Looking at Investing Through the Eyes of a Landlord

It seemed like a really great idea at first. And it actually was, but somewhere along the way, it turned bad, really bad. I’m not quite sure when, but it was either before or after a tenant started breeding Pit Bulls in the back bedroom . . . well, now that I say that, it was probably before. The story starts a good six years before the Pit Bulls. I was just finishing my freshman year in college. Four friends and I were looking for an apartment that would rent to five college kids, but no one would go above four (that should have been my first hint). So I hatched an idea and floated it past Jonathan (side note: I quit referring to him as “Dad” after my first day of work here). I proposed that we use my first-time homebuyer status to get a cheap loan, then buy a four bedroom condo, cover our mortgage with the rent from my four roommates, and on graduation day we’d easily sell it and voila, three years of rent free living. I was, as we say, very bullish.

It worked well for the first three years. In addition to the rent working out as planned, I happened to meet my wife, Millie, who was living in the building next door (I later learned she had made the same proposal to her Mom and they owned her condo also – the serendipity!) Three years later, my roommates became my groomsmen when Millie and I married a month after graduation and, even though we couldn’t sell the condo right away, we found some decent tenants to tide us over for “just a few months.”

That first batch of tenants sent their checks in on time and didn’t scuff up the walls too badly. But as we continued to rent it out while looking for a buyer, we discovered each group of tenants brought new troubles. Our costs went up: carpets had to be cleaned after each tenant, washers broke, and rooms were painted black. And our emotional expense went up as well: lost sleep over dealing with missed rents and worry over our exit price. All the while our potential liabilities piled up: the smoke detectors went unattended, the 3rd floor porch railing was removed for an impromptu golf driving range, and of course the aforementioned Pit Bull husbandry. Thankfully, the world is full of enterprising young men with four friends who want to live together – we were lucky enough to sell our place to one such “investor” well before the housing market collapsed.

What we learned from the Doctor

Justin here. I read a great article in the WSJ this morning (here) about a movement to get more doctors to give their notes to their patients.

We have a client couple where the wife has battled through a fight with breast cancer. The husband said one of the best things about their doctor was that he would photocopy his notes after they talked and give them a copy before they left the doctor's office.  He said the transparency meant a lot to him and his wife.

We've always given some sort of recap after meetings, but it usually only involves the action points coming out ("Jim and Jane need to revisit wills.") but we didn't always send our clients the full meeting notes ("Jim and Jane need to revisit will because Jane is nervous about Jim providing too much money to his grown kids from his previous marriage.")

So, after our client told us how important it was to them in their cancer fight, we started being more intentional. While we don't copy our handwritten notes (they wouldn't be much help) we've started sending clients full recaps of the meetings. Sure, it takes some time, but we find that it adds some accountability (for us and the clients) and, like with our clients and their doctor, improves transparency. We see it as standard operating procedure.

You Think You're Paying Too Much In Taxes?

Justin here. For all its quirks, it's hard to find a better (and cheaper) place to easily track what you spend that at www.mint.com. On top of that, the Mint blog does an equally great job at relaying financial concepts in easy to understand methods; today's post doesn't disappoint.

Note that the y-axis numbers are misaligned with the chart for some reason, but the meat of the chart is still right (for those of you who don't remember, the "y" axis is the vertical axis, also known as the "yo-yo" axis because it goes up and down . . . how about that?)


Personal Finance Sofware Mint.com

Congress Waivering on Fiduciary Issue

Justin here. An article last week from WSJ's Jason Zweig highlights what fiduciary duty means to Joe Investor. The element of how congressmen play into the reform is interesting. After seeing how Senator Colburn trades his account, it seems a lot like letting my two year-old decide her bedtime . . . or if she has to hold my hand when she crosses the street (depending on how important you think fiduciary duty is.) Full article here.

In a recent interview with the Journal's Brody Mullins, Sen. Tom Coburn (R., Okla.) said that most of his money is managed by a professional adviser. The senator explained that his portfolio is heavy on oil and natural-gas stocks because energy is big business in his home state of Oklahoma.

