Individually, Are We Average?
DIS and DAT-Individually, Are We Average?- July 2011
“Then there is a man who drowned crossing a stream with an average depth of six inches” ~W.I.E. Gates.
“If you’re so smart, why ain't you rich?” ~Eudora Welty
“Then the Grinch thought of something...he hadn't before. Maybe Christmas -- ...he thought -- doesn't come from a store. Maybe Christmas…perhaps...means a little bit more.” ~Dr. Seuss, How the Grinch Stole Christmas!
The legendary investment manager Bill Gross is currently being talked about negatively in the media because he has said Treasuries are extremely overvalued, yet interest rates have continued to fall. He found himself in a similar position after his September 2002 comments that the Dow Jones Industrial Index if at 5000 looks fair. This reminds us of another well acclaimed fidelity Magellan manager, Peter Lynch. He published his theory on investment withdrawals from the article “Fear of Crashing” in Worth Magazine’s September 1995 issue. In that, he advised readers that they could safely withdraw 7% of their portfolios annually while being 100% invested in common stock.
One wonders if these two individuals who have held long standing perches at the top of the Investment/Financial world can be so wrong? How come they are rich?
That question encompasses way too many variables to even begin discussing here. Instead, we believe there to be a few nuggets of wisdom to ponder from these examples.
- Maybe investment management isn't about hitting short-term home runs. Maybe it's more about having the periods when you are wrong, not wipe you out. Risk management is more important than being right in the short-term.
- The knowledge that we are going to be wrong. We are going to make mistakes, especially when judged every year, quarter, month, week, day, hour, minute, second on the market price of an investment. If we believe there are opportunities, by definition we believe markets do misprice investments.
- Relying on averages and past performance can be hazardous. In markets, prices and events are constantly changing. One would argue that ALL studies on withdrawal rates can be thrown out. None have had to deal with a 0% short-term Treasury yield before.
We hope these thoughts remind you that you are an individual investing in a unique period. This has always been the case and will always be the case. So put your skeptical hat on when you hear chatter such as: this has worked in the past……… the average is…….. everyone else is investing here.
I hope you enjoy your summer!
See you next time.
James Pope
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