By Pat Kujawa, Regional Director

Buffett, Baseball, and Investor Behavior

Over the past few years we’ve been bombarded by much negative news, especially lately. I want to share some thoughts about how investors can avoid letting negative news and their own irrational thinking derail their long-term investing success. In his poem If, Rudyard Kipling counseled “If you can keep your head when all about you are losing theirs … Yours is the Earth and everything that’s in it.”

Over the past few weeks, we’ve heard stories of bank failures with Silicon Valley Bank, Signature Bank, the list continues to grow. Many experts have commented about the poor risk management practices that these banks undertook; the implication is that there are other shoes waiting to drop. It seems so easy to assign blame and think we can extrapolate the events of the past few weeks into the future, but that’s unwise and illogical.

The reality is that as investors we don’t know whether there will be a recession in the near future, whether inflation will keep rising or start to abate, whether stocks will go into a bear market, whether real estate will crater … I could go on. Should we adjust our portfolios because we are troubled and uncertain of the future? Not if we follow the wisdom of Warren Buffett, generally regarded to be one of the best investors ever.

Buffett and …

In a recent letter to shareholders of Berkshire Hathaway, Buffett counseled that he and his longtime right-hand man Charlie Munger “refrain from basing their decisions on where they think interest rates, oil prices, or other factors that affect markets will be in a year’s time.” He also stated that he and Munger “firmly believe that near-term economic and market forecasts are worse than useless.”

Yet, we constantly hear on cable news channels what the experts know Is likely to happen and what investors should do about it. Buffett said Berkshire’s money is invested in “a manner that will achieve an acceptable result over time.” Over time – a very key phrase. Let’s compare this to baseball.

Baseball

Recently we celebrated the start of another MLB regular season, a joyous time of year when hope springs eternal.  Baseball is a nine-inning game; teams play 162 games during the regular season. So while the strategy might change a bit from inning to inning, or game to game, the most successful teams take a long-term approach.

Investors who wish to be successful, especially those approaching or in retirement, should do the same thing. Short-term market volatility can unnerve investors, especially those who have not constructed a portfolio that is better able to withstand volatility. The point is to focus on the long term. To avoid seeing your financial position weaken, you should be growing your money over time at a higher rate than inflation. To extend my baseball analogy, to win, your team needs to score more runs than your opponent over a nine-inning game.

When investors develop well-thought-out plans that, following Buffett’s reasoning, give them a very good chance of achieving an acceptable result over time, the worst thing they could do is let short-term market movements – and their perceived ability to absolutely know what the next week, month, year, etc., will be like – sidetrack them from their plan. To me, this is analogous to a baseball team that deviates from their strategic approach to offense that has landed them in first place. By being overly conservative over the course of one game or a season, they will likely forego opportunities and end up losing more games than if they stuck to their normal game plan.

“Safety” in investing viewed from a long-term perspective

How does this apply to today’s market conditions? For the past 40 years, interest rates have been trending down, as inflation was relatively benign. For the past few decades, investors were not rewarded with competitive yields for owning bonds or cash. Over the past year, as inflation has increased to the highest levels in 40 years, the US Federal Reserve Bank and other central banks have aggressively hiked interest rates – and investors can now receive more yield.

But while going to cash, CDs or bonds might make investors feel better in the short run, based on history, it is almost certain to cause them to lose purchasing power to inflation over time. They would be wise to admit they don’t know what the near-term future holds, and therefore should not make decisions as if they do. Management at Silicon Valley Bank is criticized for taking large bets that didn’t pay off, but many finger pointers don’t realize the irony of doing a very similar thing.

Is going to cash risky? Yes, as it takes you away from equities that over time have been your best chance to beat inflation. Those who retreat to cash would be better off admitting that their crystal ball is just as murky as everyone else’s. Diversifying portfolios has been proven to work over time. There again is that phrase that Buffett used – over time. Investors in their 60s and 70s may live another 20, 30, or 40 years and therefore need their portfolios to outpace inflation. Taking on short-term perceived safety is like a baseball team that falls behind in the second inning and stops playing to win the nine-inning game.

This doesn’t mean you can’t make some minor necessary changes in the makeup of your portfolio. But heed Kipling’s and Buffet’s advice. Keep your wits and focus on the long term. Over time, that will give you a good chance of winning.

Disclosure:

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.