Sen. Coburn added that he has his own account at TDAmeritrade, valued at about $70,000. He said he trades actively based on tips he gleans from Jim Cramer's "Mad Money" show on CNBC.

In 2008, Sen. Coburn traded Transocean four times in less than a month on Mr. Cramer's advice. "I lost my shirt," the senator said. He fared better with Tyson Foods, which he bought on Nov. 20, 2008, and sold less than three weeks later. "I bought it and got out because it went up," Sen. Coburn said. He added that he regretted selling Tyson so quickly, because its price kept rising after he sold.

The 'Are You Unemployed' Game Show

Justin here. The folks at Mint.com have done it again. Here's a great video explaining real unemployment. Kinda makes you think that the "great" news last week wasn't all it was cracked up to be.

Everything I Needed to Know . . .

Justin here. Everything I needed to know about fighting a recession, I learned from Tate Street Coffee House. I took this picture the other day while drinking my regular coffee (w/ half and half, spenda, and a packet of raw sugar); it says it all:

Innovate - See the bar there? TSCH is offering wine and beer now. Not just Keystone Light either, but an organic brew made from hops grown by owners Matt and Anne. Brilliant.

Do it Yourself - See that guy painting the ceiling during business hours? That's Matt, the owner. He does a bit here, a bit there. Never closes down business, never pays painters. And it gives the customers something to talk about and check in on. Two Birds/One Stone.

Know Your Customers - Again with Matt . . . he, Anne, and the other employees seem to know everyone by name and they ask about their interests and genuinely want to know their customers. I've rarely seen it done better.

Who Is Paying Taxes?

Justin here. We're getting near year-end and so taxes are on the brain. I ran across this graphic from Mint.com. They do some really great visual explanations (they recently did one on reverse mortgages) but, seeing as though my second language is "Charts and Graphs", they could probably make a diagram about paint drying and I'd be fascinated. Enjoy.


Personal FinanceSoftware – Mint.com

Paul Krugman Thoughts

Justin here. I went with a friend last night to see Paul Krugman speak at the Guilford College Bryan Series. I've got a number of things on my plate today so my review/thoughts will be brief.

Best Quote: "We can no longer make money by selling each other houses that we bought with money we borrowed from the Chinese."

Second Best Quote: In talking about the similarity between the US and Japan he said something to the effect of "With the exception of our raw fish consumption, we're pretty similar. Both democracies, both have hard working intelligent citizens, both have politicians who aren't the best but aren't idiots."

Comment That Provoked a Slight Gasp from the Woman Beside Me: when answering a question about the N.C. furniture industry, Krugman said he couldn't imagine an industry that is so labor intensive lasting so long in a high wage country like the US. And he followed that up with something to the effect of "before you get too worked up about that, remember that it's only here because the high wage North East US forced the jobs south to cheaper labor." As if to say, this is only a pit stop on the way further south.

Cold Sweat Inducing Statistic: 55% of commercial loans that are to reset in 2014 are underwater. And that's considering that they started with an extremely low Loan/Value ratio that would certainly need to go up if they get rolled forward. Makes me think of a number of friends in the commercial real estate business as well and the impacts that has on other industries.

My Question That I Didn't Get To Ask: what do you do with your excess income (i.e. how do you invest)?

Overall message:

• He talked about how we got into this mess ('shadow banking', poor regulation, leverage),
• How this was/is a global crisis (Spain, UK, even countries without bubbles felt it because they were connected.)
• What we did right (cut interest rates, stimulus, flexible fed),
• How we get out this crisis quickly (no silver bullet that will save us like railroads, world wars, and IT did for recessions past . . . only remote quick fix could be green technology, but even that has a lot of barriers and lag time, and 10% unemployment is a HUGE number will take a lot of GDP growth to get over),
• How, more likely, to get out of it slowly (possibly unions (which, to my surprise got a round of applause), possible further stimulus, cut interest rates if we could go any lower)
• Final point was that Keynes said "the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency" meaning that our ipods will break, our computers will become slow, and our tires will wear out. Although slow, this process will create demand and innovation.

