Classic Investment Advice Everyone Should Consider When Weathering a Market Storm

Written by John Woodfield Portfolio Manager, CFP®, CIM®

Good Investment Advice Focuses on the Investor not the Market

Have you ever wondered what it takes to do well as an investor?

Do the Warren Buffett’s of the world have something that regular people do not?  To shed some light on this I have borrowed some gems from the classic investment book by Benjamin Graham (who was Warren Buffett’s mentor).

Graham states, “forget about what the stock market is going to do. Instead, focus on what you, as an investor, ought to do.”  What you “ought to do” depends on your personal situation. Are you in the savings phase of life or have you already saved enough?

Investors vs. Speculators

Graham makes a sharp distinction between an investor and a speculator.

“The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices,” Graham wrote. The speculator, on the other hand, cares mainly about “anticipating and profiting from market fluctuations.”

If you are an investor, price fluctuations have only one significant meaning. According to Graham, these moves are: “an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”

Speculators are “trapped by “Mr. Market,” who offers either to buy your stock or sell you more.

Graham knows the market always wants you to trade. Some of the time, the prices set are sensible. Other times they are “ridiculously” high or low.

Due to human nature, many people become more eager to buy or sell as prices become more chaotic. A speculator is happy to buy more shares when prices rise, betting that Mr. Market will buy them back later at higher prices. When Mr. Market’s enthusiasm turns to fear, the speculator panics and sells.

Graham states: “The primary reason many individuals fail as long-term investors, is that they pay too much attention to what the stock market is doing currently.”

Intelligent investors, he insisted, don’t need superior intellect, training or expertise. Instead, intelligence consists of patience and self-control. “The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation.”

All investors have to decide if they are investors (defensive) or speculators (enterprising).  If you are defensive, you seek to avoid mistakes and losses, and do not want to spend a lot of time and emotion on investing. If you are enterprising, you are willing to attempt to outperform and should brace yourself for a wilder ride.

Sleep Well at Night by Minimizing Risk

Graham warns both defensive and enterprising investors that they should reconcile themselves “to the probability rather than the mere possibility” that stocks will fall by 33% or more at least once every five years. 

Not many investors can sleep well at night with this type of drop. If the market's sizable decline in early 2020 filled you with fear then you are most likely more defensive than you ever imagined. Weathering another steep drop, which will happen at some point, is the price for being in the market.  This is why diversification is so important.

Getting the timing right, Graham said, is close to impossible and is a fool’s game. No one knows how much the market will go up or down in any period.  We do know that historically the markets have been excellent growers of wealth.  The key is knowing yourself, listening to your advisors, and riding the bumps.

Particularly when considering financial planning for retirees, choosing an approach that considers your risk tolerance and minimizes taxable events is often the most prudent approach.

Next Steps

If you’re a Canadian resident or are planning on moving to Canada or the US and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management.

About the Author

JOHN WOODFIELD

John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP), and in 2007 was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.

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