“Be fearful when others are greedy, and greedy when others are fearful.”
– WARREN BUFFETT
At Heritage we celebrated our 30th anniversary this year, and it inspired us to look back on all the changes our industry has seen in the past three decades. Investment technology has vastly improved, allowing us to provide a wider range of services to our clients. Trading costs have fallen dramatically – in some cases, nearly to zero. The brokerage commission model has mostly disappeared from the industry and been replaced by the fee-only fiduciary model, which we have embraced since our first day in business. However, one aspect of the investment world has not changed at all over the past 30 years, and that is human emotion. When we founded Heritage, we recognized that stock and bond investors were usually driven by two emotions: fear and greed. When the news was bad, fear urged them to get out of the markets. When markets were on the rise, greed drove them to want more. And, as we have seen in the decades since, these emotions still drive many investors to make changes at precisely the wrong times, and investors as a group have not improved on this front.
Each era of our 30-year history has provided us with well-documented examples of investors being tempted by fear and greed:
Clearly the average person’s propensity to invest emotionally has not diminished over time. Investors driven by fear and greed have made the round trip between those emotions several times over the past 30 years, likely making some harmful investment decisions along the way.
Fortunately, fear and greed have not been the only constants over the past three decades; optimal investment principles have not changed either. Capitalism will make us wealthy over time if we allow it to. Markets provide us with fair prices without our having to guess what is coming next. Diversification protects us from the worst of the bubbles and panics, and discipline protects us from the ravaging effects of fear and greed.
Investors who refused to be ruled by these emotions and who adhered to solid principles benefited from the considerable growth in global equity markets since the founding of Heritage in 1993. And investors who want to be successful over the next 30 years should accept that markets will continue to be ruled by these two emotions – and that the best defense is an investment plan that is resistant to fear and greed.