Long-Term Investing: How I Learned to Stop Worrying and Ignore Volatility

I will break my comments into three parts:

• First, I’d like to define what I think risk means. The central point is that how you define risk has a lot to do with your time horizon.

• Second, I’ll discuss how you can help avoid catastrophe. Common to all great long-term investment track records is the managers survived in all kinds of environments.

• Finally, I touch on some behavioral issues—or why dealing with the long-term in the face of volatility is emotionally, physically, and psychologically hard. I’ll wrap up with some suggestions on what you can do if you accept my perspectives.

OK. If you have bought in to my comments on risk, catastrophe, and psychology, what should you consider doing?

1. Decide if you can be or should be a long-term investor. There’s nothing sacred about it—you just have to make sure you properly align your thinking, policies, and processes around your time horizon.

2. Don’t overbet. Constantly consider the problem of induction and the deleterious effects of leverage and incentives.

3. Work to reduce stress and maintain perspective. Some documented ways to lower stress include:

a. Exercise

b. Maintain and cultivate social connections (family & friends)

c. Get sleep and maintain a healthy diet

4. Don’t dwell on short-term portfolio moves. Sidestep loss aversion if possible.

5. Remember the story from Abraham Lincoln. He recounted that an Eastern monarch once charged his wise men to invent him a sentence that would be true in all situations. They came back with the words: “And this, too, shall pass away.” As Lincoln said, this phrase “chastens in the hour of pride, and consoles in the depths of affliction.” This too shall pass and long-term investors stand well to gain. 12

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