Unfortunately, over the period of 1994 to 2013, the average investor earned only 5 percent while the average stock fund returned 8 percent annually. Why? And how can we get our money to work better for us?
These next two weeks I will cover the essential wisdom of the greatest investors and how you can use them for your benefit.
* “Individuals who cannot master their emotions are ill-suited to
profit from the investment process.” -Benjamin Graham, father of value
investing and mentor to Warren Buffett.
Ben is saying that we need to avoid destructive investor behavior.
Emotions can be our greatest enemy when it comes to investing and wreak
havoc on our ability to build long-term wealth. I mentioned that the
average investor sacrificed close to half of their potential return.
This gap is called the “investor behavior penalty.” This is because
they engaged in negative behaviors like chasing the hot fund manager,
stock or asset class, avoided areas of the market that were out of
favor, attempted to time the market, or just abandoned their investment
The greatest investors know that building long-term wealth requires
the ability to control one’s emotions and avoid self-destructive
* “History provides a crucial insight regarding market crises: They
are inevitable, painful, and ultimately surmountable.” -Shelby M.C.
Davis, legendary investor.
History has shown that the stock market will always encounter crises
and uncertainty, but the market has continued to go up over the
long-term. The greatest investors understand that short-term
underperformance and volatility are unavoidable.
Ninety-five percent of the top fund managers from 2004 to 2013 fell
into the bottom half of their peer groups, with 73 percent falling into
the bottom quarter of their peer groups for at least one three-year
period. Even though these professional managers delivered great
long-term returns for a decade, almost all of them experienced some
difficult short-term stretches.
Investors who understand and recognize this are less likely to engage
in the “investor behavior penalty” and make unnecessary and often bad
decisions with their investments.
The greatest investors understand that we shouldn’t overreact to short-term fluctuations of the market.
By being disciplined, sticking to your personal investment plan, and
avoiding destructive behavior, you are better positioned to benefit from
the long-term growth potential of the stock market.
* “Though frustrating, stretches of disappointing results for the
market are not unprecedented. History shows, however, that these
difficult stretches have been followed by periods of recovery. Why?
Because lower prices increase future returns.” -Christopher C. Davis,
portfolio manager, Davis Advisors. History shows that after
disappointing 10-year periods for the stock market, the average return
for the next 10-year period is 13 percent per year! Nobody knows what
the next 10 years will bring, but investors with long-term goals should
look into maintaining or even adding to their stock allocation after a
prolonged stretch of poor returns. It may be tempting to sell or abandon
stocks, but this would be selling at the wrong time. Investors should
be confident that stocks in the long term will go up after a prolonged
period of bad returns. Why? Because low prices help increase future
returns and opportunity.
* “Far more money has been lost by investors preparing for
corrections or trying to anticipate corrections than has been lost in
the corrections themselves.” -Peter Lynch, legendary investor and
author. When the market goes down, many investors move out of stocks
with the intention of coming back in when they think it will go up.
Unfortunately, this has led to disastrous results. If patient investors
remained in the stock market the past 20 years, they would have received
9.2 percent per year. If these same investors, however, missed the best
30 days during this 20-year period, their investment would have
remained flat! If they missed the best 60 days, they would have lost a
significant amount in the market. Nobody knows when these best 30 or 60
days will be, so attempting to time the market will hurt you more than
just staying in and riding out the market corrections.
* “Be fearful when others are greedy. Be greedy when others are
fearful.” -Warren Buffett, legendary investor and chairman of Berkshire
Hathaway. Building long-term financial wealth involves
counter-emotional investment decisions. Investors want to buy when there
is maximum pessimism with the market, and sell (or resist buying) when
there is maximum euphoria and excitement with the market. The stock
market was booming from 1997 to 1999, with record amounts of money
flowing in 2000. Unfortunately, they just got in to experience terrible
years of returns from 2000 to 2002. Many of the same investors sold
during this downturn, only to see the market go up more than 30 percent
in 2003! This happened again in 2008, when many pulled out of the stock
market at the bottom, missing the subsequent double-digit returns a few
The greatest investors understand that an unemotional, rational and disciplined investment approach is crucial to building long-term
-- by David Chang, MidWeek