Tuesday, December 2, 2008

Which Looks Better To You?

If you had a gun to your head, which of the above charts would you choose for your investments? It's always interesting to me when you present something in different ways to see what the reaction is. The first chart represents annual stock returns for US large stocks per year. If you had to ride that roller coaster, I wouldn't recommend eating anything that would upset your stomach.

The second chart - the rolling 20 year history of the EXACT SAME US LARGE CAP STOCKS. If you averaged the returns over a period of twenty years for US Large Cap stocks from 1930 to 1950 and then presented a percentage, it would be 7%. This figure is in spite of the depression. Since 1950, the 20 year average has never fell below 7% (the high point came from 1941 to 1961 at 17%).

Now if you're not a fan of the previous reading material, I would pay attention to the following statements. Apparently people have forgotten the concept of "long term" investing. That refers to developing an investment strategy for 20-30 years, not 20-30 minutes. With every other show on the idiot box being devoted to some inane "lack of reality" show", infomercial, or a get rich quick by buying and flipping US real estate (I wonder how many of these shows will be off the air next year), the concept of saving money the old fashioned way seems passe. We would be foolish to ignore the thoughts of Warren Buffett (the richest man in the world although that they may have changed).
  1. Price is what you pay. Value is what you get.
  2. For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up.
  3. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.

If you believe that your retirement will be taken care of by the government, or you would rather "live for today" and forget tomorrow, then ignore me. For everyone else out there, remember the following - markets go up and markets go down. This is not new - it has been going on since markets began. When markets jumped up dramatically last week, I wondered about the "prediction" for a second bottom on or around December 4th. Yesterday's results reminded me that history does tend to repeat itself. Nonetheless, last month, in an article by Shawn Tully, Fortune magazine stated the following:

"If you buy now and wake up in 10 years, you'll probably get a return around the historic average," said Yale economist Robert Shiller. In the near term, however, Shiller - who correctly predicted the implosion of the stock-market and real-estate bubbles - is more cautious. "There is a substantial risk that with all this economic turmoil, stocks will fall far lower," he warned.

Heed my warning:

Most of us will live to get old and retire. If you don't save money, then you won't have money. Do you know the difference between an old man and an elderly gentleman? $1000 per month.

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