Booze or Pepsi? The Best Mindset for Investing in All Markets
Advice from Warren Buffett can help guide your professional investments in private markets and personal investments in public markets.
Amid recent market turbulence, investors could do worse than follow the lead of Warren Buffett, who has achieved success through many economic cycles due to his disciplined, long-term approach. Although his legendary status is most notably associated with public stocks, his search for great operating companies has led him to private businesses as well.
Buffett has some great advice to follow in today’s environment:
“You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be OK.”
His folksy wisdom reminds investors to stay committed to their investment philosophy and remain sober amid the short-term noise in the marketplace. This is easier said than done as both public and private markets accelerated to all-time highs. Since 2010, the S&P 500 is up over 200 percent, and price-to-earnings multiples have increased from 15x to 18x. In the private markets, M&A multiples increased from 8.1x to 10.5x and funds are raising record amounts of capital, according to PitchBook.
So how can Buffett’s comments help guide your professional investments in private markets and personal investments in public markets?
Stay Disciplined to Your Investment Philosophy
One of the most difficult challenges investors face is staying disciplined during both good and bad times. To stay on course in the private equity world, investment teams assess on an annual or semi-annual basis their past success and identify their unique strengths. During this strategy session, all past deals should be analyzed to understand the types of businesses and industries that have created both good and bad outcomes. This intensive process allows the team to stay focused and build a pipeline of opportunities to drive great returns.
“You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be OK.”
Warren Buffett
For individual investors, the average 60/40 portfolio yielded 6.4 percent annualized returns between 1998 and 2017. However, the average investor only returned 2.6 percent, according to a JPMorgan study. What is the reason for that underperformance? Many individual investors try to time markets or chase the best performing asset class, which is generally a losing proposition. Defining a sober investment philosophy and sticking to it allows the capture of returns and growth of your wealth over the long term.
Ignore the Short-Term Noise
Middle-market private equity firms say they are not making any changes to their approaches in the current environment. Rather, they are focused on what they know drives returns in the long-term. Those strategies include a differentiated sourcing model and a valued partnership with their operators. These methods may not take advantage of the short-term exuberance, but they do drive their objectives. Although challenging to execute, a winning strategy means focusing on long-term success without being ambushed by the short-term noise.
Meanwhile, professionals looking to invest their personal money are bombarded by television pundits and talking heads who suggest you can “double your money” or “hedge your portfolio.” But those strategies don’t take into account the long-term nature of an individual’s portfolio. When considering changes, reflect on the goal of the portfolio, the timeline of the goal and the tax implications. By taking time to analyze these aspects, you can ignore the noise to make the best decision, instead of reacting to a headline written without regard to your plan and needs.
Warren Buffett did not attain his multibillion-dollar fortune by taking part in any of the boozing at the casino. Rather, by being the sober and disciplined investor, he has created wealth in different market cycles. Any investor, whether they are investing in public stocks or private operating companies, should heed his advice and continue to ask themselves, “Am I the one boozing or drinking Pepsi?”
Matthew Kocanda is the head of BDF’s Financial Professionals Practice Group. In this capacity, he partners with clients working in private equity, investment banking and asset management as their Personal CFO to enable them to focus on their professional investing. To learn more, contact Matt at Mkocanda@bdfllc.com.
Disclosure: Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by Balasa Dinverno Foltz LLC (BDF), may not be profitable, suitable for you, prove successful or equal historical indices. Historical indices do not reflect the deduction of transaction, custodial or investment management fees, which would diminish results. Any historical index performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data. BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request. BDF does not provide legal, tax, insurance, social security or accounting advice. Clients of BDF should obtain their own independent tax, insurance, and legal advice based on their particular circumstances. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning.
