By John Reese —
In a YouTube video from 2009, Succeeding author John Reed tells his audience that to achieve success, a person must say to themselves: “Here are my strengths and weaknesses and here are the alternative paths I can take to get to my goal. Which path best fits my strengths and weaknesses?”
This notion applies to investing in a big way. While setting goals is a paramount first step in any investment plan, you must also be mindful of your risk appetite and align your portfolio accordingly. How will you react to short term market shifts, either up or down? What percentage of loss are you willing to endure if the market were to experience a pullback? Do you take a long view toward your investment portfolio or are you hyper-focused on short term changes? Can you be comfortable sticking to your plan no matter what noise is going on around you? Even if it means being the only one in your circle of friends that does?
Finding the answers to these questions takes careful thought and a healthy dose of honesty. While we all would like to think we are capable of thinking long term and can insulate ourselves from the hype of financial media outlets, we could very well be tempted to cut and run if we’re battered by warnings that the sky is about to fall.
In 2006, Oaktree Capital co-chairman Howard Marks wrote a memo titled Dare to Be Great in which he delivered a simple but provocative statement about investing: “This just in: you can’t take the same actions as everyone else and expect to outperform.” Being different, he argues, is “absolutely essential if you want a chance at being superior.”
In a recent article for the Collaborative Fund, Morgan Housel outlines what he believes are the four “psychological states of investing:”
- Miserable but confident in its eventual rewards.
- Miserable and giving up.
- Comfortable and accepting of its future downside.
- Comfortable and oblivious of what’s to come.
Housel likens investing to exercise in that you can’t enjoy the benefits of either without some degree of discomfort. “The financial rewards for being comfortable as an investor are the same as the physical rewards for sitting on the couch.” Investment returns, he argues, demand payment in the form of “uncertainty, confusion, short-term loss, surprise, nonsense, stretches of boredom, regret, anxiety and fear.”
It may seem a lot easier to formulate an investment plan based on the assumption that you will remain steady if short-term losses occur than to stick to it–particularly as we continue to experience a seemingly steadfast bull market. This is a recurring theme in many of my articles and the cornerstone of our investing strategy here at Validea: Be different and stick with a strategy through periods of not-so-good performance. This is what works in the long-run, if investors can remain level-headed and disciplined.
One way to accomplish this is to identify companies that reflect strong underlying fundamentals that will support their operations despite inevitable market downturns. In Marks most recent memo, published in July, he writes: “Many of the most important considerations in investing are counterintuitive. One of those is the ability to understand that no market, niche or group is likely to outperform the others forever.” At Validea, we embrace this concept.
For nearly fifteen years, we have been using the stock screening models I developed based on the strategies of some of history’s most successful investors, including Warren Buffett, Peter Lynch, Kenneth Fisher and James O’Shaughnessy. The long track records that the gurus had with their approaches, and the experience we’ve had with our guru-inspired models, tells us that these strategies have been successful not because of luck or gimmickry. That’s not to say they are successful all the time. Since our portfolios are heavily concentrated rather than index-based, they can suffer periods of significant underperformance when the market dips. On the flip side, however, this can lead to robust outperformance when upticks occur. Over the long-term, the strategies work well because they focus on basic, essential concepts that are at the core of good investing. By identifying efficient, financially solid firms with good growth and/or dividend payouts, we can acquire shares of those good companies at bargain prices.
These are not particularly sexy concepts, but the gurus who inspired them subscribed to the view that successful investing isn’t about flash or excitement. We are confident that over the long term, value and fundamentals do matter. That’s why we will continue to deploy these time-tested approaches in a steadfast, disciplined way.
Photo: Copyright: olivier26 / 123RF Stock Photo
John Reese is founder and CEO of Validea.com and Validea Capital Management, LLC. Validea is a quantitative investment research firm and Validea Capital, a separate company from Validea.com, which maintains this blog, is a asset management firm offering private account management, ETFs and a robo advisor, Validea Legends and Validea Legends Income. John is a graduate of MIT and Harvard Business school, holder of two US patents and author of the book, “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”.