It’s markets like these that can bring out the worst in investors’ behaviors. Some investors are afraid to take action for fear of making the wrong decision. Others are quick to react in sympathy with the herd, which almost always moves in the wrong direction. Too often, investors want to focus on the short-term outcomes of their actions (or inaction) when, in reality, they have very little impact on their long-term investment results. It explains why most investors consistently underperform the market benchmarks.
For that to change, there are two things investors need to keep in mind that can ward off these harmful behaviors.
First, you should have an investment strategy that guides your thinking. It could be one you create or, as I outline in my recent book, Taking Stock, one that is borrowed from someone else. Either way, adhering to a well-conceived investment strategy is the key to staying focused on the long-term.
Second, and this is super important, is that you need to know and expect you will be wrong at least some of the time. Understanding that even the most successful investors are wrong from time to time, should alleviate any fear you might have of getting it wrong. Consider these real-world examples of two of the greatest investors of all time.
Ray Dalio is Wrong….for Now
Ray Dalio manages the largest and, by most measures, the most successful hedge fund of all time. His Pure Alpha strategy, which manages nearly $140 billion in assets, has generated an annualized return of 12 percent since its launch in late 1991. During that time, his fund has only lost money three times. In 2018, his fund returned 15% while the S&P 500 and nearly all investable asset classes ended the year in the red. By all accounts, Dalio is an investment genius.
But, if you knew nothing about his track record and focused solely on his performance thus far in 2019, you would probably say he is investing fool. Through the end of June, while the S&P 500 has gained 18% year-to-date, Dalio’s fund is down nearly 5%. Heck, dart-throwing monkeys could probably do better than that!
Thus far in 2019, Ray Dalio is wrong. But, he isn’t about to abandon a strategy that has made him and his clients nearly $60 billion. Looking out to the next 10 years, I wouldn’t bet against him. Dalio has a successful strategy grounded in a sound investment philosophy. Here’s a glimpse into his mind:
“I think the important thing … you can have is an excellent strategic asset allocation mix. In other words, you’re not going to win by trying to get what the next tip is — what’s going to be good and what’s going to be bad. You’re definitely going to lose. So, what the investor needs to do is have a balanced, structured portfolio — a portfolio that does well in different environments.”
No magic bullets here. Just sound investment principles he can follow with confidence even when he gets it wrong from time to time.
Warren Buffett’s Bump in the Road
Based on his unbeatable track record, you would think everything Warren Buffett touches turns to gold. Berkshire Hathaway shares are up more than one million percent on a book-value basis since 1964 as compared to the S&P 500 which, in the same period of time, is up 15,000%, including dividends.
Although Buffett has owned up to several of his mistakes he has made over time, you have to go back 20 years to find a time when he really got it wrong. In 1999, the S&P 500 gained nearly 20% and the NASDAQ composite index rocketed to an 86% gain. Berkshire Hathaway lost 20%. How does that happen?
Well, he got it wrong. In the late 1990s the stock market gains were driven largely by technology companies, which, at the time, Buffett avoided because they didn’t fit into his strategy. Meanwhile, his bread and butter stocks – typically large consumer stocks like Coke, American Express, and Gillette – underperformed the market.
However, it would be foolish to write off more than a half-century of stellar returns born out of a proven investment strategy. Although he now owns a few technology stocks – his largest holding is now Apple – he has stuck to his core strategy, which is to buy great companies at a fair price and hold them forever.
The Big Takeaway
The common denominator in these two examples is you have two great investors who have great confidence in their strategies, enough to ride them through difficult times. Their success is based on strict adherence to their strategies, not abandoning them when things go wrong. They know that a 2,000 point drop in the market may be disconcerting, but over time, it will be nothing but a blip on their long-term performance.
It’s big news when a Dalio or a Buffett has a bad year because the media is always focused on short-term performance and then investors get sucked into the hype. No investor can be right all the time, especially when measured in six-month increments. That’s not the way investing works.
