2017-05-05 | Brad Cougill

What's An Investor To Do?

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What's An Investor To Do?

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Warren Buffett is considered a true genius for his ability to simplify complex ideas into some of the best quotes that will likely stand the test of time. He has spent most of his life dispensing advice to all who would listen, earning him the nickname of the Oracle of Omaha.  I often find myself reflecting on one of his most quoted remarks, “Investing is simple, not easy.” 

 

Based on the plethora of quotes attributed to many of the world’s most famous scientists, philosophers, and writers, there must be some connection between great ideas and simplicity, not just in the field of investing, but in many aspects of life.   Here is just a handful to consider:


 “If you can't explain it to a six year old, you don't understand it yourself.” ― Albert Einstein


 “Life is really simple, but we insist on making it complicated.” ― Confucius


 “Our life is frittered away by detail. Simplify, simplify.” ― Henry David Thoreau, Walden and Other Writings 


 “Nature is pleased with simplicity. And nature is no dummy.” ― Isaac Newton 


 “Nothing is more simple than greatness; indeed, to be simple is to be great.” ― Ralph Waldo Emerson



So what might Buffett have meant when he said investing is simple, but not easy?


In investing, I believe the simple part is constructing the plan.  If done correctly, the result is a portfolio appropriate for one’s investment horizon, stability of income, ability to tolerate losses, and required rate of return.

The “not easy” part is actually sticking to our plans and not letting our emotions get the better of us, whether in good times or bad.   Many times the greatest opportunities occur in the midst of fear and panic.  Conversely, when it seems as if nothing can go wrong, we are at risk of becoming complacent, leaving us vulnerable to making critical mistakes.  Another famous Buffet quote speaks directly to this: “it is only when the tide goes out that we see who is swimming naked.” 

When we are tested most, we find out if we really have the conviction to stick with our plan.  When asked to describe what accounts for his success, Charlie Munger, Buffett’s long-time business partner said, “I’m rational. That’s the answer. I’m rational.”

The environment we find ourselves in today makes it difficult for us to stay rational.  Everywhere we turn we are bombarded with stories pulling on our emotions.  Stories appear daily in our fast paced headline driven media about the increasingly uncertain political environment – not just here in the United States but around the world.  We will no doubt soon be reading and hearing about the elections in Europe, increasing tensions in the Middle East, ISIS attacks,  protectionist trade policies, rising US government debt and deficits, and frustration over continued gridlock in Washington – just to name a few.

The economic front is also rife with uncertainty.  One can hardly open an internet browser or newspaper without headlines addressing the following: 

  • Will the US economy be able to break out of the post financial crisis “low growth” mode? 
  • Will the Federal Reserve raise interest rates 2 or 3 more times this year? 
  • Was the unexpectedly weak recent employment report a harbinger of slowing growth ahead? 
  • Will U.S. companies break out of the “earnings recession” of the past three years? 
  • Will the economy enter a recession in the next few years, or will this be the first decade in modern history without one? 
  • Are equity markets priced for too much hope and growth?  Have assets prices been artificially elevated due to unprecedented central bank and government intervention?  If so, is it sustainable or might it end abruptly and badly?        

Truth is we don’t know.  The future is, by definition, unknowable.  And, we only need to think back to last year’s national elections to be reminded how wrong professional forecasters can be.  The fact is that political and economic forecasting is a very difficult, if not impossible, endeavor. Economist Edgar Fiedler once said, “He who lives by the crystal ball soon learns to eat ground glass.” 

So, how do we stay rational in these uncertain times? 

Instead of trying to predict what the future holds or worrying about the latest economic report or twitter headline, now is the time to take stock of our current plans. 

First, we should remind ourselves that our simple plans have been designed precisely to deal with an uncertain future.  Our plans are not based on, or dependent on, the latest economic or market predictions.  Already having a plan, should the investment tide unexpectedly go out, is a comfortable feeling and frees us from excessively worrying about the future.    

Secondly, we must resolve not to give in to the temptation of abandoning our plans in search of even higher returns.   After eight years of economic growth (albeit slow growth) and a global market expansion that has hardly been interrupted, history suggests that we may be in the latter stages of this cycle.  Now is not the time to succumb to greed. 

Finally, we should begin to prepare ourselves mentally for the “not easy” part of investing that will come in the future.  It may be years away or it may be just around the corner, we do not know.  But, either way, we must be prepared when it comes; otherwise we put our investment plans and our financial futures at risk.    

While we do not agree with everything the Oracle of Omaha says, we do agree that successful investing really is simple, even if it is not easy.  Should you need help with either the simple or the not easy part of investing, know that we are just a phone call, click, or email away.

Sincerely,

Bradley R. Cougill, CFP®, CIO





Disclaimer

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