds, or via Vanguard's new low-cost FTSE 100 ETF, the Vanguard FTSE 100 ETF (LSE: VUKE) -- which is now live and trading, by the way.

That's just me, of course. But if you'd like to know what Warren Buffett himself has loaded up on, then a free Motley Fool special report -- "The One UK Share Warren Buffett Loves" -- can be in your inbox in seconds.

http://www.fool.co.uk/news/investing/2012/05/24/3-buffett-sayings-that-will-make-you-money.aspx?source=uhpsithla0000002

Warren Buffett Explains Why Fear Overshadows Greed

By: Alex Crippen

Getty Images Warren Buffett

It's a good time to remember one of Warren Buffett's classic rules:  "Be fearful when others are greedy, and be greedy when others are fearful."

With so much fear in the financial markets right now, it's not a surprise that Buffett is being greedy.

He reminds Fortune's Andy Serwer that "the lower things go, the more I buy.  We are in the business of buying."  (He, of course, won't say exactly what he's buying.)

Buffett often makes a comparison to the price of hamburgers at McDonalds.  If the price tag is reduced he doesn't get worried, he buys more and feels good that he's paying less for the same hamburger than it would have cost him the day before.

He acknowledges, however, that overcoming fear is easier said than done.  "There is no comparison between fear and greed.  Fear is instant, pervasive and intense.  Greed is slower.  Fear hits."

http://www.cnbc.com/id/44108052

Nervous UK investors make a dash for cash

Thousands of nervous investors are shunning shares as the financial crisis drags on.

Investors opting for the safety of cash amid the economic debt crisis Photo: Howard McWilliam

By Emma Wall

8:03AM BST 24 Jun 2012

British investors are making a dash for cash as the eurozone turmoil shows no sign of abating. Stockbrokers, fund providers and investment managers all say that investors with Sipps (self-invested personal pensions) and Isas are keeping their powder dry by investing in cash rather than stocks and shares.

At the end of May, one leading fund broker, Bestinvest, said 75pc of the money invested by its clients went straight into cash as the uncertainty around Spanish banks and a Greek default put investors off.

Last month Fidelity's Fundsnetwork said 36pc of all investments went into cash funds, compared with an average of just 3pc, while Skandia said twice as much money was invested in cash in May as in April.

Barclays' investment management arm has also reported increased demand from investors to move money into cash. Oliver Gregson, an investment manager at the bank, said it had been a year of two halves.

"Until March we saw investors being significantly 'risk on', with large flows into equities and other assets. Japan and the US were particularly popular," he said.

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"However, in the past three months money has been coming out of markets, and deposits into cash are up."

Mr Gregson added that cash was the only asset class that could fulfil the remit set to him by many clients at the moment: not to lose capital.

Such is the market uncertainty that Barclays is allocating a substantial 45pc of low-risk investors' portfolios to cash. Move up the risk appetite scale and the proportion is reduced to 12pc for those who want moderate risk and 7pc for those who have high tolerance.

Barclays uses a mixture of floating-rate notes, short-term bonds and instant-access accounts for its clients' cash allocation – with at least half of the money in instant-access accounts for liquidity purposes.

Mark Dampier of Hargreaves Lansdown, the advisory firm, said cash was the more attractive asset for investors right now.

"While many cash accounts fail to beat the rate of inflation, at least your capital is protected if you keep it in cash," he said. "It may be an unpopular view among advisers, but the markets can lose you money."

Mr Dampier added that although fixed-rate accounts might offer a greater return on your money than the "cash park" facilities found on fund supermarket platforms, the most important thing about today's market conditions was keeping your assets liquid.

Cash parks allow investors to "park" their cash before investing it in an Isa, protecting its tax-free status and buying the individual more time to choose which fund to invest in. You can then return to the investment platform when you consider there is a worthy investment opportunity and transfer your money into a stock or fund without losing its tax-efficient status.

The cash park on the Hargreaves Lansdown platform pays 0.25pc for deposits of more than £50,000, 0.1pc for less. Fidelity Fundsnetwork's cash park facility pays Bank Rate minus 0.2 percentage points – currently 0.3pc. Bestinvest's facility pays 0.25pc on deposits of more than £20,000, but nothing for smaller sums.

Mr Dampier said: "The market moves so much at the moment that there may be a buying opportunity today that has passed in a week. If your cash is locked away in a 30-day notice account, that is no good," he said.

"Yes, you may not get an inflation-beating return in the cash park, but your capital is protected and your portfolio liquid."

