We were recently contacted by someone who told us he had just started cloning our investment portfolio. Of course, this is a compliment—or at least it should be. But we knew this person had been following our investment work since 2005. Why start now?
One possible answer is that after seven years of watching our work, and with the market going up in an almost straight line since March 2009, he was now feeling confident enough to dip a first toe in the stock market water. That could prove to be a mistake.
The average investor is notorious for buying into the market at market tops when confidence is high. To make money in the stock market it’s imperative to have capital to invest when people hate the market and are fleeing in droves. In order to have capital for the bottoms you need to sell near the tops, not buy.
In March 2009, at a generational stock market low, when we kept back a year of living expenses and pushed every other dime we had into the market, nobody was asking us if it was a good time to invest—people were too busy jumping out of windows or hiding under the bed.
Probably the single most important attribute required to be a successful investor is the right temperament. One needs to be able to invest during times of fear and leave the party when people start looking a little tipsy. Someone who only feels brave enough to take a seat during good times is also likely to leave during bad times. Buying high and selling low will never make anyone money.
One of the statistics we are most proud of is this: Since 1992 (21 years) we’ve invested in, and closed on, 117 companies. Of these, we made money or got our money back on 109 of them for a no-loss investment ratio of 93%. If you include current open positions, the ratio is currently 90%. This is after two decades of investing.
For us to do consistently well as investors, we need around ninety-five people out of a hundred to disagree with us—more if possible.
This clearly puts us in a minority, but it also means our investment approach and philosophy is only suited to a minority. Most people probably should be invested in diversified mutual funds or a broad market index fund, and not because that’s where they’ll make the most money—they won’t, but because it will give them a more comfortable chair to sit in while they go nowhere. To make real money over the long term, investors should train themselves to be comfortable being uncomfortable.
Back in 2009 we took a look at Fidelity, the mother of all comfort ships. Fidelity at that time had around 46,000 employees worldwide. If we applied for a job there, we might be lucky enough to get a position making the coffee (we once offered to work for Raymond James for free but they turned us down).
Fidelity’s offices are filled with talented and educated people with every diploma known to modern man. They are up to their eyeballs with MBAs and CFAs and talented marketers. They have over 450 mutual funds which offer the global market sliced and diced every which way you can want or imagine. Fidelity has been so successful they have been entrusted to manage over a trillion dollars of other people’s assets.
Yet, according to Morningstar, as of 9/30/09 (when we did our work on this), of those 450 funds under Fidelity’s umbrella the best performing fund over the previous 10 years was the Fidelity Latin America Fund (FLATX) with an average annual return of 17% (it was still Fidelity’s best fund as of 6/30/2012 according to BestMutualFund.Org).
The average mutual fund over the same period produced 4%. Nobody should invest 100% of their wealth in a Latin America fund. The average mutual fund investor probably got closer to the 4% return even if he was lucky enough to have FLATX in his portfolio and things haven’t improved much since then.
According to an article in USNews, for the year ending June 30, 2012, the S&P Composite 1500 beat almost 90% of all actively managed domestic stock funds.
In many ways, the difference between the average mutual fund and the kind of deep value, out-in-the-storm, concentrated investing we do, is the difference between a chair maker and a taxi driver. Do you want to be comfortable or do you need to get somewhere? Ask anyone who has invested in mutual funds for the last ten to fifteen years how their retirement plans are going, or how they are going to educate their children, or god forbid, pay for health care.
The famous hedge fund guys like Einhorn, Ackman and Loeb will take you somewhere, but after giving them their 2/20 (as in 2% of assets and 20% of profits) for a few years you will realize they spend most of their time taking you where they need to go and not where you need to go. The bottom line is most mutual funds don’t work for most people and hedge funds are too expensive. Index funds are cheap but often deliver returns that won’t get most people to their desired destination.
In our opinion, to improve long term performance the average investor needs to think differently and that includes how they view the perceived value of comfort. When Matthew Schifrin of Forbes interviewed us for his book ‘The Warren Buffetts Next Door’ we explained that investing our way was a bumpier ride than a mutual fund and that it was definitely not for everyone (here’s an embarrassing and cheap homemade video where we make this point).
Picking the right investor to copy is hard enough. Picking the right time to start doing it may be even harder. If our experience is anything to go by, the more uncomfortable you feel, the closer you will be to getting it right.