An Extract from THE EXCELLENT INVESTMENT ADVISOR by NICK MURRAY
1) I believe that the fundamental investment risk is not losing one’s money, but outliving it. Risk has changed because life has changed. People are looking at upwards of 30 Years of retirement and in 30 years consumer prices triple. So the risk isn’t the loss of principal, it’s the extinction of your purchasing power while you’re still alive.
2) I believe, therefore, that the only safety lies in the accretion of purchasing power. If the risk is the inexorable grinding down of purchasing power time, safety can only be the building up of purchasing power. I define accretion of purchasing power as a positive return from my investment, net of inflation and taxes. Investment which provides such a return is, by my definition, safe. Those that do are not. By this definition, common stocks are by far the safest financial instrument in the long run.
3) I believe that the great long term risk of stock does not own them. On July 8, 1932, the intra-day low of the Dow Jones Industrial Average was 40. On October 14, 1996, the Dow closed over 6000. The intervening period was the worst in human history: Depression, WWII, Cold War However anecdotally, I infer from these data three things. The right time to buy stocks is now (as long as you have the money); the right time to sell them is never (unless you need the money). The great risk is not owning them.
4) I believe that everything you need to know about the moment if stock prices can be summed up in 8 words: The downs is temporary; the ups are permanent [This is actually the English translation of the Ibbotson Chart]. I never mistake fluctuation for loss. Stock prices go down all the time-25% or so on an average of every 5 years (albeit not lately)-but since they never stay down, it turns out not to matter. Markets fluctuate but do not create losses. Only people can create permanent loss by mistaking a temporary decline for a permanent decline and panicking out. No panic, no sell. No sell, no lose. The enemy of investment success is not ignorance, its fear. So it’s my faith, not my knowledge that saves the investor’s financial life.
5) I process the experience which most people describe as a “bear market” in two different words: big sale. Since all declines are temporary, I regard all major generalized equity price declines as an opportunity to stock up on some more truly safe investment before the sale ends.
6) I don’t believe in Individual Stocks, I believe in managed portfolios of stocks. I can break a pencil; I cannot break 50 pencils tied together. That’s diversification. Thus: 1 stock can go to zero. Stocks as an asset class can’t go to zero. There is also the issue of professional management. When I entered the business in 1967, NYSE volume was 80% individual and 20% Institutional. Today, it’s around 80/20 the other way. I like the story of David and Goliath as much as anybody does, but the key to that story is that there was only one Goliath. When you are still David, and almost everybody else in the game is Goliath, you are going down. You can’t beat them. Join them.
7) I believe that dollar-cost averaging will make the dumbest person in the world wealthy. Hey, look at me: it already has. The more “knowledge” you have, the more you try to outsmart the market, and the worse you do. The more you see the market as long term inevitable/short-term/unknowable, the more you are inclined to just dollar cost average, and the better you do. Dollar-cost averaging rewards ignorance with wealth.
8) I love volatility. Volatility can’t hurt me, because I am immune to panic. And it can help me in a couple of ways. First, in an efficient market, higher volatility means (and is the price of) higher returns. Second, higher volatility when I’ m dollar-cost averaging means even higher returns. Higher returns are good. Trust me on this.
9) I’m not afraid of being in the next 25% downtick. I am afraid of missing the next 100% uptick. And I have noticed that I have no ability whatever to time the markets. Still, I have found a way to machine the risk of missing the next 100% uptick down to zero. It’s called staying fully invested all the bloody time. Works for me.
10) I believe that, prior to retirement, people should own as close to 100% equity as they can emotionally stand. Then, after retirement, I believe they should own as close to 100% equities as they can emotionally stand. “Suitability” is a very big issue but it’s an emotional issue, not a financial one. The emotional pull of bonds in retirement is very strong- and I am the guy who said that feelings are to facts as 19 is to one – but systematic withdrawal from stock funds makes more financial sense. Forget about income v/s principal for a moment and think in terms of total return. Would you rather have 6% a year from a portfolio of 6% bonds? Or would you rather take 6% a year from stock funds (1.5% dividends and 4.5% principle, let’s say) whose index return is north of 10%? The latter way, your income has room to grow, and your principal has lots of room to grow. My belief is that even in retirement bonds are a non-starter. See, I told you weren’t necessarily going to agree with all this stuff.