Hello friends,
Welcome to the 6th edition of The Rational Investor Newsletter. Every business day, we share a timeless bit of wisdom from a legendary investor, followed by a little commentary to help Main Street become better investors!
Onto today's quote...[emphasis is mine]:
**********
“That is not how it works in the equity market: in our opinion business outcomes can be more predictable several years out than they are in the near term.
For example, we have no idea where the market will end this year but given corporate strategies, capital allocation and starting valuations, I think we have some idea of how our companies will evolve over the next few years.
In other words (at this point economics students may wish to cover their ears) the return from investing in shares can be both increased and de-risked by time.”
Most investors look to reduce risk by trying to avoid volatility. But as Nick Sleep reminds us, risk can be mitigated by time.
This is especially true for Main Street investors who have wisely chosen to invest in a market-like portfolio, rather than trying to buy individual companies.
We know that stock prices can fluctuate wildly from day to day, but business values typically advance steadily and consistently over time.
In other words, the longer your time horizon, the more those short-term price swings fade into the background as the enduring value of the businesses you own creeps steadily higher.
It's clear to me that the real margin of safety in investing doesn’t come from predictions, or even from what price you initially pay for the funds you own.
The real margin of safety comes from time and patience.
Think about this: If you bought at the top (just before the decline) of any big market catastrophe over your investing lifetime, you would still have a very satisfactory return from where we sit today.
That's not hyperbole. That's what has happened for investors who stood by their portfolio through it all. As evidence, the S&P was at 60 in 1960 and is now over 6,000.
You didn't have to time anything to benefit from the growth in the value of this collection of businesses. You just had to own it.
It's why Sleep rightfully noted that our returns can be increased while at the same time being de-risked by the passage of time.
So instead of asking what will happen next in the market, ask where the market will be in five, ten, or twenty years. You may find that you'll begin to ignore the noise of the day-to-day and focus on the time frames where lasting wealth is built.
Until next time, invest rationally.
-Ashby
P.S. If you'd prefer this in podcast form (plus me riffing a bit more on this topic), you can listen to it via The Rational Investor Podcast.
