How To Handle Uncertainty. Wealth Inspiration part 42 | by Building Arks with Jason Clendenen | Aug, 2022
Wealth Inspiration part 42
Wwisdom 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 just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the saying: maintain buying reserves until current uncertainties are resolved, etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buying of long-term values.”
It is a long quote, but an important one in my mind.
Buffett, in his typical way, cuts through mainstream financial advice and delivers two fundamental truths about investing:
- You can’t predict the future
- If you only follow the crowd, you are not likely to build wealth
The Future
Too many investors try to employ strategies that rely on their ability to predict the future.
They bet interest rates will rise (or fall) and so take either a short (or long) position in treasuries.
They bet that Tesla (or another company) will beat (or miss) earnings next quarter and so take short-term positions based on that guess.
This is the standard mantra of financial news. You cannot turn on CNBC, Jim Cramer, or Fox Business without hearing the predictions of where the market will move in the next few weeks or months.
This is not investing, but rather speculation.
No one can predict the futureand anyone betting on short-term market movements (ie, trying to time the market) is highly likely to end up disappointed as per this article by Charles Schwab.
The real money is not made in short-term trades, but rather in long-term ownership of quality assets bought 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 may prove to be a bad investment if you pay too much for the stock.
You may believe Facebook (META) to be a wonderful company with a billion users, solid earnings, and an economic moat.
But was it a good investment in August 2021 at $380 per share? Or would you have been paying “a very high price for a cheery consensus”?
The same company today can be had for $180 per share. Have the business fundamentals changed significantly, or just the cheery consensus?
I’m not recommending anyone should buy META, and I don’t own any myself, but I hope you can see that 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 on a much higher risk just by paying a higher price.
Long-Term
One of the best ways to overcome both of the above issues is to buy and hold for the long term.
Using a long time horizon will help to overcome any urge to predict short-term market movements.
In addition, holding stocks for many years will help to ensure that the price you paid (even if higher than ideal) still provides a reasonable return.
While no one can predict stock movements over the short term, the general direction over long periods is much easier to get right.
Assuming the US economy continues to grow over the next decade, the S&P 500 will also grow. We can’t say by how much or the timing, but we can have some confidence in the direction.
While buying META at $380 last year was certainly a bad short-term move, it may still prove to be a decent long-term investment.
If META continues to grow revenues and earnings year after year, its stock price will continue to increase.
So while you would have made a better return buying at $180, a higher purchase price may still result in a profit if held long-term (compared to a loss if sold as it tanked).
Focusing on a long-term investment strategy is a competitive advantage that individual investors can have over Wall Streetwhich is forced to focus on short-term price movements.
Conclusion
The above quote from Buffett helps cement two powerful investment concepts:
- You can’t predict the future
- If you only follow the crowd, you are not likely to build wealth
Focus on buying quality assets at reasonable prices and holding them long-term, and you will do well.
Best of luck and let me know how I can help!
After struggling to build wealth early in my career while following traditional financial advice, I set out on a path to learn about investing. Over a decade later, I’m financially secure and working towards full financial independence through real estate and the stock market. I have succeeded in building my financial ark to help me weather whatever storms may come.
I founded Building Arks to help busy professionals like you ignore mainstream advice and build real wealth.
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