Sensible Investing is So Not Random

This essay was published first in September 2007

Sensible investing works all the time. We don’t have to be born in the right century or be gifted with uncommon talent. We just have to be rigorous in our buying discipline. We have to do what Carlos and Warren do.

USA Today calls Carlos Slim Helu “the richest man you never heard of.” Helu is a 67 year old Mexican whose net worth is second only to Bill Gates. He owns over 200 businesses; almost all of them are in essential services in Mexico.

He owns controlling interest in the phone company, in retail stores, in
hospitals and insurance companies. He has been a passionate investor since grade school. He learned by watching his father patiently wait for panics in the Mexican stock exchange to buy.  During the 1980s, when Mexico was under a debt crisis, Carlos bought excellent businesses when others, desperate to get their capital out of the country, were dumping at fire sale prices. Buying basic, solid businesses when they are out of favor is the foundation of Helu’s 60 billion dollar fortune.

Warren Buffett needs no introduction. Of his investment
style, Buffett says, “This is the cornerstone of our investment philosophy: make the purchase price so good that even a mediocre sale gives a good result.”

Buffett was mentored by Benjamin Graham, author of Securities Analysis, the bible of value investing. He began his investment career in the 1950s, sold out in the late 1960s when the market was in an overvalued manic phase, and bought back in during the 1973-74 crash in the US Market.

Both men have taken some of the randomness out of investing
by patiently waiting until the values appear before buying. The returns they will get over time are not predictable, but they are predictably better than those of the average investor because they have the discipline to wait-sometimes for years-for stocks to be cheap. When one of their investments doesn’t work out (it happens), the loss is tolerable because they bought right.

Observations

 The silliest thing I can say about sensible investing-that,  if it were easy, everyone would do it-is true. The key is to buy right. Today’s 401k investor puts money in stocks as if any old time is the right time to buy. He does this because, for the last twenty years social mood has been elevated and optimistic. This is wrong. Social mood will be extremely pessimistic during the next real buying opportunity. He should have been accumulating cash for that time.

The requirement will be the discipline to buy in a time when the nation is experiencing great difficulty. During such a moment, sensible investors will be said to be behaving ghoulishly, but this is not so. To commit capital in the midst of a crisis reflects a profound faith in our country’s resilience.

Cheers,

Rod

The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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