While savers' fears about investing in the market are well founded, Adrian Lowcock of Bestinvest urged them to steel their nerve if they could.

"There is no doubt that the uncertainty in Europe, particularly around the Greek elections, has put investors off. It is important that, if you do put cash aside in an Isa or Sipp while waiting to invest, you actually take action and invest it. Don't forget about it," he said.

"It is human nature not to act in times of crisis. Ultimately when investing they buy high and sell low, when in fact they should be looking for the longer term and buying on weakness, not waiting for a rebound."

The euro crisis has hit this year's Isa investors hard and their caution is understandable. Last week The Daily Telegraph's Your Money section disclosed that many savers will have seen as much as 25pc wiped off the value of their fund in just three months as global economic fears intensified.

Several of the biggest and most popular funds have been hardest hit. Aberdeen Emerging Markets, for example, was one of the best-selling Isas in the run-up to the end of the tax year. But anyone who invested £10,000 in mid-March would now be sitting on a fund worth £9,156, according to Morningstar.

An investor who bought the popular JP Morgan Natural Resources fund would have seen a £10,000 investment fall by almost £2,500 to just £7,683 – which means that the fund needs to climb by more than 30pc from here just for savers to break even.

And there is little sign of relief on the horizon despite the Greek election result, which did not rule out the threat of the country exiting the euro.

Fund managers are in a cautious mood, too. A survey of 260 asset managers across the globe by Bank of America Merrill Lynch found that cash positions rose to 5.3pc in June, levels similar to those seen at the height of the financial crisis in January 2009 and the highest since March 2003 and December 2008.

Falling sipp rates

The rates paid on cash by Sipp providers have come in for criticism in the past – last year several financial advisers branded them as "unacceptable".

Investors who choose to keep Sipp allowances in cash frequently earn Bank Rate (0.5pc) or less; the average rate is just 0.75pc, according to Investec Bank.

With inflation still riding high at 2.8pc, this gives negative real returns for hundreds of thousands of pension investors.

Advisers said that on average investors held almost 10pc of their Sipp in cash. Investors are allowed to deposit £50,000 or 100pc of their salary a year into a pension, whichever is the lower. This means that potentially £5,000 a year of pension savings is guaranteed to be eroded by inflation.

The average amount of cash held in a Sipp is £39,000, Investec said, with some investors having as much as £50,000 in cash – built up over years of pension contributions.

Lionel Ross of Investec said: "The stagnant Bank Rate is having a knock-on effect on the rates paid on the cash element of Sipps. Advisers are now waking up to the need to challenge their current cash account provider to ensure that their clients are getting the highest possible returns on their deposits, which should in turn enhance overall pension fund performance.

"Given ongoing market volatility, investors, particularly those nearing retirement, are increasing their cash allocation. However, it is essential that they check that this money is held in an account paying a competitive rate of interest."

Around £90bn is held in Sipp accounts nationwide.

Not all Sipp cash rates are bad, however. Investec's own offering pays 2.25pc for sums of £25,000 or more. James Hay Partnership pays between 1.4pc and 2.9pc, and Hargreaves Lansdown said it offered fixed deals paying up to 2.5pc for Sipp holders who wanted to hold cash for three months or more.

But Darius McDermott of Chelsea Financial Services warned investors to avoid cash funds. "There are funds that invest in cash or cash equivalents but other than providing more of a 'safe haven' for your money, as they invest across more than one financial institution, they offer little incentive at the moment. Most are returning only in the region of the Bank Rate so you'd be better off in a bog-standard savings account," he said.

Moneyfacts, the financial information service, said a higher-rate taxpayer would need to find an account paying at least 4.7pc to negate the impact of tax and inflation. However, there are few accounts available that will pay this much, meaning that once people have exhausted their Isa allowance they will struggle.

Basic-rate taxpayers have more luck, with 210 accounts that overcome both the effect of inflation and the taxman's cut by paying 3.7pc or more.

Birmingham Midshires has a three-year fixed-rate bond that pays 4pc and can be opened with a deposit of just £1. Secure Trust Bank's five-year fixed-rate cash bond requires a larger deposit of £1,000 but pays an impressive 4.45pc.

The best one-year bond on the market is from Cahoot and pays 3.6pc. For instant access go to santander.co.uk – the bank's online saver account pays a market-leading 3.2pc and can be opened with £1.

http://www.telegraph.co.uk/finance/personalfinance/investing/9352043/Nervous-investors-make-a-dash-for-cash.html

Also read:

What should Prince William do with his £10m inheritance?

