I’ve been kicking this idea around in my head for a while. I think there are essentially only two edges a small investor, whether they be an individual or professional managing a limited amount of assets, can have over the market.
1) Depth of Research
I think everyone knows this one, and most people think they have a rigorous research process. I’m not here to judge whether they’re right or wrong about that - I’m on Substack (and on other platforms) because I’m continually impressed by the amount of quality research being published on individual companies.
I don’t think the point is you have to be able to write a 500 page dissertation on your investment decisions in order to be successful. I think you have to do enough to make yourself comfortable with your decisions so that you don’t get shaken out of them if the market goes against you for what can be an undetermined (but lengthy) amount of time. The bar for determining how much due diligence is required is different for each person.
2) Nothing Beats Time
This builds on the idea above. You have to be able to sit with your decisions, even if it turns out you were wrong, for a long stretch of time. The market cannot tell you if you were right or wrong in 3 months, 6 months, 12 months, hell, maybe even 24 months.
Most of what moves your investments over these shorter time periods has nothing to do with your research. Be willing to hold on when everything tells you to sell out. Be willing to let your winners ride. Be willing to hold your losers as a constant reminder of the process that led you to your buy decision in the first place. Maybe you weren’t wrong, just early. You don’t find out unless you wait.
It makes intuitive sense that #1 is far more important than #2. Your decision making ability (based on detailed research) is more important than the time you intend to hold your position. I’m not so sure I agree.
I think if we are mostly correct in our decision making - let’s say 60% proficiency - we will be rewarded exponentially by holding our positions as long as feasibly possible.
The small investor does not have access to the insider information required to beat the market on research alone. Expecting to get every decision right while only getting half the information is an impossible goal.
One of my favorite quotes about investing comes from Tom Gayner, CEO of Markel: “We don’t expect to be perfect, just directionally correct.”
The only practical advice I have is to research to the exact extent required to make a steadfast decision. A decision you can live with even when the stock drops 25%. A decision you can stick with even when your favorite investment blogger tells his or her followers to go the opposite way.
This doesn’t mean you bury your head in the sand. It is critical to follow the companies you own and to read coverage you find pertinent.
I find Eddy Elfenbein’s process to be the ultimate guidepost in this regard. He researches all year then recommends 20 stocks on January 1st. He’s not allowed to change the list until the next January 1st rolls around (and even then he only changes 5 holdings).
I think that’s the model we should follow. Buy the company you want to buy, shut out all the noise you don’t need, and check the price a year later. Limit your decisions and lower your expectations of yourself. You are not a genius. The good news is you aren’t an idiot, either.
Make good decisions most of the time, and wait longer than everyone else is willing to wait. You’ll do just fine.
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