Winning in the investment field is as much about preserving capital in bad markets as it is about making money in good markets. We are in business to conservatively grow capital entrusted to us – to earn reasonable returns for the portfolios over a reasonable time horizon. By and large, we don’t think in terms of the calendar when considering investments, and so we don’t necessarily think of calendar years as appropriate grading periods. In our view, investment performance for the portfolio over shorter time horizons, even sometimes those of several years duration, is something of a random event. We have found that the timing by which an investment works out (or doesn’t) does not conform itself to the calendar. The time periods we refer to as months or quarters or years are useful for making sense of life, but are generally uncorrelated to the progress of businesses or the fruition of investments ideas. In fact, in all investing decisions, the issue is one of weighing risks and potential returns: balancing short term challenges versus long term opportunities, reasonable concerns versus weak logic or conventional wisdom, upside potential versus downside risk, current stock price versus intrinsic value of the underlying business in question.
We believe in working hard to serve the long-term best interests of our clients through strong analysis and prudent decision making. We benchmark our own performance (both in terms of relative and absolute returns) over a three to five year period cycle. Shorter periods tend to be misleading or just random. Good performance over an entire cycle usually results from some underlying competency or skill employed by the manager. Our goal for you and our other valued clients is the same as our goal for our own money - to achieve an excellent compounding of capital over long periods of time without taking undue risks of permanent capital losses.
We feel that is very useful and important that we both track and report our past performance. We welcome clients to use this information in their overall assessment of our approach to intelligent investing.
Upon request, we can share the specifics of our past performance with potential clients. While past is no guarantee of future performance, our track record indicates that we deliver outstanding money management services since we outperformed the vast majority (well in excess of 90%) of other managers over our measurement periods and to boot during one of the most difficult market periods in recent memory.
Long-term investment success is a function of two things:
1. The Right Approach
There are many ways to make money, but this doesn't mean every way is equally valid. In fact, I believe strongly -- and there is ample evidence to back me up -- that the odds of long-term investment success are greatly enhanced with an approach that embodies most or all of the following characteristics:
- Think about investing as the purchasing of companies, rather than the trading of stocks.
- Ignore the market, other than to take advantage of its occasional mistakes. As Graham wrote in his classic, The Intelligent Investor, "Basically, price fluctuations have only one significant meaning for the true investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market."
- Only buy a stock when it is on sale.
- Focus first on avoiding losses, and only then think about potential gains.
- Invest only when the odds are highly favorable -- and then invest heavily.
- Do not focus on predicting macroeconomic factors. "I spend about 15 minutes a year on economic analysis," said Lynch. "The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going."
- Be flexible! It makes little sense to limit investments to a particular industry or type of stock (large-cap growth, mid-cap value, etc.).
- Shun consensus decision-making, as investment committees are generally a route to mediocrity. One of my all-time favorite Buffett quotes is, "My idea of a group decision is looking in a mirror."
2. The Right Person
The right approach is necessary but not sufficient to long-term investment success. The other key ingredient is the right person. My observation reveals that most successful investors have the following characteristics:
- They are businesspeople, and understand how industries work and companies compete. As Buffett said, "I am a better investor because I am a businessman, and a better businessman because I am an investor."
- While this may sound elitist, they have a lot of intellectual horsepower.
- They are good with numbers -- though advanced math is irrelevant -- and are able to seize on the most important nuggets of information in a sea of data.
- They are simultaneously confident and humble.
- They are independent, and neither take comfort in standing with the crowd nor derive pride from standing alone…bargains are rarely found among the crowd.
- They are patient. ("Long-term greedy," as Buffett once said.) Templeton noted that, "if you find shares that are low in price, they don't suddenly go up. Our average holding period is five years."
- They make decisions based on analysis, not emotion.
- They love what they do.