019 – What is the Investment Answer?

I want to chat with you a bit today about recent market performance, which as you know has been historically weak. If you are a long time listener you are well aware of two facts: 1. Investment in equities carries risk; a risk that prices decline, sometimes more severely than others and second, that over a long term investment horizon, equities have had net positive returns; returns that are far greater than those from riskless investments. What we’ve been experiencing during the past 3 weeks is the risk of owning equities. How long this downturn will last is unknowable but we do know that at some point, prices will recover. What history has shown is that the steeper a decline, the more sudden and violent the recovery. What is immediately apparent is that the track of stock prices is higher over time. It’s also clear that over a short period of time, anything can happen. It’s fair to say that long term gains are built upon short term volatility. We’re in one of those volatile periods right now.

If you’ve been listening to TV or radio or reading papers or following financial news on the Internet, and who hasn’t?!, you’ve likely heard assertions that January’s performance is a harbinger of full year results. The fact is that there is no demonstrable correlation between what happens at the beginning of the year and the rest of that year. And as you’ve heard us say over and over, no one can predict the future. What’s behind the equity selloff may or may not be what the press is blaming; in our investment philosophy, it just doesn’t matter what causes a market decline or advance. Prices represent the collective opinions and expectations of all market participants at any given time and even more importantly, current action is not a predictor of future performance. While watching values decline is far from a pleasant experience, the fact that we have a consistent investment philosophy that doesn’t change because the markets go down helps us to endure and look beyond uncomfortable times.

Most investors don’t have a consistent investment philosophy; they react to news or their interpretation of events and anticipation of good or bad influences on equity prices. In addition, a truly fully diversified portfolio is somewhat of a rarity outside those who share our investment philosophy. An inconsistent approach to investing can lead to two of the least desirable outcomes for any investor: first, selling out when prices decline and thereby failing to participate in the inevitable rebound or second, staying invested through a selloff but then watching the markets recover while their concentrated portfolio fails to fully participate. What we can be certain of is that as markets recover we’ll be on board.

Book Review: ‘The Investment Answer’
A Wall Street veteran with terminal cancer shares his secrets.

What kind of investment book would a person write who was a Wall Street insider for over 25 years? If you’re thinking something like How I Became a Master of the Universe in Ten Easy Steps, you would be wrong. At least if you’re talking about Gordon Murray who, with co-author Dan Goldie, has given investors a real gift: the inside story of what investing truly is and how those who follow the prescriptions in their book, The Investment Answer, can have a successful and positive investment experience. The Investment Answer is also the kind of investment book that Murray, who has terminal cancer, chose to co-write in the time left remaining to him. That makes this book truly unique because Murray, who I met in 2005, has no axes to grind and so is entirely free to bring to the field of investing the kind of focus and clarity one gains when faced with such a condition. (Murray’s paper on the interplay between Wall Street and Main Street, written five years before the market meltdown in 2008, is by far the most clear and concise that I have ever read.)
Murray, who worked in institutional trading and sales at Goldman Sachs, Credit Suisse First Boston and Lehman Brothers, and Goldie, a fee-only registered investment advisor who invests his individual clients in the asset class funds offered by Dimensional Fund Advisors would, at first blush, appear to be an odd couple. When Murray retired in 2002, he looked for someone to manage his family’s wealth. After meeting Goldie, he had an epiphany and became a consultant with Dimensional whose investment philosophy, shall we say, is a tad different from that of Wall Street. Yet, ironically, it was Murray’s extensive training and experience in institutional investing that allowed him to readily see the folly inherent in the way most people invest, and to conclude that stock picking and market timing are speculation, while asset allocation, broad diversification of portfolio risk, reducing costs and staying the course are investing. How could any self-respecting investment banker come to any other conclusion when, in the course of his career, he had institutional money managers confiding in him that they hadn’t a clue as to what their next investment idea would be for the $50 billion or $100 billion they had under management? Or when others admitted to him that they were nothing more than (very expensive) closet indexers?
According to Murray and Goldie, when most people think of investing, they think in terms of forecasting, of searching for someone with an accurate crystal ball who can lead them to investment nirvana. The good news, they say, is that investors needn’t get the future right in order to have a successful investment experience. In fact, our capitalistic system generates a positive return on capital over time; otherwise, it just wouldn’t be capitalism. The authors don’t see wealth being created or preserved by moving money from stock to stock, from fund to fund, from market to market, from one hot money manager to another. On the contrary, that kind of activity to them is simply speculation, not investing.
Instead, to them true investment wealth is created and preserved by millions of laborers, entrepreneurs, workers and managers who–together with the application of capital supplied by investors–help build companies and make economies grow over time. Investors who supply this capital by investing in stocks and bonds are entitled to their fair share of the returns that are generated as a result of this activity. Murray and Goldie believe that the most effective and efficient way to invest in stocks and bonds is in public equity and debt markets. With a proper time horizon and discipline, investors can capture global capital returns in these markets which should beat most active investors (who try to beat the market) with less risk. That, to the co-authors, is what really constitutes the process we call investing. So those who choose to invest in that way–broadly and cheaply in global capital markets with asset class funds and index funds–can win over the long run because global capital market returns are just sitting there for the taking by anyone. Because of this, Murray and Goldie maintain that there’s simply no need to speculate with investment capital via stock picking and market timing. The problem is that most investors don’t understand the difference between investing and speculation.The Investment Answer was written to explain this difference. And that – the long and the short of it – is the answer.

via W. Scott Simon – Morningstar Advisor

About the author, Scott Wellens

Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.

Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.

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