Streetwise for Sunday, October 22, 2017
Many investors feel they need to search for and find the Albert Einstein of the investment world. To my way of thinking, such an undertaking is a waste of time. As I have pointed out on numerous occasions, a modicum of training, combined with the desire and motivation to undertake the necessary research, and most anyone can produce suitable investment returns.
Nonetheless, for many the search for a Moses capable of parting the investment seas, is uncontestable. And the candidate most often looked to is the person many consider to be the guru of the investment world, Warren Buffett.
Through the years, despite Mr. Buffett’s admonitions not to do so, many try to mirror his strategy as revealed on the Berkshire Hathaway Form 13F filed with the S.E.C. Because Mr. Buffett presents himself as a long-term value investor, the thinking is that it does not matter that the transactions on this filing are likely to be months old.
The problem is that by not being able to discern exactly how Buffett reaches an investment decision, you are not going to have his edge. And you certainly do not have his checkbook.
Those trying to follow Buffett soon learn that they are not only buying well after Buffett has completed his purchases, but that they are also bidding against others trying to implement a similar strategy. The result of course is higher share prices than Buffett would have considered opportunistic.
And Buffett does not have a specific investment strategy. The world is too complex for any one investment strategy to be successful on a continual basis.
The economist Alfred Marshall wrote in his 1890 textbook “Principles of Economics,” “Although scientific machinery should be as definite as possible, at the same time it should be flexible.”
He added, “There is so much variety in economic problems, economic causes are intermingled with others in so many ways, that exact scientific reasoning will seldom bring us all the way to the conclusion for which we are seeking.”
Buffett’s success lies not so much in his strategy as in his ability to grasp and judge the financial innerworkings of a corporation. However, there is no fault in respecting accomplishment in any field of endeavor and allowing it to guide you in your own endeavors.
The difficulty comes when the desire to follow an accomplished investor is accompanied by a more treacherous fault, the burning desire to outperform the market, where the market might be defined as an index such as the S&P 500.
The mentality of continually trying to claim victory over an index will inevitably mean that you will search for, and ultimately invest in, whatever is being touted as the latest “hot stock.” This will be fatal to your investment success. It is impossible to make insightful investment decisions when you are continually concerned with short-term developments.
Therefore, instead of applying an intelligent long-term investment strategy, investors become enamored with what happened last week or what might happen next week. The collective result is misguided market timing. And when they finally do act, it is often the result of emotion rather than hard data and a rational investment plan. And who is to blame when things fall apart…everyone but themselves.
Academic studies have shown repeatedly that individuals who continually move in and out of positions to outperform the market will often find that their returns are substantially less, often about half, of what they would have gained by keeping the turnover of their portfolio to a minimum.
It gets worse. I have personally watched as investors select someone to manage their portfolio and then proceed to ignore the advice of the very person they hired. Deciding instead to override that advice and implement their own trading decisions. I ask you, if a doctor prescribed a certain medicine, would you ignore the advice and take whatever medicine you thought best?
Talk about shooting yourself in the foot! All this is in pursuit of trying to beat the market. You might think such behavior is rare. Yet, academic studies have shown otherwise.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
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