Wild Week

Whitney Tilson’s email to investors discussing the wild week


1) What a wild week! The sharpest, fastest bear market in history – the S&P 500 Index was down 35.2% from its closing high on February 19 to its intraday low on Monday – was followed by the sharpest, fastest move back into bull market territory in history, as the index rallied 20% from that point through yesterday's close. Both Tuesday and the past three days were the best for the Dow in 87 years.

I can't recall such a violent upward move in my entire career. I checked the bounces off the bottoms reached on October 10, 2002 and March 6, 2009 (the closing low was March 9, but the intraday low was on March 6) and, in the four days afterward, the S&P 500 rose by "only" 12.5% and 12.3%, respectively. And going back to the Dow's 22.6% plunge on Black Monday on October 19, 1987, while it rose 5.9% the next day, it then trickled downward for another month and a half – going well below its Black Monday close.

I rarely have opinions about where I think the market in general is going, especially in the short term, as this isn't my area of expertise. I find it a far better use of my time to study particular companies and industries to try to develop proprietary insights.



But Monday was one of those rare times. In my e-mail that day, I wrote:

..... why we've come to the firm conclusion that this is the absolute best time to be an investor in more than a decade. To borrow a phrase from one of my friends, "we're trembling with greed" right now.



................



If this doomsday scenario doesn't come to pass, stocks will likely go nuts.

So after the big move in the past three days, what's my thinking? Over the next few months, I no longer have a strong feeling. I think there's a bell curve of possible outcomes, and we're right in middle of it.

But if you ask me where we will be in a year (which is the absolute minimum time horizon I tend to consider) – I think odds are at least 75% that stocks will be higher.




2) In yesterday's e-mail, I wrote:

I just completed a report on [the coronavirus crisis] that I think is the best work I've ever done.

It's broken into three parts:

1. Why I'm Optimistic That We'll Soon Stop the Coronavirus

2. The Five Reasons We're Bullish on Stocks Right Now

3. 10 Stocks to Buy to Profit from the Coming Market Upturn

As it becomes clear that we've controlled the spread of the virus and know exactly where the outbreaks are – which could happen as soon as a couple of weeks from now – we can start bringing our economy back to life.


https://www.valuewalk.com/2020/03/ackmans-greatest-trade/

Stay in Touch with the Market: Opportunities and Dangers

Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today. This is because the financial markets are prolific creators of investment opportunities. 

• Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets. 
• Today with so many market participants having little or no fundamental knowledge of the businesses their investments represent, opportunities to buy and sell seem to present themselves at a rapid pace. 
• Given the geopolitical and macroeconomic uncertainties we face in the early 1990s and are likely to continue to face in the future, why would abstaining from trading be better than periodically reviewing one's holdings? 

Being in touch with the market does pose dangers, however.

• Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short-term-oriented trading. 
• There is a tendency to be swayed by recent market action, going with the herd rather than against it. 
• Investors unable to resist such impulses should probably not stay in close touch with the market; they would be well advised to turn their investable assets over to a financial professionaL 

Another hazard of proximity to the market is exposure to stockbrokers.

• Brokers can be a source of market information, trading ideas, and even useful investment research. 
• Many, however, are in business primarily for the next trade. 
• Investors may choose to listen to the advice of brokers but should certainly confirm everything that they say. 
• Never base a portfolio decision solely on a broker's advice, and always feel free to say no.

Warren Buffett: Volatility in the Market

Market Volatility

What should you do?

If you own a farm or an apartment, you do not get a quote on them every day or every week.

The value of a business depends on how much in terms of cash it delivers to its owners between now and judgment day and I don't think it changes in 10% in a 2 months period if you are looking at it as a business.

Anything, I mean, anything can happen in the market; that is why don't borrow money against any securities.  Markets don't have to open tomorrow.  You can have extraordinary events.


You can get some of the instruments that people don't understand very well that has a lot of fire-power.

It is important to have a long-term investment horizon when getting started in stocks.

