I have been a professional investor for a long time. In any other profession, I would be nearly perfect in doing what I’m paid to do. If I were a dentist, I could fill a cavity with my eyes closed. If I were a pastry chef, my wedding cakes would be works of art. If I were a dock worker, I could load and unload those 3-ton cargo containers like they were Legos.
Alas, I did not choose a different line of work. The complex nature of the capital markets prevents most of us from feeling like we are ever “nearly perfect.” The best way to be successful in this business is to develop and stick to a well-defined investment philosophy. Trying to invest in line with whatever is popular or working at any given time is a well-documented recipe for failure.
The downside of the “best way” to invest is that sometimes one’s chosen approach will underperform any number of benchmarks. Occasionally, this underperformance will persist for a number of quarters or *gasp* even years.
I recall the legendary John Neff’s experience in the early 1980s. A well-known value investor, he concluded that metal and mining stocks represented tremendous value, and loaded up on them. For four years, this overweight position hurt his performance. In the fifth year, however, the bulk of his metals holdings appreciated something like 5 fold. Ultimately he was right, but he looked wrong for four years.
We all know that 2014 was a challenging year for active managers; something like only 15% of us was able to beat their benchmarks. 2015 has proven to be another hard year, especially for investors who have exposure to smaller-cap names, commodities and/or overseas markets. The fact that the major markets indices are down year to date has made a challenging year even more painful.
Some days I wonder if I suddenly became stupid or something. I am investing in the same way I have for decades. My ability to measure value feels the same. Many of the stocks that I found and bought in the past have shown sparkling results. A long, dry spell like now, however, can challenge one’s confidence, and I find myself constantly reviewing and challenging my approach. So far, I find nothing troubling in my methodology. I must conclude that my investment philosophy remains solid and will again lead to superior returns.
I am not ready to hang up my HP 12-C and go drive semis like many of my cousins and uncles. I come to work every day with the same level of enthusiasm as ever. I relish in the thought that today I may find yet another dusty rock of value that will one day shine as a brilliant diamond.
The recent volatility has no doubt dampened the spirits of many investors. Remember that in the short-run, all kinds of fears (are we going to see a new global recession?) and technical trading schemes (see my previous blog) can and will affect the market. In the long-run, fundamentals always win out, all stocks eventually move to their intrinsic value, and value investing beats most other approaches.
Patience will be rewarded.