It might seem a little out of place to talk about super-investing returns when stock markets are on the back foot. But it is important to understand why some money managers can be so good at what they do, even when times are tough. It is also important to figure out why some are some so bad that they are forced to hang their heads in shame.
But before we answer that, it is important to assess any money manager’s performance over a reasonable amount of time. For instance, jumping on the tech bandwagon when technology issues are all the rage is a no-brainer. Question is whether they can still deliver when nobody wants to touch technology issues with the proverbial bargepole.
Generally, a couple of business cycles should be long enough to separate those who are just plain lucky or opportunistic from those that actually have what it takes to deliver exceptional returns. Over the years, I have been fortunate enough to monitor money managers who have delivered exemplary performances. These professionals have produced triple-digit returns over a decade.
In other words, they have generated returns in the high single digits annually through good times and bad. That is not easy, given that the environment we operate in is constantly changing. So, how do they manage to continue doing what they do? It boils down to four main traits.
Focus on finding good companies
Good managers have a clear understanding of where everything is going. This is particularly important given that the world is always in flux. They then fit their investing decisions into their view of the world. This helps them remain focused rather than simply reacting to what is happening on a day-by-day basis.
Staying focussed when investing is vital at the moment, given the conflicting views about the global economy. One day it can look as though the world is going to hell in a handcart, while the very next day everything in the garden is coming up roses. Neither is true. But if we make investment decisions based on what we hear, then we are almost guaranteed to get it wrong.
Being arrogant and humble
A good manager must have the right balance of humility and arrogance to succeed in the market. We have to be arrogant enough to keep in mind a central understanding or thesis about why we have made a particular investment or bought a share.
Unless the thesis has changed appreciably, then we should be confident enough to stick to our guns and not allow events to distract us. At the same time, we need to be humble enough to admit when we have got things badly wrong. Perhaps our investing thesis was incorrect in the first place or maybe things at the company have changed for the worse.
Forget the price we have paid for a share
One problem that many investors have is a belief that they must always sell a share for more than they paid for it. What we must try to do when we invest is to forget about what we have paid for the investment.
If we can do this successfully then we are looking at outcomes rather than trying to prove we were right all along. Remember, investing is about finding a good home for our money over the long term. We can’t easily do that if our money is tied up in bad investments.
Don’t try to look for the next Microsoft or Apple
The majority of good money managers just try to buy things at the right price. There are some investors who are very good at looking at a company, even if it is ridiculously expensive, and somehow know what that company could become in the future. Unfortunately, most of us can’t, which is why it is better to buy something cheap instead.
Good money managers don’t waste their time and effort trying to unearth the next Microsoft (NASDAQ: MSFT). They know better than to look for a needle in a haystack. They don’t want the one stock that can supercharge their returns. Instead, they just buy the cheap stuff that fits into their overview of where the world is heading.
The world today
So, how does this fit into what is happening now? Firstly, interest rates are on the rise. To be fair, interest rates were always going to rise. It was never going to remain close to zero. Secondly, central banks will try to withdraw some of the cash that they have injected into the global economy.
Given the backdrop of tighter money supply, it stands to reason company valuations will probably fall. But good companies can survive under all conditions. What’s more, good companies selling at low valuations are always more attractive than when they are priced at hefty premiums. I suspect our super investors will be super excited rather than super depressed with lower valuations. Or as Warren Buffett once said: “When it is raining gold, put out the bucket, not the thimble.”
Note: An earlier version of this article appeared in The Business Times.
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Disclaimer: David Kuo does not own shares in any of the companies mentioned.
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