Time is on Your Side

Just as compound interest can dramatically grow your wealth over time, the longer you invest in stocks, the better off you will be.

With time,

• your chances of making money increases, and 
• the volatility of your returns decreases.

The Longer you invest, the Lower the Volatility of your Returns

The average annual return for the S&P 500 stock index for a single year has ranged from -39% to +61%, while averaging 13.2%.

After holding stocks for 5 years, average annualised returns have ranged from -4% to +30%, while averaging 11.9%.

If your holding period is 20 years, you never lost money, with 20-year returns ranging from +6.4% to +15%, with the average being 9.5%.


These returns easily surpass those you can get from any of the other major types of investments.




The Importance of having a Long-term Investment Horizon in Stocks

Again, as your holding period increases,

• the expected return variation decreases, and 
• the likelihood for a positive return increases.  

This is why it is important to have a long-term investment horizon when getting started in stocks.





Summary


While stocks make an attractive investment in the long run, stock returns are not guaranteed and tend to be volatile in the short term.


We do not recommend that you invest in stocks to achieve your short-term goals.


To be effective, you should invest in stocks only to meet long-term objectives that are at least 5 years away.


The longer you invest, the greater your chances of achieving the types of returns that make investing in stocks worthwhile.




Additional notes:

Though stocks typically perform best over the long term, there can be extended periods of poor performance.  

For example, the DJIA peaked in 1966 and didn't surpass its old high again until 16 years later in 1982.  But the following 20 years were great for stocks, with the Dow increasing more than tenfold (10x) by 2002.

Volatility of the Stock Market

One way of reducing the risk of investing in individual stocks is by holding a larger number of stocks in a portfolio.

However, even a portfolio of stocks containing a wide variety of companies can fluctuate wildly.

• You may experience large losses over short periods.
• Market dips, sometimes significant, are simply part of investing in stocks.

Yearly Market Fluctuations

The yearly returns in the stock market also fluctuate dramatically.  

The highest one-year rate of return of +67% occurred in 1933, while the lowest one-year rate of return of -53% occurred in 1931. 

It should be obvious by now that stocks are volatile, and there is significant risk if you CANNOT RIDE OUT MARKET LOSSES IN THE SHORT TERM.




The Bright Side of this Story

But don't worry; there is a bright side to this story.

Despite all the short-term risks and volatility, stocks as a group have had the highest long-term returns of any investment type.  

This is an incredibly important fact!

• When the stock market has crashed, the market has always rebounded and gone on to new highs. 
• Stocks have outperformed bonds on a total real return (after inflation) basis, on average.  

This holds true even after market peaks.

If you had deplorable timing and invested $100 into the stock market during any of the seven major market peaks in the 20th century, that investment, over the next 10 years, would have been worth $125 after inflation, but it would have been worth only $107 had you invested in bonds, and $99 if you had purchased government Treasury bills.

In other words, stocks have been the best-performing asset class over the long term, while government bonds, in these cases, merely kept up with inflation.

This is the whole reason to go through the effort of investing in stocks.

• Even if you had invested in stocks at the highest peak in the market, your total after-inflation returns after 10 years would have been higher for stocks than either bonds or cash.
• Had you invested a little at a time, not just when stocks were expensive but also when they were cheap, your returns would have been much greater.

Volatility of Single Stocks

Volatility of Single Stocks

Individual stocks tend to have highly volatile prices.

The returns you might receive on any single stock may vary wildly.



Best Performing Stocks

If you invest in the right stock, you could make bundles of money.

• For instance, Eaton Vance, an investment-management company, has had the best-performing stock for almost 25 years.  If you had invested $10,000 in 1979 in Eaton Vance, assuming you had reinvested all dividends, your investment would have been worth $10.6 million by December 2004.

Worst Performing Stocks

On the downside, since the returns on stock investments are not guaranteed, you risk losing everything on any given investment.

• There are hundreds of dot-com investments that went bankrupt or are trading for a fraction of their former highs in early 2000.