Politics aside, it was a good talk. It reinforced our slow growth thesis and our propensity to seek quality dividend paying companies as well as opportunities outside the US and in fixed income.

Justin W. Smith, CFA, Earns Prestigious Chartered Financial Analyst Designation

Greensboro, NC, August 14, 2009 − Justin W. Smith, CFA, a Financial Advisor at Jonathan Smith & Co., Investment Counsel in Greensboro, NC has earned the prestigious Chartered Financial Analyst® (CFA®) designation.

The CFA charter is a globally recognized credential for investment analysis and management. The CFA Program sets a globally recognized standard for measuring the competence and integrity of financial analysts, portfolio managers, and investment advisers. Currently, more than 82,800 investment professionals in 128 countries and territories hold the CFA charter.

Recipients of the CFA charter have successfully completed a graduate-level, self-study curriculum and series of three intensive examinations taken sequentially over at least two years. It is recommended that candidates prepare a minimum of 250 hours per exam, with substantially more recommended for individual circumstances.

Since the inception of the CFA Program 45 years ago, pass rates at each of the three exam levels have averaged about 50 percent. Because of the rigor of the program, only about one in five candidates who enter the program pass all three exams and successfully complete all the requirements to earn the charter.

Administered exclusively in English, the international language of business, the three six-hour exams cover ethical and professional standards, securities analysis and valuation, financial statement analysis, quantitative methods, economics, corporate finance, portfolio management, and performance measurement.

“This isn’t about adding three letters to the end of my name,” Smith pointed out. “At a time in the market where there is so much uncertainty, I’m happy to be able to do something that not only makes me a better advisor, but also gives our clients some added confidence in who they are trusting to get them safely home.”

“Five months ago, you could have picked a portfolio by throwing darts at the Wall Street Journal and had a great return,” Smith said. “But today, we think we’re looking at just the opposite. That’s an almost inconceivable shift in such a short amount of time. The CFA program has given me the knowledge, insight, and persistence to tackle this ever-changing investment landscape.”

And if his day job weren’t enough, he’s got a full load on his hands at home. “I’ve got a 115 year-old house, one toddler and another due soon, and a honey-do list that, due to the CFA exams, has been three years in the making,” Smith noted. “All that CFA work is going to seem like a breeze compared with what I have in store for me at home.”

Robert R. Johnson, Ph.D., CFA, deputy CEO, explained what motivates candidates to make such a significant investment of their time and energy to seek to earn the CFA designation.

“For more than 40 years, candidates have sought to earn the CFA charter for two chief reasons,” Johnson said, “one, to expand and test their knowledge of current practice across a broad range of investment topics, and two, to demonstrate to clients, employers, and peers their mastery of a demanding body of knowledge."

CFA Institute
CFA Institute is the global association for investment professionals. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 96,000 members, who include the world’s 82,800 CFA charterholders, in 133 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at http://www.cfainstitute.org/.

Jonathan Smith & Co., Investment Counsel
Jonathan Smith & Co. is a Registered Investment Advisor providing investment counsel and financial planning for individuals, trusts, estates, corporations, investment trusts, employee benefit trusts, and institutions. Aware that each engagement’s wealth management needs are unique and often complex, they craft individualized solutions and simplify life's financial aspects for their clients. Their mission is to build, protect and manage each client's wealth through every stage of life. More information may be found at http://www.jonathansmith.com/.

I Probably Won't Be Dessert . . .

Justin here. Professor Jeremy Seigel recently pointed out the difference between the fear of unemployment vs the reality of unemployment here:

"The June unemployment rate touched 9.5%, and it is quite possible that that rate will eventually exceed the 10.8% rate reached in November 1982. But even if it does, unemployment will rise, at most, 2 percentage points, far less than the reported 30% to 40% of workers who fear they will be laid off. And as the economy mends, the fear of being unemployed will subside, and consumption will rise."

