What would Warren Buffett do?
Today’s market activity can shake the confidence of
even the most experienced investor. Each day seems
to bring more bad news, and it is hard to endure the
effects on your portfolio. More important, during
these difficult times grave mistakes can be made to
your long-term investing strategy. Now is a good time
to sit back and ask yourself about your approach.
To invest successfully over time takes many
attributes — the most significant being a firm understanding
of why we are investing our money in the
first place. You see, investing is really just a means to
an end. We don’t want to invest or put our money
at risk — we want what the money will ultimately
provide for us. That goal is somewhat different for
each investor; however, most will agree that we
invest to provide freedom — freedom to work or
not work, freedom to buy what we need, and
freedom to make the people we love more
comfortable. That is really why we invest.
The past few months have scared many so-called
investors out of the equity markets. Money has been
taken out of stocks and mutual funds and placed in
bank accounts and even hidden under mattresses.
But no matter where you keep your money, some
risk is involved. A bank account may not seem risky
to an unseasoned investor since the principal and interest rate (albeit a low one) are guaranteed.
However, the risk is not in the loss of principal but in
the fact that after tax and inflation your money will
never really grow. As a result, you may never achieve
the financial freedom that you dream of.
Unsophisticated investors are reactionary, much to
their financial downfall. When high-tech stocks were
booming, they wanted to take their money out of
safe investments and buy stocks, and when the tech
bubble burst they wanted to move their money out
of tech stocks (near the bottom) and into cash. If they
had done this, they would have missed out on the
next big economic upswing that occurred in the
mid-2000s. This cycle of buying high and selling low
will continue to erode investment capital making that
dream of financial independence just that — a dream.
So what should I do?
The best way to invest is to emulate someone who
is a successful investor. Arguably the world’s greatest
investor is Warren Buffett, currently the second richest
man in the world. Mr. Buffett gave us one of the
best quotes on how to invest successfully:
“To invest successfully over a lifetime does not
require a stratospheric IQ, unusual business
insight, or inside information. What’s needed is a
sound intellectual framework for decisions and
the ability to keep emotions from corroding
So ask yourself: what is the intellectual framework
for my investment decisions and how can I keep
emotions from eroding them?
Right now, Mr. Buffett is following his intellectual
framework with his other famous quote:
“We simply attempt to be fearful when others
are greedy and to be greedy only when others
While the marketplace is panicking, Mr. Buffett (and
Berkshire Hathaway) is following his intellectual
framework and buying companies at good prices,
as are the professional money managers who we
employ to manage your money. They are using this
opportunity to take better positions in very solid
companies. It may take awhile to pay off, but they
are sticking to their framework as well.
So how do you build your own framework?
To help you build an intellectual framework for
investment decisions, we strongly recommend an
Investment Policy Statement (IPS). This document
explains why you are investing in the first place.
Think of an IPS as a roadmap to guide you
through your investment decisions.
The IPS first establishes the extent of your experience
with investments and documents and the
risk you are willing to take with your capital. It sets
up the time frame within which you wish to invest
and the purpose — income, growth, etc.
The IPS then identifies the different types of risk in
portfolio management and how your portfolio will
be managed to offset them — asset allocation, geographic
allocation, style allocation, efficient
frontier, tax effects, and market conditions.
Finally, it develops an investment strategy based
on this information and your stated objectives:
when and why you will rebalance your investments
(buy and sell), what investments or
investment managers you will use to manage your
portfolio, and how often you will review it.
How does an IPS help keep emotions from
corroding the intellectual framework you have just
set up? Before any new investment can be
completed or changes to the existing strategy
made, a new IPS must be developed. Only if that
new investment is suitable in the overall strategy
will it be made. And only if changing the current
allocation is in line with stated objectives will a
change take place. This process will keep you
disciplined in your intellectual framework and
always give you time to reflect before making rash
emotional decisions based on short-term events
in the world or the market.
We think that this is the right time to establish or
re-establish a framework for investors, given that
many of them, worried about the current market
situation, are tempted to make rash decisions.
If you would like to go through the IPS process,
please contact your closest CARP Certified Advisor so that we can start an
intellectual framework to help you make the right
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