• Even established, well-known companies such as Enron, WorldCom and Kmart filed for bankruptcy and investors in these companies lost everything.

All Stocks in Between these two Extremes

Between these two extremes is the daily, weekly, monthly and yearly fluctuation of any given company's stock price.

• Most stocks won't double in the coming year, nor will many go to zero.

• But the average difference between the yearly high and low stock prices of the typical stock on the NYSE is nearly 40%.

Stocks that don't perform over Long Time

In addition to being volatile, there is the risk that a single company's stock price may not increase significantly over time. 

• In 1965, you could have purchased General Motors' stock for $50 per share (split adjusted).  By May 2005 (4 decades later), your shares of General Motors would be worth only about $30 each.  Though dividends would have provided some ease to the pain, General Motors' return has been terrible.  
• You would have been better off if you had invested your money in a bank savings account instead of General Motors' stock.

All your Eggs in a Single Basket

Clearly, if you put all of your eggs in a single basket, sometimes that basket may fail, breaking all the eggs.

Other times, that basket will hold the equivalent of a winning lottery ticket.

Small losses versus Big losses. They are different stories.

Small Losses

Small hits or losses are alright, so long as they aren't persistent or don't last forever.  That said, we cannot take 10% or even 5%, losses ongoing and forever.  Even if we under-perform the markets by a few percentage points, we can lose out on considerable gains once the power of compounding sets in.


Big Losses

Big losses are a different story.  We can tolerate the 10% corrections and even ignore the 10% twitter, but if we are exposing ourselves to 50% losses on individual investments - or worse, on substantial portions of our portfolios - look out!  It will take a lot to turn that ship around and get it back to where it went off course.


Fluctuations, minor corrections and bear market

There is a big difference between fluctuations, minor corrections (considered to be 10% pullbacks by most market professions), and an all-out bear market, usually considered a plunge of 20% or more.  The prudent investor senses the difference between fluctuations, corrections and the more destructive bear markets.


The high cost of an untimely hit.

Volatility can be expensive, especially, if it goes beyond normal investment noise into creating a significant downturn, especially at the beginning of an investing period.

The principles and effects of compounding makes a difference not just how much we succeed but also WHEN we succeed in the markets.

The general principle is that the more we can earn SOONER - to unleash the power of compounding to a greater degree over a longer time - the better off we are.

Conversely, if our investment capital takes a hit in the early going, it takes a lot just to get back to even, let along to get ahead.

CONCEPT OF "RISK"

The opposite of risk is safety.

Are good bonds less risky than good preferred stocks?

Are good bonds and good preferred stocks less risky than good common stocks?

Are common stocks, thus, not "safe"?



RISKS IN VARIOUS ASSETS

1. BOND:  A bond is clearly unsafe when it defaults its interest or principal payments.
2. STOCK:  Similarly, if you have bought a preferred stock or a common stock with the expectation that a given rate of dividend will be continued, then a reduction or passing of the dividend means that it is unsafe.  Another risk is, if there is a fair possibility, that the holder may have to sell at a time when the price is well below cost.
3. PROPERTY:  The man who holds a mortgage on a building might have to take a loss if he were forced to sell it at an unfavourable time.  In the judging the safety or risk of ordinary real-estate mortgages, the only criterion being the certainty of punctual payments.
4. BUSINESS:  The risk attached to an ordinary commercial business is measured by the chance of its losing money, not by what would happen if the owner, were forced to sell.

MARKET PRICE DECLINES AND THE STOCK INVESTOR'S WELL SELECTED PORTFOLIO

A bona fide investor does not lose money merely because the market price of his holdings declines; the fact that a decline may occur does not mean that he is running a true risk of loss.

If a group of well-selected common-stock investments shows a satisfactory over-all return, as measure through a fair number of years, then this group investment has proved to be "safe."

During that period its market value is bound to fluctuate, and as likely as not it will sell for a while under the buyer's cost.

If that fact makes the investment "risky" it would then have to be called both risky and safe at the same time.



