American Consequences - May 2020

A Step Back From Crisis

Stocks build wealth over time. But they don’t do it in a straight line. If you want the money, you’ve got to be willing to walk the path. Charlie Munger – Warren Buffett’s longtime business partner – has put it this way... If you are not willing to react with equanimity to a market price decline of 50% two or three times a century, you are not fit to be a common shareholder and you deserve the mediocre result that you are going to get, compared to the people who do have the temperament who can be more philosophical about these market fluctuations. Drawdowns in stocks happen. It’s the cost of admission. Don’t fool yourself into thinking you can avoid them when they hit. Crises like this are unpredictable. And if you sell at every sign of fear, you end up selling little dips, buying back in at a higher price, and missing the good parts of the market. To quote another legendary investor, Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” So this second step toward calm and freedom is a mental one... or one of temperament. You need to accept that your stock portfolio will give you a scare every so often. But history has shown us that stocks eventually come back. At what point on the following chart was it a bad time to buy or hold stocks? We don’t know exactly what will happen with

And we want a dependable employee who gets the job done with little fuss. After all, we’ve got enough to worry about in times of crisis. We want our wealth to be a buffer against that, not another thing to worry about. We want to invest for calm and freedom. There are two things you need to do to make that happen... First, you need to plan ahead and manage your risk. We talk about the ways to do that every month: Buy the stocks of high-quality businesses ... Diversify with low-cost funds ... Allocate to stocks, bonds, and other real assets ... Limit your speculations to sizes you can handle . These ideas aren’t original to us. They can be dull and they can get repetitive. Buy the stocks of high- quality businesses... Diversify with low- cost funds... Allocate to stocks, bonds, and other real assets... Limit your speculations to sizes you can handle. But every panicked investor today wishes he did those things three months ago. The simple work of building a sturdy portfolio pays off in a crisis... even if it doesn’t excite in a boom. The second thing you need to do to invest for calm and freedom involves your mentality. You need to accept that stocks are volatile.


May 2020

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