Streetwise for Friday, October 12, 2018
Many investors feel they need to search for the Albert Einstein of the investment world. Think of it as a psychological crutch. Yet, doing so is such a waste of time.
As I have pointed out to my students, all you need is a modicum of training, combined with the desire and motivation to undertake the necessary research. The result is likely to produce acceptable investment returns that over time will likely exceed double digits. I can almost guarantee it.
Nonetheless, there is this never-ending search for a guru with a Holy Grail and by riding that person’s coattails your confidence is enhanced. The obvious candidate of course is the person many consider to be the oracle of the investment world, Warren Buffett.
Through the years, despite Mr. Buffett’s admonitions, many try to mirror his strategy as revealed on the Berkshire Hathaway Form 13F filed with the Securities and Exchange Commission. 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 in addition they are bidding against others trying to implement a similar strategy.
Moreover, Buffett does not have a single specific investment strategy. The world is too complex for any one unwavering stratagem 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 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 such a desire is accompanied by a more treacherous fault, a burning desire to outperform the market; for example the S&P 500 index.
The mentality of continually trying to claim victory over an index will inevitably mean that your investment strategy will be weakened as you are tempted by, and ultimately invest in, whatever is being touted as the latest “hot stock.”
Such a strategy is guaranteed to be fatal to your investment success. It is impossible to make insightful investment decisions when you are continually concerned with short-term performance. Moreover, you are trying to beat an index of 500 companies.
Want to take on the S&P 500? Save yourself grief, aggravation and money. Simply buy an ETF that mimics the S&P 500. No, you will not exceed the index, that is impossible, but at least you will have the same performance, although lately that might not thrill you.
A better strategy is not to become enamored with what happened last week or what might happen next week. The collective result will only be misguided market timing.
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 watched as investors select someone to manage their portfolio and then proceed to ignore the advice of the very person they hired. 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! You might think such behavior is rare. Yet, I can attest to it and academic studies have documented its prevalence.
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.RuddInternational.com.