Newspaper article Sarasota Herald Tribune

Sky Isn't Falling If You Invest in Companies, Not the Market

Newspaper article Sarasota Herald Tribune

Sky Isn't Falling If You Invest in Companies, Not the Market

Article excerpt

It is not unusual for various prognosticators to suggest that Wall Street's volatility and resultant risks are likely to outweigh any possible returns. Such comments are dubious at best and at worst they are simply wrong. Of course, with a little ingenuity you can always postulate circumstances in which investing in equities is an inappropriate strategy.

For example, a carefully selected time series of market data is often used to validate a hypothesis, either pro or con, in an effort to encourage or discourage you from undertaking a particular investment program.

Be careful. Anyone can slice and dice historical data to segregate those periods when the stock market did very well. It is just as easy to find periods when the stock market did not do well. The funny thing is that market statistics of that nature will have little or no bearing on your portfolio's performance.

During a bull market, when it seems every stock is advancing, it is not unusual for investors to lose money. Likewise, positive returns can be achieved when the markets have a glide path similar to your average brick. Having analyzed countless portfolios over the years, I can personally attest to the validity of those statements.

Over time, a stock gains in value because the underlying company reinvests some or all of its earnings back into the business, thereby creating a compounding effect and subsequently an increase in the value of the company and its shares.

As Benjamin Graham, the father of investment analysis, so carefully explained, your investment strategy should be to select only quality companies in which you can become a partner at a discounted price.

In other words, do not invest in the market; invest in the future of a specific company.

Nonetheless, investors are continually encouraged by so-called experts to move in and out of the market or in and out of specific stocks, all in the name of rebalancing. The analysis of these "experts" amounts to nothing more than pernicious, albeit influential, nonsense. As Peter Lynch, former manager of the Fidelity Magellan Fund, said, "Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves. …

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