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How can I possibly fit into this melee and write something remotely interesting? Well, over the Christmas period I have been thinking about my e-zine. In 2012 I am going to concentrate a little more on tax issues (I think these are going to become more relevant in Italy in 2012, with ‘Monti’s Manovra’). In addition to that I am going to add in some general financial planning info, financial housekeeping tips and more updates on investments.
I, along with the Spectrum IFA Group advisers around Europe have been invited to dial into a regular conference call with JPMorgan in London and their panel of economists and marketeers each month. I will be feeding back on that as well.
With all this in mind I wanted to start the year with something that could help get you through a potentially tumultuous year, once again. I am acutely aware that investments, to some degree, touch all our lives. Either through a pension/retirement plan, an investment portfolio, some inherited share certificates in the bottom draw, or a family member/friend who has their own financial concerns, to name a few
With all this going on how is it possible to view things through different eyes?
To assist in reducing the stress levels I am going to refer to a metaphor, Mr Market, which was thought up by Benjamin Graham (the mentor to Warren Buffet and, to some, the father of value investing) back in the 1930's and the Great Depression.
His relatively simple metaphor should forever change the way you look at the price of your investments.
The concept of Mr. Market goes something like this: imagine you are partners in a private business with a man named Mr. Market. Each day, he comes to your office or home and offers to buy your interest in the company or sell you his [the choice is yours]. The catch is, Mr. Market is an emotional wreck. At times, he suffers from excessive highs and at others, suicidal lows. When he is on one of his manic highs, his offering price for the business is high as well, because everything in his world at the time is cheery. His outlook for the company is wonderful, so he is only willing to sell you his stake in the company at a high price.
At other times, his mood goes south and all he sees is a dismal future for the company. In fact, he is so concerned he is willing to sell you his part of the company for far less than it is worth. All the while, the underlying value of the company may not change - just Mr. Market's mood.
The best part of this entire arrangement: you are free to ignore him if you don't like his price.
The next day, he'll show up at your door with a new one. For your interest, the more manic-depressive he is, the more opportunity you will have to take advantage of him [don't worry, he doesn't have feelings or mind being taken advantage of.]
You will be able to look at Mr. Market's offers and reject or accept them... the choice is yours.
This is exactly how the intelligent investor should look at the current investment markets - each investment that is traded is merely a part of a business. Each morning, when you open up the newspaper or turn on the news, read the updates on your favourite website, get your news feeds, talk to friends about Italian Bond prices or countless other sources of info, you can also find Mr. Market's prices.
It is your choice whether or not to act on them and buy or sell.
If you find an investment that he is offering for less than it is worth, take advantage of him and buy it. Surely enough, as long as the investment is fundamentally sound, one day he will come back under the sway of a manic high and offer to buy the same company from you for a much higher price.
By thinking of markets in this way - as mere quotes from an emotionally unstable business partner - you are free from the emotional attachment most investors feel toward rising and falling prices.
Before long, when you are looking to buy you will welcome falling prices. The only time you want to invite high prices is when you are eager to sell your investments for some reason. Thankfully, you are free to wait out Mr. Market's emotional roller coaster until he offers a price that you consider equal to or higher than the real value.
This is perhaps your greatest advantage in your investments.
My point here is that you may worry about your investments and whether they fall or rise in value, when really you should focus on your objective and motivation for investment.
If you are investing for retirement and intending to cease work in 20 years time, are low prices today an opportunity or a threat? Equally if you are retired and want to live on the income from your investments, as long as the interest/income you receive from your investments remains the same, equal or rises over time, are Mr Market’s daily price offerings important?
As long as you are in a position to wait for Mr Market to return with a higher price, then you can view all other possibilities as potential opportunities.
I have said it may times before. Time and Patience are an investor’s greatest ally.
‘Investing is simple but not easy!’
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