Investing is an activity that does NOT provide immediate gratification. The results of the actions you take today will only be felt in the future. Your beliefs will govern your behaviour now, which will dictate the results you get later.
Broadly, we define beliefs as your attitude, thoughts, ideas and perspective on investing. Everyone starts with a set of ideas that will help or hinder his or her future investment success.
We have captured a few of the more common beliefs that we encounter when we talk to prospective clients. We do not agree with these beliefs. Our investment philosophy is captured in our 11 Investing Principles.
Belief #1: Money in the bank is safe.
Having money in cash is perceived as safe. However, the value of cash will decline in purchasing power because of inflation meaning that over time you can buy less and less with the money that you have.
McDonald’s Burger Price
In 1972, a McDonald’s hamburger cost 15c.
45 years later it cost $1.
Imagine losing 85% of your purchasing power over 45 years?
Investing for income and capital gain protects you from inflation and grows purchasing power over time. Investing allows you to own the company that can charge more for its product over time!
Belief #2: Investing is a choice.
Investing is essential!
Not investing is an error of omission, a mistake resulting from not taking action that would have delivered a positive outcome.
Investing allows you to generate an income without working. Warren Buffett puts it bluntly:
By not investing, you deprive yourself of the opportunity to compound your wealth over time.
From 1801 to 2006, $1 of stocks grew to $755,183 while the same $1 purchasing power dropped to 6c.
Source: The Future for Investors. Jeremy Segal.
Belief #3: Buying and selling shares is the way to make money.
The great investors do not agree.
The great investors (Warren Buffett and Charlie Munger in particular) define an investment as part/total ownership of a productive asset (shares in a company) that can pay you, the owner of that investment, a return on investment that is significantly greater than inflation. Often this income is in the form of dividends or it may be in the form of retained earnings.
Although the investment simultaneously grows your capital (share price growth), this is a secondary function of investing. The intention is never to sell the productive asset while it remains productive.
There are no known investors that continuously buy and sell shares that have outperformed Warren Buffett and Charlie Munger over multi-decade periods. It makes sense to learn from the best!
Belief #4: Investing and speculating are the same things.
Investing and speculating are not the same.
Investing is defined above as the purchase of an asset that can pay the investor continuing cash flows and can be held indefinitely.
Speculating involves purchasing an asset with the hope of selling it at a higher price in the future.
At AXIAM, we choose to invest and don’t speculate. It is not possible to determine the value of an asset that has no cash flow. The price of a share is temporary, the value is more consistent and changes slowly.
The most important thing is to know when you are investing and when you are speculating.
Belief #5: I can lose all my money if markets crash.
If you speculate and buy assets that you don’t understand then you can experience permanent loss of capital.
If you buy assets that generate cash, have low debt-to-equity ratios and a sustainable brand value, then the VALUE of the asset will remain intact regardless of how the price fluctuates.
Berkshire Hathaway, the company that Warren Buffett and Charlie Munger have run for over 50 years, has experienced radical price movements. In 2000 Charlie Munger stated, “This is a 3rd time Warren and I have seen our holdings in Berkshire go down top tick to bottom tick by 50%.” They did not sell their shares when these dramatic price declines occurred because they understood the value of Berkshire’s cash flows and that the company would continue to own sustainable brands. The value of a company can stay stable regardless of the decrease in share price.
At AXIAM, we believe Warren Buffett when he says:
We focus on a long-term investment strategy built on 11 Investment Principles gleaned from the world’s great investors like Warren Buffett, Howard Marks and Charlie Munger. Contact our fund managers or sign up for our newsletter if you would like to learn more about investing your capital to provide ongoing retirement income.