The basic principles of successful investing are timeless and quotes from some experts help illuminate these.
“How many millionaires do you know who have become wealthy by investing in savings accounts?” Robert G Allen
Cash and bank deposits are low risk and fine for near term spending requirements and emergency funds but they won’t build wealth over long periods of time. The chart below shows the value of $1 invested in various assets since 1900. Despite periodic setbacks (see the arrows) shares and other growth assets provide much higher returns over the long term than cash and bank deposits.
Source: Global Financial Data, AMP Capital
“The aim is to make money, not to be right.” Ned Davis
There is a big difference between the two. But many let their blind faith in a strongly held view (eg “the US borrows too much”, “aging populations will destroy share returns”, “global oil production will soon peak”, “the IT revolution means this time it’s different”) drive their decisions. They could be right at some point, but end up losing a lot of money in the interim.
“Remember that the stock market is a manic depressive.” Warren Buffett
Rules of logic often don’t apply in investment markets. The well-known advocate of value investing, Benjamin Graham, coined the term “Mr Market” (in 1949) as a metaphor to explain the share market. Sometimes Mr Market sets sensible share prices based on economic and business developments. At other times he is emotionally unstable, swinging from euphoria to pessimism. But not only is Mr Market highly unstable, he is also highly seductive – sucking investors in during the good times with dreams of riches and spitting them out during the bad times when all hope seems lost. Investors need to recognize this.
“Markets can remain irrational longer than you can remain solvent.” John Maynard Keynes
A key is to respect the market and recognize that it can be fickle rather than try and take big bets that can send you bust if you get the timing wrong. For example, heavily selling shares short if you think a crash is about to happen or gearing in too heavily via margin debt. Such approaches can often undo investors and send them bust as they are too dependent on accurately timing the market.
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die of euphoria.” John Templeton
This is one of the best characterizations of how the investment cycle unfolds. It follows that the point of maximum opportunity is around the time most are pessimistic and bearish and the point of maximum risk is when all are euphoric, but unfortunately many don’t realize this because it involves going against the crowd.
“To be an investor you must be a believer in a better tomorrow.” Benjamin Graham
This is a pre-requisite. If you don’t believe the bank will look after your term deposits, that most borrowers will pay back their debts, that most companies will see rising profits over time, that properties will earn rents etc., then there is no point investing. This is flippant but true – to be a successful investor you need a favourable view of the future.
“More money has been lost trying to anticipate and protect from corrections than actually in them.” Peter Lynch