CONCEPT OF RISK IS SOLELY A LOSS OF VALUE

This confusion may be avoided if we apply the concept of risk solely to a loss of value which either
(a) is realized through actual sale or
(b) is ascertained to be caused by a significant deterioration in the company's position.

Many common stocks do involve risks of such deterioration.

But it is our thesis that a properly executed group investment in common stocks does not carry any substantial risk of this sort and that therefore it should not be termed "risky" merely because of the element of price fluctuation.



MARKET PRICE DECLINE

• The prices of all stocks may decline 
• In fact, other than Savings Bonds, all financial assets' prices can decline.  
• Stocks then to decline to a greater extent than bonds and preferred shares.
• This decline may be of a cyclical and temporary nature and the holder is also unlikely to be forced to sell at such times. 
• Market price decline is not a true risk (in the useful sense of the term).

The concept of risk. Risk = Loss of VALUE

We should apply the concept of risk solely to a loss of value which either

(a) is realized through actual sale or

(b) is ascertained to be caused by a significant deterioration in the company's position or fundamentals.  (Many common stocks do involve risks of such deterioration.)

YOUR PORTFOLIO OF STOCKS AND MARKET PRICE FLUCTUATIONS

A carefully selected and constructed portfolio in common stocks does not carry any substantial risk of this sort, that is, the risk of loss of value.

Therefore, it should not be termed "risky":

• merely because of the element of price fluctuation, which maybe of a cyclical and temporary nature, and,
• moreover, the holder is unlikely to be forced to sell at such times.

Market price fluctuation is not risk; it is the friend of the value investors.

Market Fluctuations as a Guide to Investment Decisions (2) - Timing or Pricing

Stock Brokers and the Investment Services

As a matter of business practice (or perhaps of thorough-going conviction), the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts.

The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking.

In many cases, he pays attention to them and even acts upon them.  Why?

Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market and because he feels that the brokerage or service forecast is at least more dependable than his own.

This attitude will transform the typical investor into a market trader and will bring the typical investor nothing but regrets.



Timing in a Bull Market

During a sustained bull movement, when it is easy to make money by simply swimming with the speculative tide, he will gradually lose interest in the quality and the value of the securities he is buying and become more and more engrossed in the fascinating game of beating the market.

He begins by studying market movements as a "commonsense investment precaution" or a "desirable supplement to his study of security value"; he ends as a stock-market speculator, indistinguishable from all the rest.


Market Forecasting (or Timing)

A great deal of brain power goes into this field.

Undoubtedly some people can make money by being good stock-market analysts.

But it is absurd to think that the general public can ever make money out of market forecasts.

There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.


Timing and the Speculator

Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry.

The idea of waiting a year before his stock moves up is repugnant to him.



Timing and the Investor

But a waiting period of such, is of no consequence to the investor.  

• What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy?
• He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income.

Timing is of little value to the investor unless it coincides with pricing, that is, unless it enables him to repurchase his shares at substantially under his previous selling price.

Market Fluctuations as a Guide to Investment Decisions (1) - Timing or Pricing

Common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices.

Should the intelligent investor be interested in the possibilities of profiting from these pendulum swings?

There are two possible ways he may try to do this:

• the way of timing and 
• the way of pricing.

Timing

By timing, the investor try to anticipate the action of the stock market - to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward.


Pricing

By pricing, the investor endeavours

• to buy stocks when they are quoted below the fair value and 
• to sell them when they rise above such value.

A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks.

This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.


Pricing or Timing?

The intelligent investor can derive satisfactory results from pricing of either type.

If he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's financial results.

A sound mental approach towards stock fluctuations (5): Market Declines and Unsuccessful Stock Investments

Market declines and unsuccessful stock investments

In the case of market declines and unsuccessful stock investments, there is a vital difference here between temporary and permanent influences.

The price decline is of no real importance:

• unless it is either very substantial - say, more than a third from cost - or 
• unless it reflects a known deterioration of consequence in the company's position.

