In an inflationary world, stocks outperform bonds, and long-term bonds fare particularly badly. - Foreign stocks with undervalued currencies outperform stocks denominated in inflating currencies.
- Chinese equities will continue to offer their outsized gains over the next several years, even after the amazing run thus far in 2009.
Most experienced, successful investors try to maintain a levelheaded approach to their portfolios. They try to observe the same principles through good times and bad. They try to rely more on historical perspective than on an analysis of day-to-day news developments. They stick to high-quality investments and they resign themselves to the fact that some market downturns will take them by surprise. They willingly take on some risk, however, because they know that this brings the opportunity for growth, in dividends and in capital.
Less experienced (and, generally, less successful) investors set out with the same goals, but often fail to attain them. Lacking historical perspective, they see great importance in every news release and prime rate change. This, though, can sabotage their efforts, by making them lose sight of the overall picture.
In times like these, for instance, with media reports of poor credit ratings and companies going bankrupt, some inexperienced investors quit thinking like investors. Instead, they start to think like bankers. Instead of looking for opportunity, they devote themselves to avoiding risk. This ensures they'll miss out on opportunity. When investors think like bankers, after all, they forget that they're trying to limit losses, not avoid them altogether. If you let yourself be cowed by the possibility of loss, you just might sell out when risk appears to be greatest — when prices are at the bottom. That's when you ought to be holding on, if not buying.
Mr. Bernard Baruch, who made a stock-market fortune in the first half of the twentieth century, used to advise investors, "Don't try to buy at the bottom and sell at the top. This can't be done, except by liars." However, many successful, experienced investors do manage to avoid selling at the bottom and do avoid buying at the top, most of the time. They do this by following a level-headed approach through boom and bust and by sticking to what we refer to only half-jokingly around the office as 'that old-time religion' — gradually buying a balanced, diversified portfolio of high-quality stocks and sticking with it for long periods.
The funny thing is that bankers make the opposite mistake. They too can profit from a levelheaded approach and historical perspective. For traditional bankers, this comes down to trying to avoid as much risk as possible, at all times. After all, the best that a traditional banker can hope for is to get the bank's money back, plus interest. At market tops, however, some bankers start to think like investors.
Instead of avoiding risk, these bankers start to fret about missing out on opportunity — and missing out on huge bonuses. They make high-risk bets in hopes of striking it rich rather than sticking to tried and true lines of business. Indeed, the management of investment-banking firm Lehman Brothers and Merrill Lynch bet their companies' futures — and lost.
If you do try to time the market — to buy at the bottom and sell at the top — then you need to think like a banker or an investor, depending upon financial conditions. When profits and stock prices have risen for some years and everything looks rosy, think like a banker — focus on risk and dwell on what it will cost you if something goes wrong.
In times like today, however, when profits and stock prices are down from their peaks, you should think like an investor. Get used to the idea of taking on risk. But deal with it by gradually buying a diversified portfolio of dividend-paying, high-quality stocks. Recognize, too, that stock prices already reflect most of the risks you hear about in the media.
As an investor, you should observe the standard rules. But you also have to keep opportunity and the prospects for growth in mind. After all, that's what makes it worthwhile to be in the stock market. It also protects you from another less-obvious risk: running out of money before you run out of time.