This is the opportunity facing you today. You could be at the forefront of the largest gains when the tide turns.

Sure, there may be volatility in the market for some months ahead. Years even. But this should NOT stop you from taking control of your financial destiny.

Your money might survive being mothballed in a bank account, gathering a feeble 1% or 2% per year. But unless you can get a pay rise or a windfall sometime soon, nobody is going to help you grow your wealth in the many alternatives available.

At some point, the markets will rise again, and – in our view – those who are already invested in rock-solid shares should make serious gains.

I'm old enough to remember all sorts of stock market crashes and periods of underperformance -- the causes and durations of which are long since lost in the mists of time.

What I do know is that markets eventually recover, and carry on heading upwards – carrying our stocks, and investment wealth, with them.

This is the opportunity facing you today.

You could be at the forefront of the largest gains
when the tide turns

The majority of private investors are too scared by what happened in the last few years to invest right now.

But looking backwards and doing nothing is not the way to take control of your financial destiny.

Think of it this way. You'd be crazy to drive your car whilst spending all of your time looking in the rear-view mirror.

And yet many people invest like this. They assume that because 2011 was a tough year for the world's stock markets, 2012 will be just as bad.

But the financial world doesn't work that way, especially the stock market. The past is... well... history.

The tide turns when everyone least expects it. The more obvious the market's direction seems, the greater the odds that you're wrong.

As Floyd Norris of The New York Times has pointed out that, for the past half-century, the market has moved in 15-year cycles where returns swing from spectacular to near-zero.

In 1964, the average real return over the preceding 15 years was a stellar 15.6% a year.

Then it flipped. By 1979, the previous 15 years produced a negative real return.

Then it flipped again.

By the late 1990s, 15-year average returns were near record highs. And again – as of the end of last year, stocks returned a measly 3% a year over the last 15 years.

The trend is clear: After booms come busts, and after busts come booms.

Sound crazy? It sounded crazy in the early 1980s, too.

So did the notion 10 years ago that we were about to face a decade of stagnation.

That's always how these things work. After booms come busts, and after busts come booms. Happens over and over.

Of course, history isn't guaranteed to repeat itself. And what drives stocks to a decade of low or high returns isn't the calendar: it's valuations. Stocks do well after they're cheap, and poorly after they're expensive. So the real question shouldn't be how long stocks have been stagnant, but whether they're cheap.

And right now we believe they are.

https://www.fool.co.uk/shop/secure/order-01.aspx?dc=ccd70129-62cb-417b-a440-99de3c029d1a&sf=0512_hb_plndr_L1&pd=07&source=u74spoeml0000189

How rock-bottom airline shares made bold investors 400% gains

How rock-bottom airline shares
made bold investors 400% gains

After the September 11 terrorist attacks, shares in airlines were understandably out of favour.Boeing's shares hit rock bottom about a year after 9/11. But it was sentiment and fear driving the share price so low, not the fundamentals of the company. A bit of clear analysis would have told you that was a buy opportunity.

If you'd bought Boeing shares in 2002, you would have watched them soar to FOUR TIMES their value within 5 years.

The rule is, buy when share prices are depressed. Warren Buffett puts it this way...

"When hamburgers go down in price, we sing the Hallelujah Chorus in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying except stocks. When stocks go down and you can get more for your money, people don't like them."

When the mood is pessimistic, and sentiment – not facts – drives prices down, then that's the time to buy.

https://www.fool.co.uk/shop/secure/order-01.aspx?dc=ccd70129-62cb-417b-a440-99de3c029d1a&sf=0512_hb_plndr_L1&pd=07&source=u74spoeml0000189

"Be greedy when others are fearful."

The Buffett Buy Signal
You'd Be Foolish to Ignore

Warren Buffett is one of the world's most famous and successful investors. He lives by this maxim: "Be greedy when others are fearful."

Another investing legend, John Templeton, said:"The time of maximum pessimism is the best time to buy."

We could go back even further. Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, said: "The time to buy is when there's blood in the streets."

Look around you... eurozone in crisis... top execs stuffing their bank accounts with undeserved bonuses... ordinary people angry with falling living standards and pay freezes... riots on the streets of Athens... looting and violence across London last summer.

You don't need me to tell you that 2011 was a shocker...

In the European debt storm, the markets took a battering. The FTSE 100 slumped by 10% in August to a low of 4,944 points... In November alone, £864 million poured from equity funds, the biggest outflow since 1992.

Today, for many investors, the aftermath of the storm looks grisly.