In a well-defined bear market, many sound common stocks sell TEMPORARILY at extraordinarily low prices. 

It is possible that the investor may then have a paper loss of fully 50% on some of his holdings, without any convincing indication that the underlying values have been permanently affected.



The Price can be Extraordinary in a Recession or Bear Market

In the business recession and bear market in the past, there were times, an outstanding business was considered in the stock market to be worth less than its current assets alone - which means less as a going concern than if it were liquidated.  That price was extraordinary.

Why?  The reasons maybe many.  

• The reasons were justified in some.   
• Yet, in some, the reasons were exaggerated and eventually groundless fear; 
• while others were typical of temporary influences.

An example:  

An investor bought ABC in 1987 at say, 12 times its five-year average earnings or about 80.  The share price declined to 36 soon after. 

What was the implication of the share price to him?  

• We cannot assert that the decline to 36 was of no importance to the investor.  
• The investor would have been well advised to scrutinise the picture with some care, to see whether he had made any miscalculations.  

But if the results of his study were reassuring - as they should have been - he was 

• entitled to disregard the market decline as a temporary vagary of finance, and,
• unless he had the funds and the courage to take advantage of it by buying more on the bargain basis offered.

A sound mental approach towards stock fluctuations (4): Advancing, Bull or Rising Market

Advancing or Rising Market

The investor is neither a smart investor nor a richer one when he buys in an advancing market and the market continues to rise.

That is true, even when the investor cashes in a good profit, unless either:

• (a) he is definitely through with buying stocks - an unlikely story - or 
• (b) he is determined to reinvest only at considerably lower levels.

In a continuous program no market profit is fully realised until the later reinvestment has actually taken place, and the true measure of the trading profit is the difference between the previous selling level and the new buying level.

A sound mental approach towards stock fluctuations (2) Measuring Investment Results

Price Changes as Measuring Investment Results

The success of your investment program in common stocks must depend in great part on what happens ultimately to their prices.

• How far must you commit yourself to concern with the market's price fluctuation or conduct?
• By what market tests should you consider that you have been successful or not?

Yet, focusing on short-term or minor fluctuations will make you indistinguishable from the stock trader.

The experienced investors lean toward using a combination of dividend return and market-price change over a suitable period of time as the measure of investment success.  

• These calculations are made preferably between dates, several years apart, on which the general market level has not changed appreciably.
• The inclusion of the dividend income make this method a highly satisfactory one for testing investment results.
• It may be employed: 

1. (1) to measure the overall performance of an investor's portfolio, or 
2. (2) to compare one investment fund with another, or 
3. (3) to assess the merits of alternative principles of investment - for example, buying "growth stocks" versus buying undervalued securities.

Market Price Fluctuations

When the general market declines or advances substantially, nearly all investors will have somewhat similar changes in their portfolio values.

The investor should not pay serious attention to such price developments unless they fit into a previously established program of buying at low levels and selling at high levels.

A sound mental approach towards stock fluctuations (1)

Intelligent investment is more a matter of mental approach than it is of technique.

A sound mental approach towards stock fluctuations is the touchstone of all successful investment under present-day conditions.

Your portfolio should consist of:

(a)  Savings Bonds, which have no price fluctuations, and,

(b)  Common Stocks, which are likely to fluctuate widely in their market price.

Such changes in quoted prices may be significant to the investor in two possible directions:

(A)  As a measure of the success of your investment program.

(B)  As a guide to the selection of your securities and the timing of your transactions.

Benjamin Graham's teachings on Market Fluctuations and your investing

Market Fluctuations

            Fluctuations of Common Stock Prices

Since common stocks are subject to wide price swings, the investor should seek to profit from these opportunities.  However, attempting to time the market usually ends in unsatisfactory results.  Graham believes that market timing is pure speculation and is not an investing activity.  The best an investor can do is the change the bond and stock proportions in his portfolio after major market swings. 

