sorry. Even from the Big One, stocks eventually came back.
A decline in stocks is not a surprising event, itâs a recurring eventâas normal as frigid air in Minnesota. If you live in a cold climate, you expect freezing temperatures, so when your outdoor thermometer drops below zero, you donât think of this as the beginning of the next Ice Age. You put on your parka, throw salt on the walk, and remind yourself that by summertime it will be warm outside.
A successful stockpicker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know itâs coming, and youâre ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to buy more.
After the Great Correction, when 508 points were shaved from the Dow Jones average in a single day, a symphony of experts predicted the worst, but as it turned out, the 1000-point decline in theDow (33 percent from the August high) did not bring on the apocalypse that so many were expecting. It was a normal, albeit severe, correction, the latest in a string of 13 such 33 percent drops in this century.
The next 10 percent decline, which may already have occurred since Iâve written this, will be the 41st in recent history, or, if it happens to be a 33 percent decline, the 14th. In Magellanâs annual reports, I often reminded the shareholders that such setbacks were inevitable.
The story of the 40 declines continues to comfort me during gloomy periods when you and I have another chance in a long string of chances to buy great companies at bargain prices.
THREE
A TOUR OF THE FUND HOUSE
Mutual funds were supposed to take the confusion out of investingâno more worrying about which stock to pick. Not anymore. Now you have to worry about which mutual fund to pick. There are 3,565 of them at recent count: 1,266 equity funds, 1,457 bond and income funds, 566 taxable money-market funds, and 276 short-term municipal bond funds. This compares with 452 funds (278 of them equity) in existence in 1976.
This jolly fundmaking shows no signs of any letup. Weâve got country funds and region funds, hedge funds and sector funds, value funds and growth funds, simple funds and hybrid funds, contrary funds, index funds, and even funds of funds. Soon weâll probably see the all-dictators fund, the fund of countries with no vowels, the fund of funds of funds. The latest emergency instructions for every firm on Wall Street? In Case of a Sudden Drop in Profits, Start Another Fund.
Weâve lately reached an important milestone in fundmaking history: the number of funds now exceeds the number of individual stocks traded on the New York and American stock exchanges combined. This is even more remarkable when you consider that 328 of these individual stocks are actually funds in disguise. (See the discussion of closed-end funds on page 73.) So how can we begin to sort this muddle out?
DESIGNING A PORTFOLIO
Two years ago, a group of wizened (as opposed to wise) investors in New England asked ourselves precisely that question. Weâd been invited to help the nonprofit organization I mentioned earlier (which shall continue to remain nameless) restructure its portfolio. Like most nonprofit organizations, this one was in constant need of capital. For years its investments were handled by a single manager, who divided the money between bonds and stocks, the way most investors do.
The issues we confronted in advising this organization how to redeploy its money were the same as those faced by the average person who must figure out the same thing.
First, we had to determine whether the mix of stocks and bonds should be changed. This was an interesting exercise. No investment decision has greater consequence for a familyâs future net worth than the initial growth-versus-income decision.
In my own family portfolio Iâve had to become slightly more bond oriented, since I now rely on
A decline in stocks is not a surprising event, itâs a recurring eventâas normal as frigid air in Minnesota. If you live in a cold climate, you expect freezing temperatures, so when your outdoor thermometer drops below zero, you donât think of this as the beginning of the next Ice Age. You put on your parka, throw salt on the walk, and remind yourself that by summertime it will be warm outside.
A successful stockpicker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know itâs coming, and youâre ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to buy more.
After the Great Correction, when 508 points were shaved from the Dow Jones average in a single day, a symphony of experts predicted the worst, but as it turned out, the 1000-point decline in theDow (33 percent from the August high) did not bring on the apocalypse that so many were expecting. It was a normal, albeit severe, correction, the latest in a string of 13 such 33 percent drops in this century.
The next 10 percent decline, which may already have occurred since Iâve written this, will be the 41st in recent history, or, if it happens to be a 33 percent decline, the 14th. In Magellanâs annual reports, I often reminded the shareholders that such setbacks were inevitable.
The story of the 40 declines continues to comfort me during gloomy periods when you and I have another chance in a long string of chances to buy great companies at bargain prices.
THREE
A TOUR OF THE FUND HOUSE
Mutual funds were supposed to take the confusion out of investingâno more worrying about which stock to pick. Not anymore. Now you have to worry about which mutual fund to pick. There are 3,565 of them at recent count: 1,266 equity funds, 1,457 bond and income funds, 566 taxable money-market funds, and 276 short-term municipal bond funds. This compares with 452 funds (278 of them equity) in existence in 1976.
This jolly fundmaking shows no signs of any letup. Weâve got country funds and region funds, hedge funds and sector funds, value funds and growth funds, simple funds and hybrid funds, contrary funds, index funds, and even funds of funds. Soon weâll probably see the all-dictators fund, the fund of countries with no vowels, the fund of funds of funds. The latest emergency instructions for every firm on Wall Street? In Case of a Sudden Drop in Profits, Start Another Fund.
Weâve lately reached an important milestone in fundmaking history: the number of funds now exceeds the number of individual stocks traded on the New York and American stock exchanges combined. This is even more remarkable when you consider that 328 of these individual stocks are actually funds in disguise. (See the discussion of closed-end funds on page 73.) So how can we begin to sort this muddle out?
DESIGNING A PORTFOLIO
Two years ago, a group of wizened (as opposed to wise) investors in New England asked ourselves precisely that question. Weâd been invited to help the nonprofit organization I mentioned earlier (which shall continue to remain nameless) restructure its portfolio. Like most nonprofit organizations, this one was in constant need of capital. For years its investments were handled by a single manager, who divided the money between bonds and stocks, the way most investors do.
The issues we confronted in advising this organization how to redeploy its money were the same as those faced by the average person who must figure out the same thing.
First, we had to determine whether the mix of stocks and bonds should be changed. This was an interesting exercise. No investment decision has greater consequence for a familyâs future net worth than the initial growth-versus-income decision.
In my own family portfolio Iâve had to become slightly more bond oriented, since I now rely on
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