The Best ‘Old-Timer Advice for Investors

If you don’t know who you are, this is an expensive place to find out.

– Adam Smith, The Money Game

Today, we continue our series on investing.

Our lunch yesterday was enjoyed in the company of Dr Richard Smith, the mathematician behind He reminded us that investing is more than just numbers; it is flesh and blood… nerves and gut instincts.

Guess who are the world’s best investors?’ he asked.

Rich people. And it’s not because they have more information or better advisers. It’s because they are calmer. They are not like the little guy who is worried about losing his retirement money.

They can take the long view. They can follow the best old-timer advice on Wall Street: “Get right and sit tight.”’


Right place, right time

To rehearse what we know already: You get most of your investment gains simply by being in the right place at the right time.

At Bonner & Partners Family Office, our little family wealth advisory service, we call this ‘beta’.

For the last 100 years, stocks have been the place to be. You just had to get right into stocks…reinvest your dividends…and sit tight.

An investment of $10,000 in 1915 would have turned into $1,754,401.41 today.

Most people don’t get right or sit tight. Instead, they buy this and sell that…fidgeting around, following whatever whims and fads the marketplace produces.

They get excited at market tops and buy trash. They lose heart at market bottoms and sell treasures. The average investor consistently does much worse than ‘buy and hold’.

Richard has developed tools to help investors protect themselves from their worst enemy — themselves.

But since most do worse…some must do better.



How to be a value investor

We have already given you our flimsy understanding of value investing.

In a nutshell, you turn off the TV and cancel your subscription to the newspaper.

Instead, you do your homework to find out what a company is likely to produce in earnings over the years ahead. Then you discount that future stream of revenue to its ‘net present value’.

This accounts for the fact that a dollar earned tomorrow won’t be worth a dollar earned today. (A dollar earned today, after all, can accrue interest.)

You buy when the market price is substantially below your estimate of fair value…allowing yourself what Benjamin Graham called a ‘margin of error’ in case you added the figures wrong.

It is long, hard work. That’s why most people don’t do it. And it’s why most people don’t get Warren Buffett’s returns.

We also should remind you that just because stocks were the place to be for the last 100 years doesn’t mean they will be a good place to be for the next 100…or even the next 10.

You see, in the investment world there is always ‘more to the story’. Most of the stock market gains of the last 100 years have come in the years since 1982. And the backstory of those years is the tale of a credit expansion gone wild…


Cat and mouse

Of all the things twisted and perverted by the great credit expansion, investors’ perceptions are at the top of the list.

The money poured in; almost all assets rose in price. And investors – watching this over three decades — came to the conclusion it was just the way it works.

It’s not. The problem with credit expansions is that they are always followed by credit contractions. And the bubbly stock prices you see at the end of the expansion phase turn into the flattened-out prices seen in a depression.

So, don’t count on a rerun of the last 100 years. Our own indicator — the DAMA system (more about that anon) — tells us that the most likely return rate on US stocks over the next 10 years is MINUS 7% a year.

Another important comment is that the long-term returns on any investment always seem best just before the investment collapses.

That’s the way the financial world works: Like a cat with a mouse, Mr Market plays with his prey before killing it.

Investments go up. At the top, they look like winners. At the bottom, the picture is completely different.

Then the line on the graph is pointing down, not up. And the record clearly shows that this investment is a big loser. Long-term investors see that this is something to stay away from, not something to buy.

The ups and downs of a market are as natural as the change of seasons. They should be expected. Instead, investors are shocked and appalled every time the temperature falls.

That’s why it is so important to know more about the investing world than just about investing itself. You also have to ‘know thyself’.

As Richard Smith pointed out, if you don’t, the markets will teach you. And it will be a very expensive tuition.



Bill Bonner
For Markets and Money


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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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