If you look for investing advice in the newspaper or on television, the discussion tends to revolve around what stocks will do well in the immediate future, being this week, this month, or this quarter. We refuse to participate in this speculation. When it comes to short-term predictions, whether about the economy or the stock market, there’s one thing we can say with virtual certainty: most of them will be wrong. Quite simply, no one has a consistent track record of successfully forecasting short-term movements in the economy and markets.

In uncertain times such as these, we look to Warren Buffett for guidance. In an investment industry poll a couple of years ago, Buffett was voted the greatest investor of all time. Among the runners up were Peter Lynch, John Templeton, and George Soros.Buffett’s returns are a testimony to the power of compounding. From 1965 to the end of 2009, the growth in book value of his investments averaged 20 percent annually. As a result, $10,000 invested in 1965 would currently be worth a remarkable $40 million. In one of his annual letters to shareholders, Buffett wrote that it only takes two things to invest successfully – having a sound plan and sticking to it. He went on to say that of these two, it’s the “sticking to it” part that investors struggle with the most. The quote on page one, made at the height of the financial crisis, speaks to Buffett’s discipline on this issue.

The argument in favour of long-term investing isn’t new but it’s a story that bears repeating. When we work with our clients to put a plan in place, we focus on their long-term goals, modifying it as circumstances warrant, without walking away from the original goals. When the markets soar it’s easy to forget that there will be times such as these when the markets and economy are plagued with volatility. However, these conditions can also represent an opportunity. In Buffett’s most recent letter to shareholders, he wrote that “a climate of fear is an investor’s best friend.”

We share Warren Buffett’s mid-term positive outlook. Many of the positive market indicators that drove market optimism two years ago remain in place. Among these is the continued emergence of a global middle class in developing countries like Brazil, China, India, and Turkey. This educated middle class will fuel global growth that will make us all better off.

In the meantime, here are four fundamental principles that we demand when selecting money managers and that drive the portfolios that we believe will serve clients well in the period ahead:

1. Only own great businesses
The record recovery of stock prices over the past year was led by companies with the weakest credit ratings. Some have referred to last year as a “junk rally,” with the lowest quality companies posting the highest returns. This anomaly is unlikely to continue. We are comfortable with focusing on portfolios that include the highest quality companies and those best able to withstand the inevitable ups and downs in the economy.
2. Demand steady cash flow
Historically, dividends made up 40 percent of the total returns of investing in stocks and have also helped provide stability through market turbulence. Two years ago, quality companies paying good dividends were hard to find. Today, it’s possible to build a portfolio of good quality companies paying dividends of three percent or more.
3. Don’t pay too much
Maintaining strong price discipline when buying and selling stocks is paramount to success. History shows that the key to a successful investment is ensuring that the purchase price is a fair one. Investors who bought market leaders Cisco Systems and Intel ten years ago are still down 40 to 70 percent, not because these aren’t great companies but because the price paid was too high.
4. Stick to your plan
In the face of economic and market uncertainty, another key to success is having a diversified plan appropriate to your risk tolerance – and then sticking to it. It can be hard to ignore the short-term distractions, but ultimately that’s the only way to achieve your long-term goals with a manageable amount of stress along the way.
Should you ever have any questions, or if there’s anything you’d like to talk to us about, we are always pleased to take your call toll-free at 888.811.6808.

Glenn Ayrton is registered as an Investment Advisor with Sora Group Wealth Advisors Inc. (SGWA), a member of the Canadian Investment Protection Fund. This information is general in nature and is intended for educational purposes only. This should not be considered personal investment advice or solicitation to buy or sell securities. For specific situations you should consult a financial professional. The views expressed are those of the author and not necessarily those of SGWA.