Drystone Communications

October 9, 2008

Like the difference between potential energy (the rock on top of the cliff, the S&P 500 at 1576.09 last October) and kinetic (the rock already falling, the S&P 500 plummeting to 909.19 this October), fear and risk are inversely correlated. The less fear you’re feeling, the more risk you’re probably bearing – the risk just hasn’t reared its head yet. Vice versa (we can hope), the fear we’re feeling now means that a sizable portion of the risk has already manifested itself and been recognized in asset prices.

Just as the time at which you pull out of your driveway is a safer and more reliable indicator of when you will arrive at the grocery store than betting that you can leave late and average 90 mph, the price you pay for stocks is a safer and more reliable predictor of the eventual return on your investment than a high expected growth rate of cash flow or earnings per share. Getting to be stingy about the price you pay is probably more important to your ultimate investment performance than the growth rate of earnings.

Drystone LLC investment portfolio manager