Thinkpiece

01 Sep Thinkpiece

In this update: 

• Ben Graham’s timeless reminders
• Fluctuations
• Investor vs Speculator
• Market Amnesia
• Opportunity
• Take a long term view

Ben Graham’s timeless reminders

Ben Graham, Warren Buffett’s early mentor, wrote the Intelligent Investor in 1949. Whilst society has undergone unimaginable evolution since that time, the principles espoused by the book echo down the decades.

I would recommend that anyone serious about planning for their financial future at least reads chapter 8, which is entitled ‘The Investor and Market Fluctuations’.

Fluctuations

Movements in a price of a company (stock) or fund are called fluctuations. The rate of the fluctuations is called volatility. Volatility is perfectly normal.

The current price of a stock effectively distils into demand and supply. There is a perennial relationship between buyers and sellers to determine the price of a stock in the market.

If there is a dominance of buyers, demand will be elevated and as a result the price of the stock will go up. Conversely, if there is a dominance of sellers, demand will fall and the price of the stock will go down.

Investor vs Speculator

As Graham identifies ‘The most realistic distinction between the investor and the speculator is found in their attitude towards stock market movements. A speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.’

Graham goes on to advise that the investor should know about these fluctuations and prepare for them financially and psychologically. He warns that an investor may be lured into speculating, and not investing, and that ‘If you want to speculate, do so with your eyes open, knowing you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program’.

Where an investor places their emphasis on market timing (essentially forecasting – which as regular readers to this blog will know cannot be accurately or consistently predicted), one will end up speculating.

Market Amnesia

The significance of emotional discipline is so important. The longer the bull market lasts, the more severely investors will be afflicted with amnesia. After five years or so, many people no longer believe that bear markets are even possible. All those who forget are doomed to be reminded; and, in the stock market, recovered memories are always unpleasant.

The intelligent investor is a realist who sells to optimists and buys from pessimists.

Benjamin Graham

Opportunity

Nothing in markets is ever dormant. It may appear that markets go quiet at times, but in fact this is just a precursor to change. The whole thing is changing and adjusting to itself constantly.

Investing during uncertain markets, allows for unique opportunities that are not apparent during rising (Bull) markets.

Those investing on a regular basis can buy some of the best businesses in the world at a significant discount.

Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, reach for a bucket.

Warren Buffett

Take a long term view

Ensuring you have a healthy margin of safety (a cash fund for emergencies and major purchases – see last months’ Thinkpiece) will allow you to avoid interrupting the compounding process.

The market doesn’t know your timing and wouldn’t change its behaviour if it did. Therefore you need to ensure you have a healthy cushion in place to soak up bumps in the road.

If you stand at a bus stop, eventually you’ll catch a bus. But if you run from bus stop to bus stop, you may never catch a bus.

Howard Marks

Summary

• Be prepared for market fluctuations.
• Understand when you’re investing and when you’re speculating.
• Be careful you don’t suffer from market amnesia. Markets don’t rise in a linear fashion.
• Make sure you have a suitable margin of safety in place, and keep it in proportion with your wider arrangements at all times.
• If you have surplus funds, remember the opportunity of buying funds invested into businesses at discount prices, but don’t compromise on your margin of safety.
• Take a long term view.

If you wait for the robins, spring will be over.

Warren Buffett

If you’ve not yet put in place a sound financial plan and you’d like to know more, please feel free to contact us on
01626 305318 or via email here.

The views expressed are not to be taken as financial advice. Professional advice should be sought before proceeding.