President’s Message – 3rd Quarter 2019
Warren Buffett once commented that, “the most important quality for an investor is temperament, not intellect.” Think about that for a moment. In other words, it’s not how smart you are or how quickly you process information that makes the biggest difference in the long run. What ultimately counts the most is how measured you are in your thoughts and how deliberate you are in your behavior.
Our behavior, what we discipline ourselves to do – and even more importantly, what we discipline ourselves not to do – when provoked by perfectly natural human tendencies to act out, is a far greater determinant of our long-term financial success than any other factor. It’s greater than our intellect, our timing, the quality of our research, our investments, and our luck. Behavior vanquishes all.
The trouble is, we’re living through a time now when skepticism, even cynicism, towards each other and towards the institutions that undergird our society is reaching new heights. Trust is at a low point. Congress is dysfunctional. Political polarization is more extreme than at any period in our lifetimes. The social and political tension is palpable.
Add to this the facts that interest rates around the world are near their lowest levels in recorded history; income and wealth disparity between the “haves” and the “have-nots” keeps widening; and U.S. stock markets are close to all-time highs, while many obsess about an impending recession. So many things seem unstable and subject to sudden change. How can one invest confidently in this environment?
The huge conundrum, and indeed the greatest temperamental challenge that all long-term investors must wrestle with is that the future we invest in and for is inherently unknowable. It always has been, and it always will be. And yet, we must move forward anyway. On one hand, the great goals of life, like funding a solid education for children or grandchildren; ensuring our financial security, dignity and independence throughout a three-decade retirement; or building and leaving a legacy for those we love, take decades of dedication and discipline to accomplish. But on the other hand, the only guarantee we have during that time is that everything will change. All those intervening years (and indeed every day that comprises them) will be full of uncertainty and ambiguity. We will never have all the information we want before having to make important decisions. We’ll always be unsure of something, and often we’ll be unsure of many things. Other times, the things we are sure of will suddenly change.
Exhausted and under stress because of these conditions, human beings reflexively resort to simplistic binary distinctions– fight or flight. Feeling instead of thinking becomes the path of least resistance. And then we act out – temperamentally. Don’t do that.
As hard as it is to do in this maelstrom of emotions, a successful investor absolutely must overcome this temptation towards reactivity. In an environment like the one we’re experiencing now, it’s ever more important to think, plan and act purposefully – based on principles like patience, discipline and a hard-nosed faith that, in due course, things will work out. It’s also very important to examine the unconscious word definitions you attach to the various assets you’re investing in, and to frame your decision-making in ways that are appropriate for the objectives you’re trying to achieve.
For instance, many people quickly associate the words “risk” and “volatility” with stock investing. They subconsciously think of other words like “blue chip”, which they quickly associate with gambling. Or they succumb to the intentional reactivity of television shows like Mad Money that propagate a high-stakes, short-term trading mentality: “Buy, buy, buy! Sell, sell, sell!”
Re-framed in a more deliberate, long-term perspective, however, owning stock simply means you’ve become a long-term shareholder in a business. In the case of investing in publicly traded equity markets, you’re becoming an owner of some of the most successful, well-financed, dynamic and profitable businesses ever conceived in the United States or the world. These enterprises produce innovative products and services that are sought after by millions, and sometimes billions of consumers around the globe. They are run by experienced, highly adaptive management teams who are well-compensated to mind the interests of shareholders. They innovate relentlessly, adapt constantly to ever-changing environments and can demonstrate a history of successfully weathering any number of past recessions. Defined this way, equity ownership almost becomes an entirely different concept, doesn’t it?
There is nothing easy about exercising patience and discipline. There is also nothing easy about maintaining perspective. They all take diligence and effort – and regular inoculations against our own worst proclivities. It’s so much easier to get swept up in the urgency and anxiety of the moment than it is to look far ahead and allocate capital based on time horizons of 10, 20, or 30 years. It’s so much easier to sell when the crowd is fearful and prices are falling, than it is to stalwartly allocate new money to an asset class (or several) when it’s out of favor and the news is gloomy. It’s so much easier to believe that the solution to our investment needs lies in finding some new, different, cutting-edge fad than it is to stick to a diversified buy-and-periodically-rebalance philosophy that utilizes time-tested but boring investment strategies. Remember: the purpose of investing isn’t to generate excitement, it’s to fund and endow the most important financial goals of our lifetimes – this is serious money.
If there is one truth I’ve learned about successful investing and investors in the last thirty-five years of my career as an advisor, coach, counselor and leader it’s this: You play this game chiefly against yourself. Your biggest opponents are your own worst instincts. You must recognize and curb those reactive instincts.
Successful investors are goal-focused and guided by a meaningful long-range plan. They’ve gained a clear view of what’s important to them, what their philosophy is, and what their unique challenges and opportunities are likely to be. With our help, they’ve also thought proactively about how they intend to respond to shifting circumstances. They’re temperamentally resilient, practiced at handling tough setbacks, and well-prepared to make any number of personal changes and course corrections along the way. That’s the only way one can invest confidently in this environment, or in any other for that matter.
Thank you, again, for your confidence and trust.
Thomas G. Twombly
President