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Investing is like Dieting

This May, at the Berkshire Hathaway annual meeting, Warren Buffett boiled down what it means to be an intelligent investor into two startling sentences: “If a stock [I own] goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Knowing he owns good businesses, Mr. Buffett wants prices to go down, not up, so he can buy even more shares more cheaply before they bounce back.

In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000. The renowned investor Benjamin Graham once wrote that “the investor’s chief problem — and even his worst enemy — is likely to be himself.” Equity markets are chaotic and the reason we expect the risk premium is that there are periods of extreme volatility.

For, as Mr. Buffett has also pointed out, investing is much like dieting: it is simple, but not easy. Everyone knows what it takes to lose weight. (Eat less, exercise more.) Nothing could be simpler, but few things are harder in a world full of chocolate cake and Cheetos. Likewise, investing is simple: diversify, buy and hold, rebalance and keep costs low. But simple isn’t easy in an environment that has seen extreme volatility as a result of skyrocketing oil prices, shaky lending practices and faltering investment banks. The real secret to being, or becoming, an intelligent investor is bolstering your self-control.

Nonprofits face unique challenges which greatly complicate matters.  Most long term reserves operate within an indefinite or uncertain time frame.  Furthermore, additional funds are often not available to buy additional securities as prices fall – as they are in 401k plans or other savings plans.  Accordingly, intelligent nonprofit investing must be matched with clear expectations and a thorough understanding of the organization’s cash flow requirements and tolerance for losses in the short term.  A well drafted investment policy should provide direction and minimize emotionally driven decision making.  A formal rebalancing policy should dictate the systematic process of selling high and buying lower.

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