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Dear Fellow Fools,
In recent editions of Take Stock (in particular our Oct. 17 edition), I’ve conveyed a cautionary tone over what the coming days/weeks/months might have in store for Mr. Market.
Time will tell if this short-term call for caution is warranted, but let’s face it—for those of us to who strive to find bargains in the market, it’s tough sledding out there. Cheap stocks are hard to find!
Not only that, there are still some demons swimming around that are hard to shake. Namely, the taste of one of the worst financial meltdowns in history continues to linger. Throw in the uncertainty caused by things like high frequency trading, an overbearing media that blares out reports of imminent doom one minute and is overboard with joy the next, as well as a relentless onslaught of trading-related scandals and you’ve got a recipe for a rain cloud—heck, thunderstorm—hanging over the heads of most investors.
However, as a recent Wall Street Journal article (paywall) by famed columnist Jason Zweig indicated, in reality, there has never been a better time to be an investor. This week’s Take Stock is dedicated to digging into this truism.
But what about …
Flush all of the negative thoughts from your head, put on some good music (I’ve got Led Zeppelin going right now!), maybe get a glass of water, and let’s dig into the points raised in Zweig’s great article:
1. Access to information
It’s impossible to deny the HUGE advantage that we have compared to prior generations of investors when it comes to information. In fact, we might have too much information at our disposal. If handled properly, though, this fact might be enough on its own to satisfy our argument of how great the present investing landscape is. As Zweig pointed out, about 35 years ago you still had to either spend hours in the public library or write away to a company just to see its financial statements. To expend such energy for something so simple is impossible to fathom for those of us that have only ever had a company’s entire financial history at our fingertips.
2. Transaction costs
Even though we Fools rail against the fees that the financial industry continues to charge, in historical terms, this situation is a whole lot better than it used to be. And perhaps, we’d like to believe at least, we’re part of why this is so.
As Zweig illustrates, to buy 100 shares of a company trading at $20 in 1978, it would have cost about $42 in commission. Added to this was a ridiculously wide bid/ask spread that might have measured as much as $0.25. The result was a transaction “fee” of about 3%—and that was for relatively liquid stocks! The cost to trade in more illiquid names was much more punitive.
In today’s world, with discount brokerage fees that can be as little as $5 or so per trade and bid/ask spreads that are typically a penny (remember those?) and seldom more than a dime, that same trade is considerably cheaper to make. Over time, this can make a huge difference to your returns.
Also mentioned: 35 years ago mutual funds charged a “sales load” or upfront commission of 8.5%. And to make matters worse, fund holders would be charged that same 8.5% each time they made an additional purchase, even if they were reinvesting dividends, which at the time was a foreign concept. Yikes!
Zweig indicates that the volatility of monthly returns—that is, the extent to which they’ve fluctuated around their average—over the past 12 months has been 9.4%. And while the road of late may have felt a bit bumpy to some, this compares very favourably to the measure of 13.4% that was recorded in 1978 and the long-term 15.1% average that has been booked since 1833. Relative to these figures, arguments about too much volatility these days don’t hold much water.
This was not part of Zweig’s article, but in my mind, education serves as another indication as to why we’re investing in a golden age.
There are many ways that we investors can educate ourselves that simply weren’t available to previous generations. And we’re not just talking about The Motley Fool here! This includes everything from formal designations like the Chartered Financial Analyst (CFA) program, which has really only gained significant traction in the past 10-20 years, right down to the simple fact that Warren Buffett didn’t start making his annual letters publicly available until 1977. And even then, the distribution of his letters would have been relatively miniscule.
Buffett’s shared wisdom ties into one of the most wonderful things about the world of investing. It’s a world that lends itself very nicely to an accumulation of knowledge. Over time, thanks to the lessons learned by those who have gone before us, we’ve at least been given the opportunity to better understand what works and what doesn’t. Not that we always listen, but we at least have the opportunity!
The Foolish Bottom Line
Positive evolution is constantly occurring all around us, and the financial world is no exception. The thing is, these wonderful structural changes, like improved access to information and lower trading costs, do not occur overnight. This is a big reason why we Fools try to take such a long-term view with the companies that we recommend in advisory services like Stock Advisor Canada. Standing on the shoulders of giants and learning from the great ones is another huge component of what we Fools do. These practices lend themselves very nicely to our business-first approach when we analyze a stock’s prospects. We know that if we recommend great businesses that have an edge, over time, they too will continue to evolve and prove to be outstanding investments.
Ask a Fool
We love hearing from our community of Fools and want to remind you that you can utilize our “Ask a Fool” service to put forward whatever might be on your mind. Simply e-mail us at [email protected].
‘Til next time … happy investing and Fool on!
Chief Investment Advisor
Motley Fool Canada