Long Term Thinking and Discipline Wins!

There continues to be more and more media attention that the ‘buy and hold’ strategy is dead. That Modern Portfolio Theory no longer works. This is another attempt by the Wall Street bullies to keep your money on the move.

There is even more conversations about ‘safe’ investments. ‘Guaranteed’ is often used to describe their ‘solution’.

There are an increasingly amount of ‘experts’ extolling the underperformance of ……………….. for the near future. These ‘experts’ have an obvious conflict of interest as they recommend their own solution.  These ‘experts’ are using recent history as a sales gimmick. You will hear ‘look I would not have as much ………… or ………… will underperform for some time to come’. Or both.  As you can see the underperformers are interchangeable. (As well as the solutions.)

True investors are much better served using a passive management strategy and utilizing Modern Portfolio Theory and ‘buy and hold’. This strategy, over the long term will lead to success. It should be emphasized that ‘buy and hold’ should really be ‘buy and rebalance’.  ‘Buy and hold’ might signify set and forget and we must rebalance back to our target allocation periodically. This entails buying low and selling high, automatically.

When we rebalance we sell asset classes that have done well and buy asset classes that have done poorly, short term. Buy low, sell high. This is done periodically and eliminates the need to forecast the future.

In his 1993 letter to shareholders of Berkshire Hathaway, Warren Buffet counseled; “By periodically investing in a ‘passive’ fund….the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” He repeated the advice 10 years later in the 2003 letter. Mr. Buffet, in my opinion, was saying that trying to stock pick, market time and track record investing was ‘dumb’.

Over the long term the properly coached investor will outperform the ‘sophisticated’ investor. These ‘sophisticated’ investors believe because of their wealth they will receive special advice. This may work over the short term. However over the long term the properly coached investor will prevail.

To be successful, investors, no matter how large, would be far better off using a passive strategy with Modern Portfolio Theory as part of the process. Modern Portfolio Theory is actually part of a larger strategy called Free Market Portfolio Theory.

Remember no strategy always looks like the right thing to do. We must continue to believe the free markets do work.  Most importantly we must believe in our strategy and remain disciplined.

We must own equities….. globally diversify ……. rebalance.

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