“Price is what you pay for something, value is what you get.” – Warren Buffett
Regardless of how great a company or sector of the market may seem, high relative prices reduce future returns. Conversely, low relative prices increase future returns. If a particular segment of the market has performed well (as defined by its price increasing), we are more likely to rebalance back to our targets or even reduce the allocation to that segment of the market. Conversely, when a market sector has underperformed, we are likely to rebalance into that segment of the market or overweight that area.
"I would rather lose half of my shareholders than half of my shareholders’ money." - Jean Marie Eveillard
It has been said that the purpose of economic forecasting is to make astrology look respectable. Contrary to what most people believe, long-term investment success actually requires that you are comfortable underperforming certain areas of the market in a given year. Fundamentally, we are more concerned with risk management than obtaining the highest possible return in any given year. The erosion of returns and portfolio growth is magnified far more than most people believe on the downside. A 50% decline, for example, requires a 100% return to get back to even.
"The stock market has a very efficient way of transferring wealth from the impatient to the patient." - Warren Buffett
Do not try to time the market. Investors who understand that timing the market is a loser’s game will be less prone to reacting to short-term extremes in the market and more likely to adhere to their long-term investment plan. It may take years to realize the value you anticipated when you purchased the asset in the first place.
“I would rather be approximately right than precisely wrong.” – John Maynard Keynes
Patience is critically important in investing, but you can cause a lot of harm by mistaking patience with greed. Trying to get-in early on the next Microsoft, or continuing to ride a hot stock or market sector until the very last minute can lead to detrimental results. We would rather run the risk of rebalancing out of a hot segment of the market a bit early than risk doing so too late.
