How to manage uncertainty. Wealth Inspiration part 42 | by Building Arks with Jason Clendenen | August 2022


Wealth Inspiration part 42

Image by Gerd Altmann from Pixabay

OIsdom can often come in small packages, and wisdom about building wealth is no different.

Today’s quote is from Warren Buffett, the world’s most famous investor:

“An argument is made that there are simply too many question marks about the near future; wouldn’t it be better to wait until things cleared up a bit? You know the prose: maintain buying reserves until current uncertainties are resolved, etc. Before you reach for that crutch, face two unpleasant facts: the future is never clear, and you pay dearly for a happy consensus. Uncertainty is actually the friend of buying long-term stocks.

It’s a long quote, but important in my mind.

Buffett, in his typical way, cuts through mainstream financial advice and delivers two fundamental truths about investing:

  1. You can’t predict the future
  2. If you’re just following the crowd, you’re not likely to build wealth

The future

Too many investors try to employ strategies that rely on their ability to predict the future.

They are betting that interest rates will rise (or fall) and therefore take a short (or long) position in Treasury bills.

They are betting that Tesla (or another company) will beat (or miss) next quarter earnings and therefore take short-term positions based on that assumption.

This is the standard financial news mantra. You can’t turn on CNBC, Jim Cramer, or Fox Business without hearing predictions about where the market will go in the next few weeks or months.

This is not investment, but rather speculation.

No one can predict the futureand anyone betting on short-term market movements (i.e. trying to time the market) is very likely to be disappointed according to this article by Charles Schwab.

Real money is not earned in short-term transactions, but rather in long-term ownership of quality assets purchased at reasonable prices.

Reasonable prices

If you follow the crowd, you will struggle to build wealth.

Popular stocks sell for high prices.

Even a good company can turn out to be a bad investment if you pay too much for the stock.

You might think Facebook (META) is a wonderful company with a billion users, solid revenue, and an economic stronghold.

But was it a good investment in August 2021 at $380 per share? Or would you have paid “a very high price for a happy consensus”?

The same company can be bought today for $180 per share. Have the fundamentals of the business changed significantly, or just the happy consensus?

I don’t recommend anyone to buy META, and I don’t own one myself, but I hope you can see it buying the same company for $180 per share is MUCH safer than buying it for $380 per share.

Yet most people follow the crowd and do the opposite, therefore taking a much higher risk simply by paying a higher price.

Long term

One of the best ways to overcome the above two problems is to buy and hold for the long term.

Using a long-term horizon will help overcome any urge to predict short-term market movements.

Additionally, owning stocks for many years will help ensure that the price you paid (even if above ideal) still provides a reasonable return.

Although no one can predict short-term stock movements, general direction over longer periods of time is much easier to obtain.

Assuming the US economy continues to grow over the next decade, the S&P 500 will rise as well. We can’t say how many or when, but we can have some confidence in the management.

While buying META at $380 last year was certainly a bad decision in the short term, it may still turn out to be a decent investment in the long run.

If META continues to increase its revenue and profits year after year, its stock price will continue to rise.

So even though you would have gotten a better return buying at $180, a higher buy price can still result in a profit if held long-term (vs. a loss if sold as it was). fall).

Focusing on a long-term investment strategy is a competitive advantage individual investors can have on Wall Streetwhich is forced to focus on short-term price movements.

Conclusion

The quote above from Buffett helps cement two powerful investing concepts:

  1. You can’t predict the future
  2. If you’re just following the crowd, you’re not likely to build wealth

Focus on buying quality assets at reasonable prices and holding them for the long term, and you’ll do well.

Good luck and let me know how I can help you!

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After struggling to build wealth early in my career while following traditional financial advice, I embarked on the path of learning how to invest. Over a decade later, I am financially secure and working towards full financial independence through real estate and the stock market. I managed to build my financial arch to help me weather the storms.

I founded Building Arks to help busy professionals like you skip traditional advice and build real wealth.

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