Making It Possible for Investors to Be Secure in Their Later Years
Stock investing should be viewed as old-age insurance. Stocks are serious business because, for most of us, how we handle them will determine how we will be able to live in our later years. The challenge of living comfortably for the rest of our lives has become more of a challenge as the Prudential Life Insurance Company has recently pointed out that the first human to live to 150 years old is alive today. The Wall Street Journal reported in its March 19, 2013 issue, that many workers are saving too little to retire . The article quoted a study which pointed out that today 28% of American’s have no confidence they will have enough money to retire comfortably. This is the highest level in the study’s 23 year history. The Society of Actuaries in another report said that rising life expectancies could add as much as 97 billion dollars to corporate pension liabilities in the next few years. On top of this, companies continue to do away with traditional pension plans. Declining interest rates have eliminated the ability of many of the pension plans in this nation to adequately take care of the retirements of the employees they cover. That’s why investing in stocks in the correct manner is so important, because for many of us this represents the best opportunity we will ever have for comfort in our later years. In terms of managing money in a way that makes it probable that one will end up with wealth, there are timeless principles to be followed. Perhaps the most important is never to invest without a margin of safety. That’s how Warren Buffett became one of the wealthiest people in the world. He never was willing to take a lot of risk so he always used a safety net. In 2008/09 the market crash was the largest since 1929. Long-term, it was a non-damaging event for most of our clients because they were able to stay the course knowing that they had a net underneath them. A safety net is a margin of safety created by only investing in durable businesses for which we believe there is a high probability that they will continue to prosper for many years to come, particularly businesses which we feel confident will continue to pay and raise their dividends year after year. These are blue-chip, multi-national companies, which most people are familiar with. When it comes to the stock market, there really is no such thing. What exists is a market of businesses. To invest with a safety margin, one must have the ability to analyze a business so well one will know what price not to exceed in order to create a margin of safety. Without this knowledge it is impossible to know what price will create safety for the buyer. If living in comfort during your later years is your goal, you must never buy a stock without knowing what price will result in a margin of safety for you.
But this is where the hard work begins because it takes specialized training, years of experience, and many hours of hard work to determine what price represents a sufficient bargain to create long-term safety. It also takes equal experience for an expert to determine the proper price at which to sell in order to avoid dangerous overvaluation.
The next most important principle is never to be so impatient that you try to earn returns quickly. In other words never try to make a fast buck. PT Barnum had a saying for investors who go for fast returns - “there’s a sucker born every minute”.
The point is risk minimization, patience, and consistency creates wealth. To say it another way, the secret to creating wealth is to not make creating wealth your top priority. Warren Buffett had a charming way of saying this. “Rule No. 1: never lose money; rule No. 2: don’t forget rule No. 1”.
Part of the genius of Warren Buffett and other distinguished stock market investors of the past was to realize that once they became competent with the principle of safety net investing, they never again needed to be concerned about such things as the economy, who was President, what dangers in the world existed, etc. In fact, they didn’t ever have to do the impossible again which was trying to predict the future. They became protectors and not predictors! To manage money in the most certain way to create long term wealth, one must determine the correct price to pay when purchasing and the correct price to demand when selling in order to preserve one’s safety net.
In addition to having the analytic ability to determine the proper price to buy and sell, a manager must have the emotional control and the discipline to always be consistent in not deviating from the above value discipline. In selecting a professional manager, you must expect no less than one who offers at least a ten-year, third-party- verified performance record* showing more wealth creation than that which would have been earned by merely buying an index on the market as a whole. It takes at least ten years to show that the manager has managed well over a period containing many market ups and downs.
When one understands how difficult it is to manage a stock portfolio which creates long term wealth, one can understand it is imperative that professionals are chosen to do the job for you. Most individuals should not attempt to manage their own money. This is the equivalent of trying to be your own doctor or lawyer without training and years of experience. The importance of choosing the right professional organization cannot be overstated since, for most of us, the result will determine the kind of life we are able to live in our later years.
* A third-party verified performance record does not mean that the performance numbers are audited; it means that the firm has been verified to ensure that its policies and procedures are designed to calculate and present performance in compliance with GIPS® Standards. The Global Investment Performance Standards (GIPS®) is a set of standardized, industry-wide ethical principles that provide investment firms with guidance on how to calculate and report their investment results to prospective clients. Golub Group claims compliance with GIPS® and has been independently verified for the period of December 1, 2003 through December 31, 2012.The Golub Group, LLC is an independent registered investment advisor that specializes in portfolio management for high-net worth individuals, separate accounts, retirement plans, foundations, and endowments. The firm maintains a complete list and description of composites, which is available upon request.Please contact Jennifer Rouse at [email protected] or 650-212-2240 to receive the list.
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