Author: Jeremy Zhou
Covestor model: Biotech and Medtech
Steve Jobs passed away last week and I’m certain that he’ll be greatly missed. For the next few weeks, there will be volumes of writeup about Steve by authors who possess much more intimate knowledge about him than me, so I won’t try to compete. But there is one thing that I’d like to borrow from him which is at the heart of successful investing.
In Steve Jobs’ 2005 Stanford Commencement speech, he ended with, “Stay Hungry. Stay Foolish.” Now, given the level of success and wealth that he’d already achieved, why would he be hungry, for anything? And as for foolishness, let’s just state the obvious: Steve was regarded as the genius of geniuses. Perhaps he’s really saying that no matter where you are in life, don’t ever stop learning and absorbing. This also happens to be the core of sustaining a successful investment track record.
This year’s third quarter happens to be the worst performing quarter for the S&P 500 since the late 2008 global financial meltdown, with the market down more than 15 percent as measured by the S&P 500. On one hand, value managers proclaimed stocks are too cheap and this was a good time to buy, but on the other extreme, pessimists were predicting gloom and doom as if the world was about to enter the deepest depression ever. Who is right?
I’d humbly suggest that neither is right, and more importantly, they’re forgetting to stay hungry and foolish. Both groups mistakenly think that they know, based on the limited information they received and their ingrained mental models. While a low price multiple is a good indicator for cheapness and high debts and deficits can be a clear sign of troubled economies, neither is sufficient to determine the outcome of market performance.
The proper attitude in my opinion is to be hungry for new ideas, information and knowledge, and to admit one’s foolishness when faced with situations that are outside your circle of competence. Currently there are serious troubles affecting many developed economies, and there is also unprecedented prosperity blossoming across emerging countries; consequently, some companies and sectors are bound to be hurt while others benefit. The future course of events and outcomes are not set in stone, and our investment performance is hinged on our willingness and ability to recognize what is unknowable, analyze what is known, and adapt.
Some signals and factors that have worked well for me in the past for healthcare companies lost some efficacy in the past several months – hence the significant draw down in my model portfolio. This could be the beginning of a structural change in the U.S. healthcare system or simply a herding towards safety and liquidity. Either way, I’m adapting and making changes to reduce portfolio risk, improve stock selection, and refine entry and exit discipline.
I know what I don’t know and I’m thrilled to learn more with each passing day!
