Five Ways to
Pursue Wealth and
Have Fun
Along the Way
Five Ways to
Pursue Wealth and
Have Fun
Along the Way
by Elizabeth Bennett
Pioneer Investment Management, Inc.
Too
many people today are encouraged to think of investing as a game, not the
serious business it should be. How many times are we persuaded to "play"
the market, Arather than simply invest? How many investors expectedat least
until recentlyto wake up each morning and find their stocks up 10% over
the day before?
The
fact is that investing is not a quick and easy game. The key concepts here
are quality and time. To quote Philip L. Carret, founder of Pioneer Fund:
"There is no substitute for buying quality assets and allowing them
to compound over the long term. Patience can produce uncommon results."
(1995)
So
what's an investor to do? Here are five tips on how to pursue wealth and
have fun at the same time:
1.
"Buy valuesnot fancy names."Philip L. Carret (1952) Ever heard of the celebrity investor? These are
people who absolutely have to own the hottest stocks out there. In the past,
this group has included companies such as Boston Chicken, Callaway Golf,
and KTel. Never mind that the P&E ratios of most of these stocks at
their peaks were out of line with reasonable investment values. Some celebrity
investors buy regardless of price, others like to brag that they bought
at cheap prices, but many have gotten burned either way.
It's
generally better to stick with solid, quality companies that offer the potential
for long-term value. Quality is often associated with growth stocks, but
there is another, often neglected side to the quality storyvalue. Some investors
mistakenly assume that value implies low quality, but nothing could be further
from the truth. A mid-1998 study of value stocks by Merrill Lynch found
that more than two-thirds of these companies' stocks could be defined as
quality issues. The report used Standard & Poor's rating (the same rating
scheme they use to measure the quality of corporate debti.e., AAA, AA, A
etc.) as a barometer for quality.
A
good example of a value stock is Schering-Plough (4.74% of the Pioneer
Fund portfolio as of 1/31/99). Like other health care companies, it was
beaten down by the healthcare reform proposals of the Clinton administration
five years ago. But Shering had a strong pipeline of new products and a
capable management team. It has since proved itself to be a quality company
by almost any definition.
2.
Avoid the knee-jerk investing trap. With
the amount of publicity the stock market has been receiving these days,
many investors feel compelled to buy or sell an investment at a moment's
notice. The "hold, do nothing" strategy seems to be out of favor.
But if we look at what quick, knee-jerk reactions have done to investors
in the past, the results make dismal reading.
For
instance, take a hypothetical investor who invested $10,000 on October 16,
1987, in a portfolio of stocks represented by the Standard & Poor's
500 Index (an unmanaged index of 500 stocks which is often used for broad
U.S. stock market performance). If the investor withdrew the remainder of
his money$7,953on October 19, 1987, after the market went down 20% and invested
it in 6-month CDs, his result on 1/31/99 would have been $15,023, or a 50%
gain.
But
what if that same investor had stayed the course on October 19, 1987, and
done nothing? The results are dramatically different. Without investing
any additional funds, his investment would be worth $61,724 on 1/31/99,
or a total return of 517.2%. Of course, this is an illustration onlyyou
cannot invest directly in an index.
It's
also a good idea to resist the temptation to make snap decisions based on
short-term company news (unless the news is indicative of a longer-term
trend). Remember when "new" Coke was introduced in 1985? The public
hated it, called Coke, wrote letters, held demonstrations, and circulated
petitions (Source: Coca-Cola). The company was quick to realize, admit,
and fix its mistake by bringing back the original as "Classic"
Coke. Any investors who rushed to dump their shares missed out on the stock's
solid performance through December 1998.
3.
Ignore the siren call to instant wealth. The desire to "get rich quick" is often tempting, but
it has no place in the world of investing. If we define "instant"
as three years in stock market terms, historically that's not been enough
time for a market cycle and is certainly not enough to test an investment
theory or philosophy. Many 50-year-olds may consider three years as 10%
of the rest of their lives, which sounds like a long time. In reality, life
expectancies are steadily increasing according to the 1997 Statistical Abstract
of the United States, and therefore three years actually represents less
and less. So these folks don't need to respond to "quickie schemes."
According
to a July 1998 survey commissioned by Merrill Lynch and based on 1995 Census
data, families headed by people aged 55-64 had median net financial assets
of only $4,800. The bottom line is many people in this age bracket have
saved very little, and are often squeezed between the cost of educating
their children on the one hand and caring for older parents on the other.
Even so, they must resist the temptation to chase "get rich quick"
wealth. As life expectancy rates rise, these investors should be lengthening
their investing time horizons, not reducing them.
4.
Learn to be patient. A patient
approach to investing based on buying quality stocks and holding them over
time may seem unexciting, even boring. But it can make a huge difference
to results. For instance, a $10,000 purchase of Class A shares in Pioneer
Fund at its inception 70 years ago would be worth over $75 million as of
1/31/99, after expenses and all charges and with dividends and capital gains
reinvested. An investor would have had to stick with his/her investment
during up and down markets to achieve this result.
Granted
70 years may seem an extremely long-term horizon. On the other hand, even
the commonly used 20-year timeframe may not be long enough. In order to
gain proper historical perspective, the last great bear market of the early
1970's should be included in any rigorous analysis of the performance of
an investment over time. That's because there has not been a serious bear
market in the past 20 years, and returns in the U.S. equity markets over
the past several years have been unusually high despite increased volatility.
Where possible, including the 1970's bear market helps an investor see how
a specific investment might perform in difficult, as well as good, times.
For
instance, a study by Tom Mead of AXA Rosenberg in Orinda, CA showed returns
for US growth and value stocks for the period 1/1/67 through 12/31/98, contrasting
a buy and hold strategy with returns based on a high turnover strategy.
Growth stocks are generally those of companies that have significant profits
and get lots of attention from Wall Street. Value stocks are typically those
of well-managed companies that may have hidden assets, long-term plans for
change, or innovative strategies overlooked by Wall Street. The study showed
that no matter which investment style was used, a patient buy and hold approach
paid off, beating the high turnover strategy by more than 200 basis points.
Note that these returns don't take into account the taxes and transaction
costs associated with high turnover.
5.
Know the difference between "fun" money and "real" money.
If you want entertainment, you
can still have it. Take a little cash, call it your "casino" money,
and recognize that what you're doing is gambling. But don't use money you
may need down the road, and don't call it investing. While day-trading,
market-timing, or buying and selling "hot" stocks may be fun,
they aren't investing. "Fun" money can be enjoyed instantly and
without question. "Real" money should be allocated to investments
seeking solid returns over the long term. The most important lesson for
investors is to know the difference.
Conclusion
People
who focus on fancy names instead of values, practice knee-jerk investing,
or listen to "get rich quick" schemes are following pseudo-investing
strategies. And short-term trading may be exciting, but it isn't investing.
In fact, folks who use these methods are doing nothing different than those
who spent $1.2 trillion gambling and wagering in 1996 and 1997, according
to a 1998 Standard & Poor's study of the lodging and gaming industry.
So,
be a smart investorseek quality companies, look for unrecognized value,
sit tight with the companies you believe represent real value, and set aside
a small amount of "play money" to keep you entertained. These
principles should help keep you on the road to pursuing wealth and may even
allow you to have fun in the meantime.
Editor's Note: Elizabeth Bennett is Vice President of Investment Marketing,
Pioneer Investment Management, Inc.
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