Observations From The Great Minds...

Every now and then, a long-time financial writer retires and pens his parting words to a loyal fan base. These pieces are always interesting because the departing author finally gets to say what they really think. Here are few useful ones that we have run across recently.

 Brad Perry, former President and Chairman of money management firm David L. Babson, wrote a wonderful newsletter both at Babson and subsequently in retirement. In his final issue he outlined the core things he has learned over his career.

 Act on what you know. Brad reminds us that much of the future is unknown and cautions us not to base investment decisions on mere guesses, forecasts or predictions.

 Do the math. While investment decisions cannot be made on numbers alone, they do help discipline our thinking. Numbers, whether they relate to earnings or the economy show us what is factually known.

 Learn from history. Much economic activity is based on human behavior which remains remarkably consistent over time. Financial bubbles and bear markets are driven by investors’ feelings of greed and fear. Learn to recognize periods when both hold sway.

 Don’t try and be too smart - just use plain common sense. Investors have gotten into more trouble over the years trying to “outsmart” the market. These efforts have taken the form of overly complex products and short-term trading strategies. But a “plain vanilla” approach focusing on long-term results and low fees more often wins out.

 Focus on quality companies and the valuation of shares. Identifying good businesses is important and then you need to buy at the right price. Not easy, but this is the investment challenge.

 Practice patience. Investing requires patience; both to wait for the right price to come along and to wait through a period of sub-par results when a holding stumbles.

Vanguard founder John Bogle, at age 87 continues to write widely on investing. According to Bogle, the worst mistakes investors can make include:

Basing investment decisions on past performance. Investors turn to a number of metrics to improve their chances of outperforming. Past performance is one of the most commonly used metrics but it is one of the least reliable. The reason? Outperformance does not persist over time and, in fact, reverts to the mean.

 Looking only at nominal returns. Over long periods of time, stocks have produced average annual returns in the 9%-10% range and inflation has averaged about 3%. As a result, investors have earned close to 6% per year in stocks once inflation is taken into account. Investors who ignore the eroding impact of inflation risk under-saving for important long-term goals like retirement.

Finally, former Wall Street Journal editor, Michael Siconolfi recently wrote a good summary piece on the lessons he learned while covering the mutual fund industry. Many of his observations, such as the need to focus on the long-term and keep your investing strategy simple, are similiar to both Mr. Perry and Mr. Bogle. But he adds a few others as well.

 Pay attention to costs. This mantra is particularly important for mutual fund investors who can end up paying 2% or more annually in fees. Understanding the various charges, including operating expenses and sales loads, is necessary for long-term success.

 Follow the money. Conflicts of interest abound on Wall Street. Most firms that produce products, whether they be mutual funds or mortgage backed securities, make money by selling them. Before purchasing any investment product, find out first who gets paid to sell it and how much.

 Don’t get stuck.  Anxiety is a powerful force and it can often prevent investors from taking action. The difficulty of recognizing losses or investing funds after missing out on a market advance are two examples of how investor inertia can impair long-term results.

The lessons outlined above were hard-won and come from years of investing in a wide range of investment markets. But each of these investment veterans knows that individuals who bring a thoughtful, humble and patient approach to investing improve their chances of success.