Formulas do not work, although they have been in vogue since the 1950s.  When the market reached new highs in the mid-1950s, many formula investors sold their equities according to formula only to witness the market grow increasingly higher.  Any approach to the market that is easily described is sure to fail (except for Graham’s method). 

The investor also can focus on the price of a security. Graham recommends this practice.  Short-term fluctuations should not matter.  Over a period of 5 years, the investor should not be surprised if the average value of his portfolio increases more than 50% from its low point or decreases 1/3 from its high point.

Market advances and declines tempt investors to make foolish decisions.  Varying the proportion of stocks and bonds between the 25%-75% ratio occupies an investor’s time during turbulent markets and prevents him from making gross errors in judgement.  The true investor takes comfort that his actions are opposite from the actions of the crowd.

The better a firm’s record and its prospects, the less relationship that its price will have to its book value.  The more successful the company, the more likely its share price is to fluctuate.  More often than not, a fast growing firm’s market price will exceed its intrinsic value.  So, the better the quality of the stock, the more speculative it will be.  This explains the erratic price behavior of some of the most successful and impressive enterprises, such as IBM and Xerox.

The investor should purchase issues close to their tangible asset values and at no more than 33% above that figure.  These purchases logically are related to a company’s balance sheet and not to its earnings.  Any premium over book value may be thought of as a fee for liquidity that accompanies any publicly traded stock.   

            Just because a stock sells at or below its net asset value does not warrant that it is a sound purchase.  In addition to below market values, the investor also must demand a strong financial position, a satisfactory p/e ratio, and an assurance that the firm’s earnings will be sustained over the years.  This is not an entirely difficult bill to fill except under dangerously high market conditions.  At the end of 1970 more than half of the DJIA met these investment criteria.  However, the investor will forgo the most brilliant, high growth prospects.

            With a portfolio purchased at close to book value, the investor can take a more detached view of market fluctuations.  In fact, so long as the earning power of the portfolio remains satisfactory, the investor can use these market vagaries to buy low and sell high.

As seen with the stock fluctuations of A & P over many years, the market often goes wrong.  Although the stock market may fall, a true investor is rarely forced to sell his shares.  Rather, the investor is free to disregard the market quotes.  Thus, the investor who allows himself to be unduly worried about the market transforms his basic advantage into a disadvantage.  In fact, the investor who owns common stock owns a piece of these companies as a private owner would, and a private owner would not sell his business when it is undervalued by the market.  A quoted stock provides an option for the investor to sell at a given price and nothing more.  The investor with a diversified portfolio of good stocks should neither worry about sizeable declines nor become excited about sizeable advances.   An investor never should sell a stock just because it has gone down or purchase it because it has gone up.

Graham provides the parable of “Mr. Market”, who like the stock market, quotes you a price for your shares each and every day.  Mr. Market will either buy your shares or sell you his.  The price will depend upon Mr. Market’s mood.  You can ignore his efforts, or you can take advantage of him when he quotes you a price that you believe is priced advantageously.  Finally, one should not forget the effect of management on a firm’s results.  Good management produces acceptable results and bad management does not.

Fluctuation of Bond Prices

            Short-term bonds, defined as those with a duration of less than 7 years, are not significantly affected by changes in the market.  This applies to US Savings Bonds, which can be redeemed at anytime.  Long term bonds, however, may experience wide price swings as a result of fluctuations in the interest rate.  Thus, long term bonds may seem attractive when discounted, but this practice often leads to speculation and losses.

Low yields correspond with high bond prices and vice versa; prices and yields are inversely related.  The period from 1960 to 1975 is marked by reversing swings in the price of bonds so much so that it reminded Graham of Newton’s law: “every action has an opposite and equal reaction.”  Of course, nothing on Wall Street actually occurs the same way twice. 

Graham acknowledges the impossibility of attempting to predict bond prices, even if common stock prices were predictable.  Therefore, the investor must choose between long- term and short-term bonds chiefly on the basis of personal preference.  If the investor wishes to ensure that his market values will not decrease, then the investor is best served by US Savings Bonds.  With higher yield long term bonds, the investor must be prepared to see their market values fluctuate. 

