Investing is emotionally taxing. This inescapable truth does more harm to investing success than any other impediment. It is perpetually alluring, for novices and old hands alike, to abandon well thought-out but disappointing strategies moments before they work, in order to chase successful strategies just as they are about to run their course. How do we avoid this peril ourselves?
First, we remember that in good times the country grows at about three percent and inflation is somewhat less than that. Therefore, anyone hoping to achieve greater than ten percent gains in the investment world is assuming he is much cleverer than the country as a whole. Hoping for an investment result three or four times the country’s average growth rate on an unleveraged basis is a self-evident path to a world of trouble. In the good times, we remind our clients about this.
Secondly, it doesn’t really matter how well you do in good times; over the course of many years it is how you fare in the hard times that ultimately tells the tale. This second point is rather subtle and deserves explanation. Imagine two competing money management firms; the first dull as dishwater, earning 15% a year for ten years running. Now imagine a second much more exciting shop just down the street making 20% a year in eight years, it doesn’t matter which eight, and losing twenty percent in two years. The mind’s eye pictures the two outcomes being roughly the same. In fact, the first fellow will be 47% ahead of his more venture-some colleague. The second fellow will, however, have a much larger money management business, as he had bragging rights for 80% of the time. This is the bane of our business, and unless human nature changes there is no likelihood of this ever being otherwise. But, as a glance at our results over the past two decades will attest, we are the epitome of the first belt and suspenders fellow in the analogy, and that’s that. So if you are of the same type, or you just understand the nature of compounding money, come around and have a talk with us.