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 – today’s stock market is up about 60% from its lows of a year ago. 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:
… Endless questions on the direction and timing of the economic recovery and the timing of higher interest rates
… US housing prices that are staying stubbornly low and unemployment levels that are stubbornly high.
… Rising deficits and the cost of the Healthcare Reform
Here’s a New York Times article about the IMF’s views.
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.
… the same day the Financial Times ran a similar story about dividend increases in Europe
Forecasting the future
Whether you choose to focus on the positives or the negatives, there’s broad agreement that the steps taken by governments were effective – fewer talks about what 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 guru TO listen to is Warren Buffett.
Advice from Warren Buffett
“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 on CNBC on Friday, October 10, 2008
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 above, 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” or as I’ve always heard “the market climbs a Wall of Worry.”
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 some fundamental principles that drive the portfolios that we believe will serve clients well in the period ahead.
Remain Diversified
The record bounce in stock prices over the past year was led by companies with the weakest credit ratings. That’s unlikely to continue – that’s why I’m focusing my portfolios on only the highest quality asset classes, those best able to withstand the inevitable ups and downs in the economy.
Focus on the Long Term
Having a strong price discipline on buying and selling is paramount to success – history shows that the key to a successful investment is being invested and avoiding the large drawdown’s. We continue to focus on asset classes (US, International, Global Bonds) that will be there long-term for us.
Build in a buffer
Given that we have to expect continued volatility, we identify cash-flow needs for the next 2-3 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.
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.
P.S. If you’re interested, here’s a link to Warren Buffett’s 2010 letter to investors