Today we have a rather lengthy quote from Warren Buffett, excerpted from his 2015 letter to the shareholders of Berkshire Hathaway:
“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this [instructional] assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”
I have underlined two key messages embedded in this quote. I have passionately echoed these words to almost anyone who would listen for almost 20 years. Warren Buffett is stating a tenet of his belief system which also happens to be factually accurate. It is also true that the occurrence of volatility is what prevents the clients of many a financial advisor from being successful as investors and failures as speculators.
Volatility is going on all the time. The difference is how often and to what extent it occurs. Equity markets demonstrate daily volatility, and fixed incomes demonstrate volatility over longer time frames. but both still exist. Changes in account values in the short term is not risk! Risk is the ravages of inflation and the compounding results of making poor investment decisions. The results of an advisor’s work is not a short term endeavor and will only truly be measured as the longer term plays itself out.
The presence of volatility is when an advisor earns his or her money, especially in a fee-based business model. How your clients respond is a direct result of two factors. First, bringing on the right client who is investor-focused in action and not word. This is not the same thing as someone who will transfer their assets to you. Second, the success and degrees to which you have educated/trained your clients to be investors and not speculators.
Weathering a storm is all about preparation. If you are prepared, then ready yourself and lean into it with your full resolve and ride it out. If you are not as prepared as you should be, then do what you can to survive and make a personal determination never to be unprepared again. If it helps, as an added bonus, the advisor who is prepared is usually the one who receives referrals to the clients of the unprepared. What side of the ledger do you want to be on?
Tomorrow is a holiday, so we’ll be back on Monday. Until then, best wishes and Happy Easter.