The eurozone is still in turmoil. At 3.6%, UK inflation remains painfully high¹². UK Government debt stands at over £1 trillion... a whopping 66% of the total economy¹³... while we consumers owe around £1.5 trillion.¹⁴

No wonder many private investors won't go near the stock market...

The herd is running scared.

Earlier this year, Warren Buffett seemed to think that once again it was time to be greedy. And there was one UK blue chip in which he made a significant bet. It's the supermarket chain Tesco. Buffett first bought into this company in 2006. In January 2012, he invested another £500m¹⁰ after the company issued a profit warning, which saw the shares dive by 20%.

Tesco has taken a hit – but the likes of Warren Buffett are moving in on what could be a bargain

This is without doubt one of those periods of pessimism that gets investors like Buffett excited. And it's the mood of the crowd that's driving many share prices down to lows we think they don't deserve.

This could mean you have an opportunity to snap up some serious bargains – companies with solid fundamentals, tasty prospects for growth and ridiculously cheap share prices.

https://www.fool.co.uk/shop/secure/order-01.aspx?dc=ccd70129-62cb-417b-a440-99de3c029d1a&sf=0512_hb_plndr_L1&pd=07&source=u74spoeml0000189

Warren Buffett: Timing is Everything

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

Source: Letter to shareholders, 2004

Read more: http://www.businessinsider.com/warren-buffett-quotes-on-investing-2010-8?op=1#ixzz1oXFcQIec

Buying Time

When the market hits its low, true value investors feel that harvest time has arrived.

"The most beneficial time to be a value investor is when the market is falling," says institutional manager Seth Klarman.  There are plenty of companies ripe for the picking.

In the summer of 1973, when the stock market had plunged 20 percent in value in less than 2 months, Warren Buffett told a friend, "You know, some days I get up and I want to tap dance."

Unfortunately, this is the time when investors are feeling most beat up by the markets.  Fear and negative thinking prevail, and anyone who has faced down a bear knows how paralyzing fear can be.  This, at the depths of a bear market, is the time to buy as many stocks as are affordable.

Value bargains aren't found in strong market.  A good rule is to examine stock markets that have reacted adversely for a year or so.

Undervalued stocks quite often lie dormant for months - many months - on end.  The only way to anticipate and catch the surge is to identify the undervalued situation, then take a position, and wait.

Benjamin Graham: "Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience."

Warren Buffett on investing in a climate of fear

Warren Buffett on investing in a climate of fear 

– a Q1 letter to send clients

April 12, 2010

"I have no idea what the stock market will do next month or six months from now. I do know that, over a period of time, the American economy will do very well and investors who own a piece of it will do well."

Warren Buffet in an interview on CNBC on Friday, October 10, 2008

After the market roller coaster of 2008 and 2009, the first quarter of 2010 has been blessedly uneventful by comparison. The US markets gained about 5% in the first quarter, the best start to the year since 1998 - the US market ended up about 60% from its lows of a year ago. Canada did well also, up almost  3% in the first quarter.

That said, there is still a cloud of uncertainty that is making many investors nervous.

Causes for concern ... and for optimism

Even with the stabilization of the global economy, there's no shortage of short term causes of concern:

... continued questions on the direction and timing of the economic recovery in the United States and Europe and the timing of higher interest rates

... US housing prices that are staying stubbornly low and unemployment levels in North America and Europe that are stubbornly high.

... and in late March the deputy director of the International Monetary Fund made headlines as he talked about the need for advanced economies to cut spending in order to reduce deficits. 

Here's a New York Times article about the IMF's views: http://www.nytimes.com/2010/03/22/business/global/22imf.html?scp=1&sq=lipsky%20imf&st=cse

The good news is that there are offsetting positives, even if the media headlines that feature them aren't quite as prominent:

... on Monday March 22, the Wall Street Journal ran a story about dividend hikes as a result of rising profits by US companies. The article also mentioned that cash on hand on US corporate balance sheets was at the highest level since 2007.

... on the same day the Financial Times ran a similar story about dividend increases in Europe

... and there's growing attention to the impact that Germany's emphasis on manufacturing productivity had in sheltering it from the worst of the economic downturn - and questions about whether  this might be a model for other countries. In March the Economist ran a 14 page feature on how Germany positioned itself for success.

Forecasting the future

Whether you choose to focus on the positives or the negatives, there's broad agreement that the steps taken by governments stabilized the financial crisis that we were facing a year ago - and there is almost no talk today of a global depression.

So the issue is not whether the economy will recover, but when and at what rate -and whether there might be another stumble along the way.

