This time it’s different


Dear Fellow Share Market Investor,

I have a confession to make: There’s not much new in investing.

That won’t make me popular with some investment professionals — after all, the more complex you think investing is, the more likely you are to pay big fees to the so-called experts.

Luckily for you — and me — I’m not in this game to be popular with the big end of town. I’m far more interested in helping Australians invest better(and it’s also The Motley Fool’s purpose).

Famed US investor Sir John Templeton famously declared:

“The four most dangerous words in investing are, ‘this time it’s different’.”

And he’s right.

Of course, fads come and go, and certainly the largest industries in 2012 are very different to the largest of 1912 and even more different to those of 1812.

Templeton’s comment doesn’t imply that change doesn’t happen… of course it does.

Indeed, the process of ‘creative destruction’ that characterises our system of democratic capitalism is very significantly responsible for much the improvements in living standards over the past couple of centuries.

In my mind, that truism is best when combined with another, espoused by former US president Thomas Jefferson, who said:

“In matters of style, swim with the current; in matters of principle, stand like a rock”

The more things change…

Sir John Templeton wasn’t suggesting that investors should stick with buggy companies rather than automobile businesses, and he certainly wasn’t passing judgement on the revolutionary IT industry, per se.

He was suggesting that the basic underpinnings of successful investment rarely — if ever — change.

Industries rise and fall, and investment fads come and go, but the investing fundamentals don’t change.

Don’t get me wrong, circumstances ebb and flow.

But too many investors confuse the two — to their detriment.

I can’t think of a better example than the tech boom and crash in the 1990s and 2000.

15 years isn’t that long ago, but many of the most painful memories have faded. With apologies to those who still shudder at the losses they suffered during that time, the lessons shouldn’t be forgotten.

It was during that time that many investors were caught up in the promises of a new world. The old investing rules suddenly no longer applied — or so it seemed. Profits didn’t matter — it was all about ‘eyeballs’ — people who viewed your website.

The internet was changing the world, but investors forgot to be discerning… and forgot the basics of investment.

To wit: flight changed travel, but airlines are lousy investments.

Similarly, the internet changed many, many aspects of life and of business, but that didn’t mean that any company with a ‘.com’ at the end of its name was necessarily going to be a raging success.

Indeed, many went on to bankruptcy or at least a dramatic fall in the share price — taking many fortunes with them.

The dot.com boom and bust isn’t the only example of irrational investor behaviour! It seems that when it comes to investor irrationality, ‘this time isn’t different’ either!

The GFC is the most recent example of that irrationality –  from property ‘investors’ flipping houses in the US to investment banks and ratings agencies who packaged up low-quality mortgages and somehow pretended they were valuable.

Prior to that we had a debt bubble in the 1980s which fuelled a sharemarket bull run that unsurprisingly came to an end in October 1987.

We’ve also had resources booms and busts, most notably the Poseidon episode in 1969 and 1970.

Lest we think that irrationality only occurs in booms and bubbles, we’ve also had periods of irrational pessimism. During much of the 1970s, many investors stayed out of the equities markets, and P/E ratios (on average) were hardly ever in double figures.

‘Irrational exuberance’ may get all of the headlines, but ‘irrational pessimism’ is just as real.

But back to the central theme…

There really isn’t much new in investing.

Profits matter, growth is important and promises are worth little more than the paper they are written on.

But the fact that there isn’t much — if anything — new to learn, doesn’t make it easy.

Understanding how the age-old investing themes apply to today’s businesses is where art meets science. There’s no formula for this stuff — despite what you might hear.

Newspapers make their money telling you what’s just happened. We care, and it’s often important, so we pay attention.

Some people treat investing the same way — so much is apparently ‘different’ that you need to respond anew to each headline, each sound bite, each press release.

For share market traders, this is their stock in trade. Brokers (and traders) love to tell you this stuff:

“It’s a trader’s market”

“The market is going sideways”

“You have to be active”

“Buy and hold is dead”

Really?

Tell that to the Telstra  (ASX: TLS) shareholders who had the gumption to hold on to their shares as they fell below $3. In the face of endless eulogising, Telstra has recovered to within a whisker of $4 — and those investors have received their annual $0.28 per share in dividends along the way.

(But remember: that’s different to assuming Telstra is a good investment at any price – as many who bought Telstra at $7 will recall only too painfully.)

Ever met a wealthy share trader or chartist (someone who buys and sells based on the squiggly lines on the share price graph)? No, me either.

Instead, the investing pantheon is full of investors who bought with the intention of not selling.

I will give the ‘buy and hold is dead’ camp one small victory — I don’t think ‘buy and hold’ was ever intended to mean ‘never, ever sell’, but it’s been twisted and/or misinterpreted to mean that by some people.

Instead, I’ll acknowledge the confusion that phrase might cause, and use the newer variation — ‘buy to hold’.

A well bought company (that is a quality company bought at a good price)should be an investment you hope never to sell. If you’ve bought well, the company’s profit growth — and its stream of dividends — for years hence should mean you don’t ever have to sell.

(After all, who wants to pay brokerage at all, or capital gains tax before it’s absolutely necessary!)

But that doesn’t mean you stick with the company, regardless.

If the business starts to perform badly, then you need to reassess your investment thesis.

If the price becomes clearly and enormously disconnected from the potential of the business, then you might consider selling.

Ditto if you have a better idea… but remember, you’re often selling a company you know well (having held it — and followed it — for hopefully a number of years) and buying one you know less well. That can add extra risk, so tread carefully.

Learn from the masters

To me, successful investing is about applying age-old approaches to today’s opportunities.

It’s about having a clear head, and ignoring the ‘noise’ from those who would tell you how different things are, how you need a different strategy, and how you have to trade, trade, trade.

Warren Buffett, Peter Lynch, Philip Fisher and many other successful investors had outstanding long-term track records — and different investing styles.

But one thing they had in common is a reluctance to sell — and considered ‘trading’ anathema to success.

Is this Fool serious?

All of this might sound funny coming from a company that sells an investment advisory service. Even Foolish!

I hope you’ve at least asked yourself that question as you’ve read this.

The difference is that we don’t make money convincing you to trade over and over again. We don’t make money by telling you that everything has changed and only we have the answers.

We provide a service with ASX and US stock recommendations, but just as importantly, we aim to ‘help Australians invest better’.

We hope to provide an investing education — to help you understand the stock market, how to approach investing, how to think about companies and some of the psychological traps investors fall into.

We only continue to make money if our subscribers find that valuable… not on the basis of how often they trade — and certainly not because we try to make investing sound so complicated you couldn’t possibly be successful on your own.

Beware of the ‘helpers’

Warren Buffett’s annual letters to the shareholders of Berkshire HathawayNYSE: BRK-A, BRK-B) should be required reading for any investor. In his2005 shareholder letter, Buffett told the story of the ‘Gotrocks’ family, and their ‘Helpers’ under the heading ‘How to minimize investment returns‘.

I imagine you can guess Buffett’s perspective.

Fool on!

More reading:

Scott Phillips is an investment analyst with The Motley Fool. He owns shares in Telstra and Berkshire Hathaway. You can follow Scott on Twitter @TMFGilla. Take Stock is The Motley Fool Australia’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).

 

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