Don’t Lose Your Position – It’s a Bull Market

Most of us believe that experience in an occupation, measured by time spent on the job, leads to higher productivity for the employer and greater income for the employee. I agree that this belief holds true for most occupations. However, I disagree when it comes to the business of providing investment advice. In this business, the best experience is gained when an advisor’s own wealth is at risk, and his or her decisions are measured by personal dollars gained or lost. While it’s always good to be right about your investments and make money, the most valuable knowledge is gained through the experience of being wrong.

I am sure many practitioners will take offense at this idea, and there are numerous academic studies that will provide “proof” for their own investment approach. They may run Monte Carlo simulations and state probabilities of outcomes with utmost confidence, advising you to manage your savings accordingly. They may tell you about their collegiate degree, their hard earned professional designation, or their years of experience providing advice. All of these are positive things, but they are only part of what is needed in improving investment results. The remaining requirement is the emotional experience that comes only when one’s own money is on the line.

Market prices for common stocks and bonds are at historically high levels in today’s market. This fact by itself is not important, at least to us. What is more important is that market prices relative to investment value are also at very high levels. All publically traded securities have an investment value and a speculative value. It is our job to attempt to separate these two elements, for both the price of each individual security and for the market in totality. Determining an investment value is easy. It is the speculative value that is near impossible to measure. Most of our attempts to do so have taught us a good lesson, and have thus influenced our approach to portfolio management.

A diversified portfolio of common stocks has a rich history of performance, both in preserving wealth and increasing it over a lifetime. This fact, plus our belief that it is impractical and impossible to determine future highs and lows of market prices, has led us to conclude that a portfolio for individual investors should always include some common stocks. Of course the weighting of common stocks in a portfolio is subject to each individual’s needs as well as their emotional ability to withstand large fluctuations in prices. In a non-restricted investment portfolio, the percentage of common stocks held should be adjusted downward when the degree of speculative value exceeds an estimate of investment value inherent in the current market price. This percentage should continue to decrease as the speculative value increases. I mentioned earlier that we learn the most from our mistakes, and I learned an important lesson many years ago: it is easier to buy and sell than to just sit tight.