Convertible issues should be avoided.  Their prices fluctuate widely and unpredictably based upon the price of the underlying common stock, the credit standing of the firm, and the market interest rate.  Because convertible issues experience huge swings in market value, they are largely speculative investments.

MARKET FLUCTUATIONS OF INVESTOR'S PORTFOLIO

Note carefully what Graham is saying here. 

It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33% ("equivalent one-third") from their highest price -regardless of which stocks you own or whether the market as a whole goes up or down.

If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.

Time is your friend. Time smooths out volatility.

Historically, time smooths out volatility.

The longer you stay in the market, the more likely you are to see your investment do what it should.

The range of returns narrows when we hold our investments for a longer period of time.

Even the most volatile asset class, that is, stocks, becomes relatively stable when you take the long view.

If you have a reasonable time horizon, you have an excellent chance of high average returns over many years.
That translates into a comfortable portfolio with plenty of cushioning along the way.

What if you are approaching retirement or you are already in retirement?

How can you get the returns you want while minimizing the volatility you don't want?

The answer:  diversify.

A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability.

One thing badly needed by investors - and a quality they rarely seem to have - is a sense of financial history.  In nine companies out of ten the factor of fluctuation has been a more dominant and important consideration in the matter of investment than has the factor of long-term growth or decline.

Yet the market tends to greet each upsurge as if it were the beginning of an endless growth and each decline in earnings as if it presaged ultimate extinction.

Investments may be soundly made with either of two alternative intentions:

(a)  to carry them determinedly through the fluctuations that are reasonably to be expected in the future, or
(b) to take advantage of such fluctuations by buying when confidence and prices are low and by selling when both are high.

Neither policy can be followed with intelligence unless the investor, or his adviser, has a broad comprehension of the effects of the economic alternations of the past, and unless he takes them fully into account in planning to meet the future.

The art of investment has one characteristic which is not generally appreciated.  A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability, but to improve this easily attainable standard requires much application and more than a trace of wisdom.  If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse.

Since anyone - by just buying and holding a representative list - can equal the performance of the market averages, it would seem a comparatively simple matter to "beat the averages"' but as a matter of fact the proportion of smart people who try this and fail is surprisingly large.

Even many of the investment funds, with all their experienced personnel, have not performed as well over the years as has the general market.

Allied to the foregoing is the record of the published stock-market predictions of the brokerage houses, for there is strong evidence that their calculated forecasts have been somewhat less reliable than the simple tossing of a coin.


Benjamin Graham
Intelligent Investor

Judged by past history, you always had a chance to buy them back at substantially lower levels at some time later.

Another encouraging element for the preceptor is found in the strong warp of continuity that seems to underlie the pattern of financial change.

Important developments affecting broad groups of security values do not come suddenly or in one piece.

An excellent example is found in the long term course of the stock market; this has never moved to permanently higher levels without retreating at least once to former territory.

Hence, investors who sold out representative stocks at what seemed a high price as judged by past history have always had a chance to buy them back at substantially lower levels at some later time.

This proved true in spite of the inflationary effects of the First World War and again of the Second World War, and it also was notoriously true after the extreme market advance of 1928 - 29.


Benjamin Graham
The Intelligent Investor


Comments:

Here are the charts of KLSE and the annual returns of KLSE.

Observe for yourself whether the statement by Benjamin Graham above holds true.

It generally is so but how can you hope to profit from this strategy?

Annual Stock Market Returns in KLSE

2005      -0.84%   
2006      21.83%   
2007      31.82%   
2008     -39.33%   
2009      45.17%   
2010      19.34%   
2011        0.78%   
2012       10.34%   
2013       10.54%   
2014      -5.66%



MSCI Malaysia (price) index

2005      -1.52%
2006      33.11%
2007      41.54%
2008      -43.39%
2009      47.79%
2010      32.51%
2011      -2.92%
2012      10.76%
2013      4.17%
2014      -13.41%