So, readers of these missives probably know that we have been out of the country for a while. First was a week in Montreal seeing portfolio managers (PMs) and presenting at a lunch. Then off to Berlin for a few days to do the same before driving to Warnemunde, Germany to board the Crystal Cruise ship “Serenity” and speak at Steve Forbes’ “Cruise for Investors.” Now we don’t know what the economists in NYC are looking at, but the restaurants in Berlin and the subsequent ports were full of people as were the streets. So, Germany may be in economic trouble, but it sure didn’t look that way to us. As a sidebar, it was hotter in Europe than it was in Florida, but I digress.
In one of the Forbes’ sessions I was on a panel along with such notables as Gary Shilling Ph.D., John Buckingham (captain of The Prudent Speculator founded by our deceased friend Al Frank), Marilyn Cohen (Envision Capital Management), well you get the idea. In that panel discussion John Buckingham made many of the points we have lived by over the decades. First, the successful investor needs to have patience. As we have opined, “The rarest commodity on Wall Street is PATIENCE.” In today’s world there seems to be a need “to do something” because the markets are doing something. In reality, you do not need to do something. As Warren Buffett said, “I made most of my money by just sitting.” Indeed, sometimes me sits and thinks and sometimes me just sits!
John’s second point was about dividends. Dividends are a huge contributor to the total return for portfolios. Since 1926 the S&P 500 (SPX/2932.05) has returned roughly 10.4% per year. Five percent of that return came from earnings growth. Nine tenths of it came from Price Earnings multiple expansion (PE), but a large part of that return (4.5%) came from the compounding of dividends. His third point was about managing risk. For me this is the single most important tenet for the successful investor. In Benjamin Graham’s seminal book, The Intelligent Investor, Graham tells us:
The essence of portfolio management is the management of RISKS not the management of RETURNS. All good portfolio management begins and ends with this premise.
Or as my father use to say, “If you manage the downside in a portfolio and avoid the big loss, the upside takes care of itself!”