As cliché as it feels to make a New Year’s resolution, I believe they can be helpful – especially for your finances.
It’s a new year, which means we’ll be encountering both threats and opportunities as we try to move away from last year’s whipsaw market.
And in order to be more successful this year, I have three “resolutions” I suggest making as we tread carefully into 2024…
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A Tale Of Two Americas
A lot of people don’t realize it, but America has been divided into two groups for the last 30 years or so. Now when I talk about two group, I’m not talking about rich or poor; instead, these two groups revolve around those who know how to leverage new technologies… and those who don’t.
The 1% make up the first group: the ones who managed to take advantage of the internet’s wealth-building opportunities… while the 99% make up the second group. Right now, there’s an incredible opportunity for everyday Americans to ascend to the first group… It’s all thanks to a brand-new technology silently taking the country by storm.
Consider the catastrophic losses suffered in the early 2000s by some employees of Enron, who were encouraged to put most – or even all! – of their 401(k)-retirement savings in Enron stock.
These folks did not use Intelligent Asset Allocation — and they paid a heavy price.
In the late 1990s, Wall Street considered Enron to be one of the world’s most innovative companies. Its executives were the superstars of Corporate America, and the Houston-based company received endless accolades.
In early 2001, all 15 Wall Street analysts who followed the stock rated Enron a “buy.” Meanwhile, the financial press also was heaping praise on the stock.
In August 2001, the Houston Chronicle lauded Enron as “a company with innovative people who have shown they can turn ideas into profitable businesses.”
In its September 2001 issue, Red Herring magazine insisted: “Forget about Microsoft. America’s most successful, revered, feared — and even hated — company is no longer a band of millionaire geeks from Redmond, Washington, but a cabal of cowboy/traders from Houston: Enron.”
Less than three months after the Red Herring’s glowing endorsement, Enron filed for bankruptcy. As its stock plummeted to zero, the “cabal of cowboy/traders” gained infamy as some of the biggest fraudsters in American history.
The employees who bet everything on Enron were completely wiped out. When the company went under, they didn’t just lose their jobs. They lost their savings, too.
It was easy to be taken in by all the hype surrounding Enron — and to be seduced by the stock’s seemingly limitless promise and potential. It was easy to believe that Wall Street and the financial media knew what they were talking about.
Enron seemed like a sure thing, especially to the folks who worked for this high-flying success story. That’s why so many employees placed all of their retirement savings in Enron stock. Their asset allocation was 100% Enron.
Not good.
If you devote a huge portion of your wealth to a single asset class — whether it’s stocks, bonds, oil, gold, real estate or whatever — you are financially fragile. You expose yourself to serious harm.
Resolution No. 2: Just Say “No”
To outperform the market, an investor must maintain the discipline of saying “no” to bad risks… and then keep on doing that until good risks come along.
Marginal opportunities are what I call “bad risks,” or “asymmetrical risks.” That’s when the potential upside is much smaller than the potential downside.
Here’s an extreme example to illustrate the concept…
Riding in a barrel over Niagara Falls for a $20 prize. If everything works out perfectly, you win $20. If not, you perish.
Here’s another example…
Running red lights to get to Disneyland 10 minutes early. If everything works out just right, you make it to the “Happiest Place on Earth” and have to wait 45 minutes instead of an hour for Space Mountain. Or you might get into a horrible accident.
These examples of asymmetrical risk are so obvious that they seem ridiculous, but many asymmetrical risks are less obvious.
Disciplined investors understand the dangers of these risks; that’s why they begin their analysis by asking “What can go wrong?” rather than “What can go right?”
Disciplined investors understand that investing is optional and that they must be selective.
It’s OK to say “no” to bad risks. Unfortunately, many investors grow impatient. We justify buying richly valued stocks by comparing them to stocks that are even more richly valued. But it is still dangerous to buy stocks that are “less risky.”
It’s no different than camping 40 feet away from a pride of lions because a few other folks are camping only 20 feet away. You might wake up every morning 40 feet away from the lions, just like the morning before. But getting eaten is also possible, if not probable.
Avoiding bad risks is the essential first step toward outperforming the market.
Resolution No. 3: Stay Patient
Eagle-eyed readers may recognize this example because I have mentioned it a couple of times previously.
Let’s call this example, “Stock X.”
If you had purchased Stock X 36 years ago (which is when the Bloomberg records on it began), you would have endured the following setbacks…
21% of the time, your stock would have produced an annual loss…
7% of the time, your stock would have produced a three-year loss…
And on one occasion during those 30 years, your stock would have spent an entire decade producing a loss.
Think about that! How would you feel about holding a stock for an entire decade without making one single penny on it?
If that stock had been “Stock X,” you might have been okay with that particular setback.
“Stock X” is Berkshire Hathaway (BRK-A), the investment vehicle that made Warren Buffett a multi-billionaire… and made millionaires out of many ordinary investors.
Berkshire produced its success over a multi-decade span that included numerous setbacks, or “slumps,” along the way.
It’s true; if you had purchased Berkshire Hathaway 36 years ago and held that stock until the present moment, you would have endured numerous rough patches. Based on rolling 12-month calculations, BRK-A produced a negative annual return 21% of the time.
But those uncomfortable one-year episodes would have seemed like a day at the beach compared to the nearly 11-year stretch from June 1998 to March 2009 when BRK-A produced a loss!
One decade is a very long time to wait for a payday. It’s a very long time to be wondering why you hadn’t done something else with your money. Anything else.
And yet, during the last 36 years, combined, Berkshire shares have delivered a staggeringly large return of more than 18,000%!
During the identical timeframe, the S&P 500 Index produced a total return of about 3,900%. In other words, BRK-A produced more than four times the gains of the S&P 500!
Berkshire’s extraordinary investment results would not have been possible without a long-term time horizon. As Warren Buffett himself famously explained, “Our favorite holding period is forever.”
No one wants to endure a 10-year slump of zero returns. In fact, no one wants to spend any time at all losing money. But that’s an unavoidable part of the investment process.
But without patience, a wonderful business will never deliver a wonderful stock market gain. Some things are worth waiting for.
However, you won’t have to wait too long to find incredible stocks worth investing in…
Right now, I’m working on my Power Trends Forecast for 2024 – the most promising “Big Picture” opportunities that can deliver exceptional rewards, no matter the market environment.
I’ll deliver this annual forecast to readers of my Investment Report research service first – as early as next Friday, Jan. 12.
