Investors are known for their style of investing. The moment
you hear of value investing, Warren Buffett leaps to mind; Peter Lynch reminds
us of growth investing; Howard Marks of distressed debt; George Soros or Stan
Druckenmiller are known for their macro trades; Jesse Livermore, a trader. And
the list goes on.
It is important to know your own dominant style of
investing. There would be something where you would be most comfortable in. For
example, my natural inclination is to buy stocks which are compounding in
nature and then sit and do nothing as long as they keep performing both on the
business and stock price fronts.
The problem starts when we become slightly successful in
your way of investing. Due to our ego, we tend to believe that our way of
investing is the best and others are subpar. And then we look for confirmation
from the external world. If we are a trader, we deify eminent and successful
traders, if we are investors we do the same with the famous investors. And that
is why you will find fundamental based investors deriding technical chartists
and vice-versa. This also puts subtle biases into our mind based on the
authority and commitment & consistency biases. For example, a generation of
investors blindly followed Buffett and avoided tech stocks just because he said
it was not within his circle of competence. And guess what, they missed the
best companies and winners in the last 20 years – Google, Apple, Microsoft,
Most of the people who start investing typically start with
either the technical or fundamental side, based on how they started their
journey and what influenced them. And over years, they keep getting better at
their craft. Very few have the curiosity and courage to take a peek at the
other side. And even for those that do, it is not easy to be successful.
Trading and investing require two completely different and mostly complimentary
mindset and very few can actually do well in both.
I have friends who are so deep-value oriented that they find
even entertaining the idea of studying a company with a PE of greater than 15
repugnant. Similarly, others would not even look at stocks which are not
growing above a 15% CAGR rate.
The table is from the book “Excess Returns” by
Frederik Vanhaverbeke. The book is completely ignorable other than this one
table! It captures the CAGR returns of investor-trades with long term track
records. When I chanced upon this table a few years back, it triggered a major
change in my thought process and I actually started delving into alternate
styles of investing. In fact, if you look closely, the people who have the best
long term public track records (greater than 10 years), it is the traders who
more or less win hands down. And yet their longevity was not there. The moment
you increase the investment duration to more than 20 years, the investors and
quant guys started taking over.
My main takeaway from this table was that it is important
not to deride other styles and get “style-boxed”. Style diversification is as
important as portfolio diversification, probably much more important. Since my
own style was primarily a buy-compounders-and-sit kind, I was perennially
missing out on shorter-term upswings in stocks of companies which may not merit
a buy in a concentrated quality portfolio. But even those stocks had a great
potential of giving decent returns.
I started exploring how the people on this list made money.
That opened up technical analysis and quantitative investing up for me. Now, I try to improve my skills in those areas as much as I spend time doing
fundamental research. And the main motivation is to be able to marry my
fundamental, technical and quantitative methods together to get a smoother
return profile over time.
is the Head of the equity advisory www.intelsense.in for long term wealth creation and a pure
quant focused newsletter at www.quantamental.in. Nothing in the article should be construed
as investment advice. Please do your own due diligence before investing.