Why did the share price of Woodside — a big producer of oil and gas — fall by 4 per cent as oil prices soared? And why have the share prices of Australian banks — with their balance sheets and profitability in more comfortable shape than banks elsewhere — declined disproportionately? Share markets are jumping at shadows.
It’s a good time to ignore day-to-day imponderables and to muse on something solid, like the 10 most important investment sayings of all time. Here are my favorites:
- “Diversify your investments” (Sir John Templeton). During the 1980s, I twice had the pleasure of one-on-one meetings with Sir John at his home in the Bahamas, and admire his investment style, his personal modesty and his philanthropic work. Sir John (who died last week aged 95) always emphasised the importance of sensible diversification across and within the main asset classes.
- “The four most dangerous words in investing are ‘This time, it’s different”‘ (Sir John Templeton). We often hear claims that “this time, it’s different” — or, worse, “it’s a new era” or “it’s a new paradigm”. When you hear such phrases, be wary!
- “Wall Street people learn nothing and forget everything” (Benjamin Graham). Graham was an influential economist, an early proponent of value investing, and a successful investor. As the quote reveals, he had some thoughts also on the moods and behaviour of people who work in markets.
- “We simply attempt to be fearful when others are greedy and greedy only when others are fearful” (Warren Buffett). Buffet, founder of the highly successful Berkshire Hathaway company, was a student of Benjamin Graham and greatly influenced by Graham’s disciplined approach to value investing. He, too, has a view on how to respond to swings in the moods of market participants.
- “Please, God, just one more bubble” (bumper sticker, Silicon Valley, 2003). Nothing is more seductive, for someone already invested, than a market that’s roaring ahead. And nothing is more painful than still being invested after the bubble has burst.
- “It is interesting that the (investment) industry has invented new ways to lose money when the old ways seemed to work just fine” (John Stumpf, quoted approvingly by Buffett in the 2007 annual report of Berkshire Hathaway). Every bubble bursts. The end point is always the same — huge losses — even if the route travelled differs.
- “Our favourite holding period is forever” (Buffett). Buffett’s approach is to buy carefully and then hold the investment. He is not a counter-cyclical investor — but when the same investment criteria are applied year in and year out, guess what? Most of his investments are made in the gloomy times, because more investments can then be found that meet the criteria; and fewer investments are made when strong markets make assets expensive.
- “What a pity you only meet one Alan Bond in your lifetime” (Kerry Packer). Packer was always on the lookout to buy in gloom and sell in boom — the classical counter-cyclical investor. He had a natural hunch for identifying assets that appeared too cheap or too dear, as well as the sense to keep good people nearby to check whether the investment arithmetic supported his intuition. Buffett and Packer have taken widely divergent views on how long to hold investments: there is more than one successful approach to wealth accumulation.
- “Time in the market is more important than timing the market” (source unknown). Most of us lack the skills to fine-tune our getting into and out of investments at the right times. In particular, when most of us exit the share market in gloomy times, we’re too late in re-entering the market — and we miss the big gains that the early days of recovery provide. However, in circumstances such as June last year, when big contributions could be made to superannuation without a tax penalty, or when people have an inheritance to invest — the timing of the investment is more important. In those circumstances, dollar cost averaging — putting money into the market over time — makes a lot of sense.
- “The magic of compound interest” (often attributed to Albert Einstein). Einstein’s supposed endorsement of the magic of compound interest has been worded in many ways. He is said to have described compound interest variously as the most powerful force in the universe, the greatest invention of the 20th century, and the eighth wonder of the world. I’ve been unable to find a reference to compound interest in Einstein’s English language writings. But does it really matter whether advice for investors to recognise the “magic of compound interest” carries the Einstein imprimatur? I think not. In any event, given that growth assets produce better returns over time than interest bearing securities, let’s substitute the phrase “the magic of compounding”.