Professor Seigel has forgotten more than I'll ever know about economics, but I have to (very respectfully) disagree. I think it’s unrealistic to think that Joe Consumer could have 10-20% more friends, family, and co-workers lose their jobs and then somehow he'll then breathe a sign of relief and start spending because some economists think that unemployment is already far above normal. I think Joe is going to pretty scared for a pretty good while.

It’s like being in a pit of lions that, on average, will eat no more than one human in a sitting. I don’t know about you, but if I’m stuck in there and two of my buddies were just eaten (mind you that's 100% above the average), mean reversion and bell curves won’t make me any less likely to need a clean pair of underwear.

Two Wrongs Don't Make a Right - Pension Insurance

Pension insurer shifted to stocks - The Boston Globe
Posted using ShareThis

The article above gives me a pit in my stomach on a number of levels, but one in particular. I think most people would get sick thinking of the money already "lost" . . . I get sick thinking about the money that might not be gained.

I'd like to think that the Pension Benefit Guarantee Corp would operate under some pretty standard advice: if you need money in the next 5 years, maybe you shouldn't have it in stocks. I do think they need to be proactive and estimate if they'll have an onslaught of pensions to back and see if that changes their time horizon, but they also need to be able to face reality. With valuations where they are, it might very well make sense to "stay put" and not have Congress reallocate your portfolio.

As we say here: "Two wrongs don't make a right." From this observer's point of view, it seems like shift back to the old strategy right now might be wrong #2.

Note: The author recognizes that he does not possess the right mix of qualifications, connections, and unconfessed past sins that is required to work for the PBGC, the Government Accountability Office, or the Congressional Budget Office. Therefore, his opinions are merely that and should not be applied to your investment strategy or the government's investment strategy for that matter and frankly he's surprised you're reading this fine print.

Feeling Like the Dryer Ate My Socks AND My Stocks

[UPDATED: I originally posted the entire article from investopedia here, but after brushing up on my copyright rules and regs (thanks to a couple colleagues) I've removed the article and just linked to it. Oops. Better safe than sorry.]

Justin here. I ran across a great article on investopedia.com (you can find the original here) that talks about where all our stock value "went".

The take-home is this: when so much of a company's stock price is determined by perception, there is real value and security in investing in companies that will pay you a dividend. People can argue all day long whether a stock is worth $5 or $50, but it is impossible to argue about the real value of the dividends that just landed in your account.

Once you start focusing on dividends, the main question becomes: "is this company (stock) able and inclined to pay a stable, meaningful, and growing dividend?"

We think that's a whole lot more productive and easier to determine than the non-dividend approach where the sole question is: "is this company going to be worth substantially more on the day I need to sell it?"

Pick-a-Pay Loans

Justin here. One of the worst financial inventions to come out of the housing boom has been the "Pick A Pay" loan.

Basically, the homeowner picks a payment they feel comfortable with, then they just pay it; it's as easy as that. You get a low payment, increasing house value, and big biceps (see picture) . . . well, not really.

What happens most of the time is that the homeowner is actually paying less than the interest! So the principal, instead of going down with every payment, actually GOES UP! You are essentially borrowing more money monthly. This was all well and good (though still not smart) while home values were rising. You can guess what happens when the house starts falling.

In May 2008, a San Francisco news station did a segment spotlighting the training videos that the company used (video here). It shows a scene where the homeowner asks the loan officer to clarify that he won't actually be paying down principal with this loan and the recommended response is "it's optional".

(Note: The company shown in the video was bought by another bank, which was bought by another bank, which then suspended the pick-a-pay program and then got bought by yet another bank.)

Recipe for Disaster: Keeping Up With The Joneses

Justin here. The single best (and by far most fascinating) explanation I've found of the current financial crisis is This American Life’s The Giant Pool of Money episode that aired on NPR. (You can listen to the 30 second promo here, the full story here, or read the transcript here.)

