Years ago, Warren Buffett remarked during a Berkshire Hathaway shareholder meeting that he and Charlie Munger weren't concerned about sharing their investment philosophy because when push came to shove, most people simply cannot resist the biological, primal urges that cause them to make foolish financial decisions; namely, buying when assets are appreciating and selling when asset prices are falling.
At the time, I thought it strange and, to be honest, doubted this assertion. In my younger days, I couldn't believe that people would work against their own long-term self-interest and spend decades working, then throw the money away on a security simply because the price was moving north, or sell their interest in a great business when the economy hit a rough patch. After all, I was able to not only be the first member of my family to graduate from college, but effectively retired at only 24 years old because my ownership in businesses and the income from my investment portfolio provided more than enough for me to spend my days reading, visiting family and friends, and studying finance. By spending my teenage years studying Rockefeller, Carnegie, Buffett, Graham, Munger, Lynch, and others, I saw first hand that the power of compound interest, when coupled with a collection of operating businesses, could set you free.
Now, at the very moment stocks are cheapest and my personal balance sheet and companies are breaking the bank to come up with every excess penny we can - to the point that I literally confiscated the coffee budget so I could buy additional shares of General Electric when they were at $6.00 each - I find that everyone from CNBC to investment newsletters, personal finance writers to professional investors are declaring that the buy and hold philosophy is dead. Evidence to the contrary is simply ignored. Consider a basic fact pointed out by Fortune Magazine recently: "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends! The article goes on to say, "Even if you hadn't reinvested the dividends, that single share would now be 2,500 shares as a result of splits, and you'd be collecting dividends of $4,500 a year from that $37.50 investment. If only Grandpa had bought 100 shares."
I don't dispute that there is a lot of money to be made trading right now as a result of unprecedented velocity. As I wrote in Using LEAPS Instead of Stock to Generate Huge Returns - A Stock Option Strategy for Bullish Investors my companies have made a lot of money since March of 2009 trading different types of options on a portfolio of underlying bank stocks that we are happy to own in the long-run at present prices. For the average investor, going to work everyday to put food on the table and who wants nothing more than to put their children through college and retire in comfort after a lifetime of working, this is a dangerous, dangerous game. The notion that they are going to be able to effectively trade against professionals in the hope of earning an extra 3% or 5% per year is deeply upsetting. They are entering a game they do not understand, risking their future on assets they do not fully comprehend, and playing against competitors with far more time, inclination, and assets. They have everything to lose and very little to gain.
The cause of the problem is somewhat complicated. Can you blame professional money managers for behaving like lemmings when their clients threaten to defect if they don't see frantic activity each and every month? Combined with peoples' almost perverse desire for exotic securities - why buy shares of Johnson & Johnson when you can trade copper futures or short a basket of Euro-denominated energy stocks to play both the fall of the dollar and collapsing crude prices? - and you have a recipe for disaster. Instead of measuring their success by risk-adjusted after-tax net of inflation return on invested capital, it seems that they simply want to be clever. Risks be damned. Tax consequences - who cares? They now have something to brag about at cocktail parties.
No comments:
Post a Comment