If you look for investing advice in the newspaper or on television, the discussion tends to revolve around what stocks will do well in the immediate period ahead ... this week, this month, this quarter.

We refuse to participate in that speculation - when it comes to short-term predictions, whether about the economy or the stock market, there's one thing we can say with virtual certainty: Most of them will be wrong.  Quite simply, no one has a consistent track record of successfully forecasting short term movements in the economy and markets.

Which is why in uncertain times such as today, one of the people I look to for guidance is Warren Buffett.

Advice from Warren Buffett

In an investment industry poll a couple of years ago, Warren Buffett was voted the greatest investor of all time; among the runners up were Peter Lynch, John Templeton and George Soros.

Buffett's returns are a testimony to the power of compounding.  From 1965 to the end of 2009, the growth in book value of his investments averaged 20% annually. As a result, $10,000 invested in 1965 would currently be worth a remarkable $40 million. By contrast, that same $10,000 invested in the US stock market as a whole, returning just over 9% during this period, would be worth $540,000.

In one of his annual letters to shareholders, Warren Buffett wrote that it only takes two things to invest successfully - having a sound plan and sticking to it. He went on to say that of these two, it's the "sticking to it" part that investors struggle with the most. The quote at the top of the letter, made at the height of the financial crisis, speaks to Buffett's discipline on this issue.

I try to apply that approach as well - putting a plan in place for each client that will meet their long term needs and modifying it as circumstances warrant, without walking away from the plan itself.

Boom times such as we saw in the late 90's and scary conditions such as we've seen in the past two years can make that difficult - but those conditions can also represent opportunity. Indeed, in his most recent letter to shareholders Buffett wrote that "a climate of fear is an investor's best friend."

Five core principles that shape our approach

On balance, I share Warren Buffett's mid term positive outlook, not least because many of the positives that drove market optimism two years ago are still in place, among these the continued emergence of a global middle class in developing countries like Brazil, China, India and Turkey. This educated middle class will fuel global growth that will make us all better off.

In the meantime, here are five fundamental principles that we look for in money managers and that  drive the portfolios that we believe will serve clients well in the period ahead.

1.     Concentrate on quality                                          

 The record bounce in stock prices over the past year was led by companies with the weakest credit ratings. Some have referred to last year as a "junk rally", with the lowest quality companies doing the best.  That's unlikely to continue- that's why I'm focusing my portfolios on only the highest quality companies, those best able to withstand the inevitable ups and downs in the economy.

2.     Look to dividends

Historically, dividends made up 40% of the total returns of investing in stocks and have also helped provide stability through market turbulence. Two years ago, quality companies paying good dividends were hard to find - one piece of good news is that today it's possible to build a portfolio of good quality companies paying dividends of 3% and above.

3.     Focus on valuations

Having a strong price discipline on buying and selling stocks is paramount to success - history shows that the key to a successful investment is ensuring that the purchase price is a fair one. Investors who bought market leaders Cisco Systems, Intel and Microsoft ten years ago are still down down 40% to 70%, not because these aren't great companies but because the price paid was too high.

4.     Build in a buffer

 Given that we have to expect continued volatility, we identify cash flow needs for the next three years for every client and ensure these are set aside in safe investments. That buffer protects clients from short term volatility and reduces stress along the way.

5.     Stick to your plan

In the face of economic and market uncertainty, another  key to success is having a diversified plan appropriate to your risk tolerance - and then sticking to it. It can be hard to ignore the short-term distractions, but ultimately that's the only way to achieve your long term goals with a manageable amount of stress along the way.

In closing, let me express my thanks for the continued opportunity to work together.  Should you ever have any questions or if there's anything you'd like to talk about, my team and I are always pleased to take your call.

Name of advisor

P.S. If you're interested, here's a link to Warren Buffett's 2010 letter to investors:                       http://www.berkshirehathaway.com/letters/2009ltr.pdf

http://clientinsights.ca/article/warren-buffett-on-investing-in-a-climate-of-fear-a-q1-letter-to-send-clients

A Q1 letter to send clients - Warren Buffett on investing in a climate of fear 

An important note:

Over the past 18 months, the quarterly templates for a client letter have ranked among the most popular features on this site.

Research with investors has identified the five elements of an effective client letter. It has to be:

1.     balanced in outlook

2.      candid

3.     short enough for clients to get through comfortably but long enough to be substantial

4.      supported by facts

5.     indicative of the advisors voice and personality

On this last point, if you like the basic structure of the letter, you MUST take the time to customize it to your own philosophy and outlook - I can't emphasize this strongly enough.