photo credit: VirtualErn
The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values. -Warren Buffett
My first real introduction to investing came through Roger Lowenstein’s fascinating biography of Warren Buffett . The two lessons that stayed with me after my initial reading?
- The power of compounding. Every dollar we spend could be earning the average market return of 10%, so we better be sure that whatever we buy gives us a greater return, otherwise we are squandering that dollar.
- Stocks are like burgers. If you were interested in buying the quarter pounder off of the dollar menu, wouldn’t you be even more willing to buy it for 50 cents? If your Dow Jones index fund was appealing at $14,000, wouldn’t it be even more appealing at $7,000?
The latter point is a simple change in perception. If you have faith that the US and World economy will be stronger in 10,15,25 years from now than it is today, then invest, invest, invest.
My friend emailed me last week saying he thought it was probably about time to start taking advantage of his 401k.
Fantastic.
I know many of my friends don’t invest at all, so just hearing someone else besides me thinking about their investments was refreshing. But… 2 years after starting his job and he was just thinking about using his 401k???
Not fantastic.
Then my girlfriend relays the story of her coworker who had been out of college 4 months and was telling her that he was considering reducing his 401k investment because the market was doing so badly. Really??? The market is on sale and you don’t want to buy cheap?
My friend had the investment sin of not taking advantage of compounding. My girlfriends coworker had the investment sin of missing the market on sale.
Because my perception of investing was framed in a young age by the biography of Buffett, my first instinct when the market began its precipitous decline was to increase my 401k contribution to the maximum.
It took 7 years for the market to fully recover from the recession during 2000. 25 years to recover after the decline during the great depression.
But no matter how long recovery takes, the market does recover. Better to invest when the market is at lowest. And we should only be investing for the long-term anyways. In 25 years I still plan to be investing, so the money I invest now… when the market has cratered… should be the money that increases the most.
Burgers are on sale. Hope you’re hungry.
{ 3 comments… read them below or add one }
It all depends on your perspective. P/E ratios are still rather high, historically, and who’s to say that the markets will come back? Japan’s lost decade comes to mind.
To say that it was once “this high” and will get back there again soon and we’ll all be rich if we invest now is a little naive.
I fully agree. Now might not be the exact perfect time to be at the absolute lowest of the market. But timing the market is always a losers game.
Even worse than Japan’s lost decade was the lost 25 years after the great depression. But, the point I was trying to convey was that as someone who is under 30, now is the time to take advantage.
Our time horizon is 30+ years to accrue a gain. While 5 years from now the market might not have fully recovered, in 30 years it will have.
The biggest mistake a young investor could make would be to sit on the sidelines and not put there money to work. DO NOT invest in individual stocks, but DO invest in broad market index funds. Low cost funds that mimic the market are the best way to maximize on long term value.
In the 70’s, Newsweek ran the Headline, on its cover, “The Death of Equities” … from that point on a steady and impressive climb upward can be plotted.
Short term volatility can always hurt the short term investor, but as Buffett points out, short term volatity only helps the long term investor purchase equities at a much more attractive price.
Thanks for the comment. You made us think!
C’mon! A burger? Veggies are always a good buy and oh so much better for you. At least make it a real hamburger and not one of those faux,chemically laced, filled with sugar burgers from the drive thru.
Great money advice for young and old alike. I think money talk should be a language we all understand. Thanks for helping us to make sense of it.