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June 15 - June 15, 2017
Today, the institutions are the market. Institutions do over 95 percent of all exchange trades and an even higher percentage of off-board and derivatives trades.
given the cost of active management—fees, commissions, market impact of big transactions, and so forth—investment managers have and will continue to underperform the overall market.
Individual investors investing on their own do even worse—on average, much worse.
In a winner’s game, the outcome is determined by the correct actions of the winner. In a loser’s game, the outcome is determined by mistakes made by the loser.
the side that makes the fewest strategic errors wins the war.
investment management has evolved in recent decades from a winner’s game to a loser’s game because a basic change has occurred in the investment environment: The market came to be dominated by the very institutions that were striving to win by outperforming the market.
As a group, professional investment managers are so good
that they make it nearly impossible for anyone professional to outperform the market they together now dominate.
For most investors, the hardest part is not figuring out the optimal investment policy; it is staying committed to sound investment policy through bull and bear markets and maintaining what Disraeli called “constancy to purpose.”
Being rational in an emotional environment is never easy. Holding onto a sound policy through thick and thin is both extraordinarily difficult and extraordinarily important work. This is why investors can benefit from developing and sticking with sound investment policies and practices. The cost of infidelity to your own commitments can be very high.
An investment counselor’s proper professional priority is to help each client identify, understand, and commit consistently and continually to long-term investment objectives that are both realistic in the capital markets and appropriate to that particular investor’s true objectives. Investment counseling helps investors choose the right objectives.
THE ONLY WAY ACTIVE INVESTMENT MANAGERS CAN BEAT THE market, after adjusting for market risk, is to discover and exploit other active investors’ mistakes.
the reason so few investors do better than the market is not because they lack skill or diligence, but because the markets are so dominated by investing experts who are so very capable, so well informed and so hardworking all the time.
But remember: Every time you decide to get out of the market or get in, the investors you buy from or sell to are professionals.
Market timing does not work because no manager is much more astute or insightful—on a repetitive basis—than his or her professional competitors.
Decisions that are driven by greed or fear are usually wrong, usually late, and unlikely to be reversed correctly. The market does just as well, on average, when the investor is out of the market as it does when he or she is in it.
All the total returns on stocks in the past 75 years were achieved in the best 60 months—
If you missed those few and fabulous 60 best months, you
would have missed all the total returns accumulated over three full generations.
What is remarkable about profound investment concepts is how few have been discovered that have lasted for long—most likely because the hallmark of a free capital market is that few if any opportunities to establish a proprietary long-term competitive conceptual advantage can be found and maintained for a long time.
With so many competitors simultaneously seeking superior insight into the value/price relationship of individual stocks or industry groups and with so much information so widely and rapidly communicated throughout the investment community, the chances of discovering and exploiting profitable insights into individual stocks or groups of stocks—opportunities left behind by the errors and inattention of other investors—are certainly not richly promising.
The first step into reality is to recognize that the key to market success is not your skill and knowledge as an investor compared to other individual investors, but the skill and knowledge with which each specific investment transaction is made.
1. The dominating reality is that the most important investment decision is your chosen long-term mix of assets: how much in stocks, real estate, bonds, or cash. 2. That mix should be determined partly by the real purpose—growth, income, safety, and so on—primarily by the investor’s ability to stay the course and, most importantly, according to when the money will be used. 3. Diversify within each asset class and between asset classes. Bad things do happen—usually as surprises. 4. Be patient and persistent. Good things come in spurts—usually when least expected—and fidgety investors fare
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And over the past 20 years, more than four out of five of the pros got beaten by the market averages. For individuals, the grim reality is far worse.
The more you study market history, the better; the more you know about how securities markets have behaved in the past, the more you’ll understand their true nature and how they probably will behave in the future.
Knowing history and understanding its lessons can insulate us from being surprised.
The long term is inevitable. It is regression to the mean all over again.
Investing, like parenting teenagers, benefits from calm, patient persistence with a long-term perspective and constancy to purpose.
The hardest work in investing is not intellectual; it’s emotional. Being rational in an irrational, short-term environment is not easy, particularly with Mr. Market always trying to trick you into making changes. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus—particularly at market highs or market lows—and staying committed to your optimal investment policy.
THE LARGEST PART OF ANY PORTFOLIO’S TOTAL LONG-TERM returns will come from the simplest investment decision—and by far the easiest to implement: buying the market by investing in index funds.
Warren Buffett, recommends that individual investors consider indexing: “Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
The problem is not in the market but in ourselves, our perceptions, and our all too human reactions to our perceptions.
Investor risk can be reduced—often quite substantially—in four ways: avoiding mistakes that are “all too human”; determining your own realistic investment objectives; designing a sensible long-term strategy to achieve your particular objectives; and staying committed to your long-term program.
The great advantage of concentrating on investment policy and asset-mix decisions is that it helps you avoid the vain search for superior performance.
investing proportionately in all the world’s major stock markets and all the different economies those markets represent increases diversification significantly.
The key to long-term success is not found in the last few years’ performance numbers; it’s in the professional culture of the organization.
And be wary and skeptical about organizations that try to get you to focus on recent results when your true interests are all long term.
Ironically, most investors do not seek—and are unwilling to pay for—real help in developing an optimal long-term investment program. This grievous sin of omission incurs great opportunity cost: the cost of missing out on what might easily have been.
Successful investing does not depend on beating the market. Attempting to beat the market—to do better than other investors—will distract you from the fairly simple but interesting and highly productive task of designing a long-term program of investing that will succeed at providing the best feasible results for you.
The real challenge is to commit to the discipline of long-term investing and avoid the compelling distractions of the excitement that surrounds, but is superfluous to, the real work of investing.
The real purpose of investment management is not to beat the market; it is to do what is right for each particular investor who will accept the central investor responsibility and who wants to be successful at achieving his or her true and realistic objectives.
