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August 2002
The past two and a half years have been financially devastating
to many investors. Equally devastating has been the change
in our culture. First – we endure a horrific terrorist
attack, changing our lives forever. Then we endure the fallout
of corporate greed as we watch accounting scandals rattle
the foundation of capitalism. In the words of Chicken Little,
“The sky is falling, the sky is falling.” Everyday
our office fields calls from nervous shareholders or befuddled
potential investors wondering if now is the time to “buy”
or the time to “bail”.
So – what is the best answer? Unfortunately, there
is no perfect answer. The ultimate decision may differ dramatically
because it depends on what you are trying to achieve in your
portfolio, your age, your employment situation, and on other
variables. But if I could generalize for all my investors,
I would tell them, “Remain calm,” or “This
too shall pass.” Just five years ago, many investors
threw every penny they had into any company with a dot com
after its name. Their investment was not based on quantitative
analysis or scrutiny, nor did it matter whether the company
they were investing in had any customers or revenues. How
far we have come. I believe the answer lies deep with each
individual investor, and it is the reason that most investors
are currently experiencing the worst stock market returns
of their lives.
Perhaps the most counseled and also most difficult rule for
investors to follow stems from the old adage "a watched
pot never boils". What I mean by this is if you watch
your investments every day, and your goal is long-term growth,
you will go crazy waiting for your portfolio to reach its
intended goal. We are constantly reminding people to keep
in mind their long-term goals, which can be difficult to do
in these markets. But you as an investor already do it outside
the stock market without even thinking about it. For instance,
when you purchase a home you do not get a monthly statement
that illustrates the amount your home's worth. You don’t
open the paper each day and review the “price”
of your home. You live in your investment and it is tangible.
This helps you keep your long-term discipline and focus, it's
what keeps your emotions out of the decision-making process.
But with stocks or mutual funds, most investors become frustrated,
scared and upset when they open their 401K statements or read
the share price of their investments in the paper and those
investments are not going their way.
I think that the investors who are “failing”
and driving this bear market are in basically two categories:
those who invest out of fear, and those who invest out of
greed.
Fear can work against an investor in both bull and bear markets.
As investors, all of us fear losing our money and we fear
missing out on the next big thing. Most investors end up losing
their long-term perspective and give into their fear. I believe
this is why recent market behavior is starting to show signs
of a classic capitulation. During the technology mania, most
news was interpreted positively, and right now, most news
is interpreted negatively. But remember, historically bear
markets finish in a flurry of selling and it is exactly at
that moment of surrender that the bell rings for the next
bull market. The ability of any investor to control their
fear and replace it with long-term moderation will determine
his or her success in the market.
Other investors get “greedy.” They want fast
returns and they want them today. Greed is the combination
of overconfidence and a desire to achieve profitable results
in the shortest amount of time. When things are going our
way, we predict it to be correct and we tend to “double
down” taking on more risk than we probably should. I
believe this kind of risk taking caused the market to fall
in 2000. Investors who succumb to greed are like gamblers.
The problem with gamblers is that once they start to lose
money many of them try the "chase their losses".
What I mean by this is they take greater risks in an attempt
to "win" back their money. These risky bets in turn
often develop into serious financial losses.
So what should the average investor do? We continue to believe
that if you buy quality companies that present real value,
have real customers, and operate real businesses, eventually
the market will realize that the selling in these companies
has been overdone and the quality names will rise to the top.
Most individual investors fall into the trap of buying high
and selling low- they buy when a stock or fund is “hot”
and expensive only to be disappointed in the short-term returns
and sell when that same “hot” product is at it’s
low. If there has ever been a better time to maintain long-term
vision and not be carried away by the mania of the stock market
we can’t think of it. Our funds have done well historically
because we have maintained our focus and not let our emotions
impede our investment strategy. We remain committed to finding
our shareholders exceptional values in companies we believe
will outperform the market on a historical basis, and we refuse
to deviate from that strategy. I believe commitment to both
an investment strategy and a well-defined long term goal will
allow any investor to succeed in shaping his or her own financial
freedom.
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