Investment Management

 

The Main Question in Investing 
 
A significant study by Terrance Odean and Brad Barber shows that the average investor buying and selling stocks and bonds, jumping in and out of the markets, dramatically underperforms the markets, and would've been better off just buying and holding a diversified portfolio through thick and thin (Terrance Odean and Brad Barber,"Trading is Hazardous to Your Wealth: The Common Stock Performance of Individual Investors" The Journal of Finance,  Vol. LV, No. 2, April 2000, 773-806).
 
But these studies beg a very important question, in fact the question in investing, in our opinion: who's getting all the extra return?  In other words, there's the average everyday individual investor earning their meager returns and then there are the higher returns of the market.  So who's cashing in on the winning side of the mistakes of the majority of individual investors?
 
There are, of course, the lucky--those who gambled and won.
 
Then there are those investment managers who possess a high degree of investment skill.  Or so it seems.
 
The data shows that more often than not, investment managers tend to underperform the markets over time (For example, see Robert D. Arnott, Andrew L. Berkin and Jia Ye, "How Well Have Taxable Investors Been Served in the 1980s and 1990s?" Journal of Portfolio Management 26, no. 4, Summer 2000). The star investment manager of today, given enough time, eventually loses their edge.  Today's hot managers may be tomorrow's cold turkeys.
 
One can conclude that this happens for two reasons.  (1) Those who were thought to be skilled were just plain lucky.  (2) And those who are in fact skilled eventually get run over by the competition of other skilled managers. The markets are a brutally competitive environment, in one false move a prominent money manager can lose their place on the top of the heap of performers and can be sent to the bottom of the pile.
 
If it's difficult for professional investors to outperform one another, it's even more difficult for the average individual investor to beat the markets.
 
Consider these facts: 
 
                        There are more than:
                    
                                     15,000 New York Stock Exchange Companies
                                       4,000 Equity Mutual Funds
                                       8,000 Hedge Funds
 
If, for example, an average individual investor has some cash to invest and is looking to find a good deal among the 500 companies that make up the S&P 500, that investor is competing against 27,000 different companies who are constantly pouring over the same data and evaluating this list of companies looking to exploit inaccuracies in the price of stocks.
 
This means that whenever an investor is buying or selling a stock, there is someone else on the other side of the trade who are, many times, these kinds of professional investors.
 
See why it's so hard to outperform?
 
So, instead of trying to soar with the performance of the investment stars by leveraging yourself to the hilt and pursuing concentrated bets in speculative investment arenas, we think there is a better way. 
 
Rather than chasing the performance, strategies and methodologies of the rock star investors, we think the more viable route to investment success is to understand the attributes and qualities of successful investors, and apply those attributes and qualities to each individual's situation and goals.
 
Necessary Qualities:
 
What are the qualities, skills and tools of successful investors that we can learn from?  
 
1) The ability to think for themselves independently from the crowd.
 
        Every now and then, the markets go raving mad--either in a speculative mania or in         
        a panicked crash. Investors who follow the herd are likely to inflict damage on their portfolio.  
        The successful investors of our times consistently demonstrate an ability to think for
        themselves and make decisions based on their own research and insight. Watching CNBC
        while you get ready for work doesn't count.
 
2) A written strategy, a game plan.
 
        Successful investors have a written plan of action about what they will do as the future
        unfolds. It seems that most investors tend to fly by the seat of their pants and buy or sell
        based on emotion or a hot tip.  Successful investors create a game plan in advance that they
        will use to help guide them through important times. A game plan helps successful investors
        know when to take money off the table and cash in on profits, or when to buy and seize upon
        opportunity.
 
3) Successful investors control their emotions and do not operate out of fear or greed.
 
        Greed can cause investors to stay in an investment too long or buy at dangerously high
        levels due to wishful thinking.  Fear can cause investors to panic and sell at a time when they
        should be increasing their exposure to that position. Controlling one's emotions is easier said
        than done.  It's one thing to state that you'll not succumb to your emotion when markets
        become extremely overbought or oversold, it's another thing to actually stay the course when
        everyone from the media to your brother-in-law is screaming otherwise. 
 
4) Competence: market history, market theory, a grasp of what makes the markets tick.
 
        When it comes down to it, many investors prefer not to have to think.  Thinking requires too
        much effort.  But as the old adage goes, "no pain no gain."  It's critically important to be
        knowledgeable about the markets, their history, how they work and how to best deploy your
        resources over time in light of changing conditions.  
 
To achieve investment success an investor must possess all the above attributes and skills, not just some of them.  The idea that a little knowledge is a dangerous thing is especially true in investing. When an investor ventures into the markets, they can easily get taken for a ride by the pros, or the by tides of panic and mania. 
 
We specialize in independent thinking, strategies that work, discipline and competence. Our goal is to help our clients earn their fair share of returns with a level of risk they can sleep with at night. 
 
Please contact us for our fee schedule.