Mostly because excerpts like this:

“I wouldn't have loaned me the money. And nobody that I know would have loaned me the money. I know guys who are criminals who wouldn't loan me that and they break your knee-caps. I don’t know why the bank did it. I’m serious ... $540,000 to a person with bad credit.”

It made me realized that the sole cause of the crisis (literally ... the ... sole ... cause) is this: the need to keep up with the Joneses.

At every level of the chain: from countries needing to boost their investment returns so they sell out of treasuries and go to higher yielding alternatives, to homeowners taking out mortgages and second mortgages because their neighbors and friends are, to mortgage brokers creating riskier and riskier loans because their competition are, to banks buying those mortgages because the other banks are buying them.

The desire to “keep up” overtook the need to act rationally. I urge you to read or listen to it. Below are some more excerpts (emphasis mine) and my key takeaway:

"An interesting fact, here. Mike Garner's bank did not care how risky these mortgages were. This was the new era: banks didn't have to hold on to these mortgages for 30 years. They didn’t have to wait and see if they’d be paid back. Bank's like Garner's just owned them for a month or two and then sold them on to Wall Street. Wall Street would sell them on to the global pool of money."

And this:

"No income no asset loans. That's a liar's loan. We are telling you to lie to us. We're hoping you don't lie. Tell us what you make, tell us what you have in the bank, but we won't verify? We’re setting you up to lie. Something about that feels very wrong. It felt wrong way back when and I wish we had never done it. Unfortunately, what happened ... we did it because everyone else was doing it."

And lastly, this about the current and future landscape:

"The global pool of money is avoiding anything with even the slightest hint of risk and that affects everybody, no matter who you are. It's harder to borrow money to buy a house, or build a factory, or bring your country boldly into the 21st century."

My key takeaway is this: things are generally not as good or as bad as they seem.

Translation: if Mr. Market underpriced risk on the outset of this mess (ie - he bought risky securities he shouldn’t have), is it so crazy to think that Mr. Market could overprice risk today (ie – Mr. Market might not be buying some low risk securities that he should be buying?)

The House is Falling

Justin here. When my wife and I moved to Greensboro, we looked at 10 or 15 houses before making an offer on the cheapest one of the lot. After finding out there were two other offers, we paid the asking price ($129,900) for the 110 year old bungalow that had an abundance of charm and lead paint but skimped on the closet space and bathrooms.

Almost four years, one baby, 6 restored windows and a new paint job later, I'm still scurrying across the house at 6:00am to get to my closet, one that was made for a man with much narrower shoulders than me.

Anyway, when the stock market is moving like it is now, we've found it helpful to think about stock prices in terms of home prices. We've often asked clients, "What if you had a ticker running across your screen telling you what your home was worth? What if Jim Cramer screamed about your home price on TV? What if Barron's did a story about how overvalued your house was?" You'd start to believe everything they say.

Enter Zillow, a website that is supposed to track the daily price of your house. Zillow has been out a while, but I only got around to looking up my house in the last few months (below is the 5 year chart, that circle withe the $ is where I bought the house.)

And when I looked at it, do you want to know what I felt? Regret. Seriously. I regretted buying it for more than zillow said it was 'worth' ($115,000) and regretted not selling it in May 2008 when it was 'worth' $164,000.

But, you want to know what else I felt? Relief. Seriously. I was relieved to not have gotten the email, seen the quote, or heard the news that my house was 'worth' only $120,000 in February of 2007. Relieved that I didn't panic and sell out after it "when down" 15% from my purchase price. Relieved that I knew what my house was really worth and didn't sell for less.

And then I realized that looking at Zillow is no different than reading a stock analyst report, listening to a talking head, or checking your stock portfolio daily. The analysts and talking heads might sound slick and have a clean looking chart, but chances are they don't know the real value. And your stock portfolio today is only a snapshot of what someone will pay you right now, not a true measure of what is is worth. We think the prices we'll see in 6, 12, 18, 24, heck even if it takes 36 months (which is still long before the bulk of us will need to use our investments) will tell a much different story that the 'quotes' we're getting today.

