“The 1%” phrase has been used a lot to decry income inequality, but I’m using it here in an entirely different context. I’m thinking about the 1% in relation to a recent article by Motley Fool’s Morgan Housel. Here’s an excerpt from his article:
Building wealth over a lifetime doesn’t require a lifetime of superior skill. It requires pretty mediocre skills — basic arithmetic and a grasp of investing fundamentals — practiced consistently throughout your entire lifetime, especially during times of mania and panic. Most of what matters as a long-term investor is how you behave during the 1% of the time everyone else is losing their cool.
That puts a little different spin on it. Maybe your behavior during 1% of the time is how you get to be part of the 1%. (The bold in Mr. Housel’s quotation above is mine.)
In his article, Housel demonstrates how consistency—in this case, dollar-cost averaging—beats a couple of risk avoiders who try to miss recessions. We’ve harped on having some kind of systematic investment process here, so consistency is certainly a big part of success.
But also consider what might happen if you can capitalize on those periods of panic and add to your holdings. Imagine that kind of program practiced consistently over a lifetime! Warren Buffett’s article in the New York Times, “Buy American. I Am.” from October 2008 comes to mind. Here is a brief excerpt of Mr. Buffett’s thinking during the financial crisis:
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So … I’ve been buying American stocks.
If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Gee, I wonder how that worked out for him? It’s no mystery why Warren Buffett has $60 billion—he is as skilled a psychological arbitrageur as there is and he has been at it for a very long time.
As Mr. Housel points out, even with mediocre investing skills, just consistency can go a long way toward building wealth—and the ability to be greedy when others are fearful has the potential to compound success.