Try telling the seller of my house that it was only worth $115,000 the day before he sold it - that's what Zillow said it was worth. I think he'd argue that my bank's check to him for $129,900 is a lot more accurate than Zillow's "quote." For him, his house ended up being worth about 13% more than Zillow quoted. Would it surprise you if we had the same thing going on in the stock market today, but on a much larger scale?

Ben Graham, the father of value investing, Mr. Market, and Warren Buffett's investing career, once said:

"The investor who permits himself to be stampeded or unduly worried by unjustified market declines . . . would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment."

Words worth remembering, especially now.

Question: What Are You Doing?

Justin here. American Public Media's Marketplace has been asking different people that question ("what are you doing?") since the start of this financial crisis. Today, they asked one of our favorite people: Dan Ariely

In this three minute 'interview' (listen below) Dan says that he has decided to not look at his investment statements. His motivation is more for peace of mind than anything else. Dan found that when he looked at his dwindling account it put him in a bad mood. In other words, worrying about it didn't add a single day to his life (those are my words, not his . . . well, not really even mine.)

We'd agree with Dan's advice . . . but with a caveat. We think two of the keys to successful investing are 1) finding a person (or process) that you trust and 2) sticking to them (or it.)

The "leg-work" is done in step 1 and "stomach-work" is done in step 2.

So, if you've done your leg-work in step 1 (picking a sound, rational, time-tested person or process), then the stomach-work in step 2 should be easier (not easy, just easier).

However, if you've been willy nilly in step 1 (following the talking heads, the cocktail party stock picks, or the advisor without a process), then step 2, well . . . you better keep that motion sickness bag next to your letter opener.

Class is in Session

I stumbled upon some some great explanations of recent events from martketplace.org (as in "Hi, I'm Kai Ryssdal and you're listening to Marketplace on NPR.)

They have a number of videos by Senior Editor Paddy Hirsch. The stick-figure-on-white-board lessons are great primers on what is going on. In the short (5 minute) videos he touches all sorts of terms acronyms you hear on a daily basis but might be a little (or a lot) fuzzy on such as: CDOs, naked shorting, CDSs, The TARP, margin calls. You can find them all here.

I think the most enlightening one is on CDOs (below):


Crisis explainer: Uncorking CDOs from Marketplace on Vimeo.

. . . so, what are we doing?

Justin here. This is from our most recent market commentary, (here):

One of our clients called, saying he had a question: “I’m just curious as to what you are doing to insure that I won’t lose a lifetime of savings?” . . . I’m going to take a cue from my old high school algebra teacher and assume that if someone in the class asks a question, chances are that other folks in the room are wondering the same thing.

In the commentary, we include an excerpt from Warren Buffett's 1987 letter to shareholders, which features his explanation of the way he thinks about the stock market - what he calls Mr. Market.

Buffet's words are so clear and helpful that is should be required reading before anyone opens a brokerage account (maybe I'll include that on my "suggestions box" form for President Elect Obama.)

As a side note, you can find all of our past commentaries here. If you'd like to be added to our quarterly mailing list, send me your mailing address and we'll be happy to send it to you the old fashioned way.

Inflation Hits the $1. 0 Cleaners

Justin here. I have breakfast every Thursday with some guys over at Biscuitville. Across the street there is this Dry Cleaners shop that obviously didn't think through all the implications of inflation (pardon the poor picture; I snapped it with my phone.)

Not only is the new name on the sign $1.75 Cleaners, (note much bigger "7") but you can see on the window that they call themselves $1. 0 Cleaners, twice!

There is some equation in economics with a cute chart that dictates when you decide to raise prices (I think it's when Marginal Return equals Marginal Cost or MR=MC) . . . I think it should really read MR = MC + new signage.

Warren Buffett Op-Ed: Buy American. I Am.

Justin here.

Warren Buffett wrote a great Op-Ed piece for the New York Times this morning. Well worth your next five minutes.

Buy American. I Am.

By WARREN E. BUFFETT

Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.