Patience is underrated and remains a real advantage – John Huber, Saber Capital.
One of the people I discuss investing with is a trustee of a large pension fund. They invest via 2 (potentially replaceable) fund managers. Both of whom have daily, weekly and monthly reporting internally. The pension fund sees this as ensuring the fund manager firm keeps pressure on the fund manager to perform.
The pension fund then pays another company to review the work of the 2 fund managers quarterly. The review is largely there to protect the trustees and does not cost a lot given the size of the fund. But what all the reporting and levels do is focus everyone in the process on monthly if not daily returns. Nobody is interested in the 2 year return as you can lose your job/mandate over a couple of bad quarters. Having paid for the second level of review the trustees would of course open themselves to a risk of litigation if they did not follow the advice and as advisors the review party recognises it is redundant unless they can find something to suggest a change is necessary. It is in my opinion a ridiculous situation but not as I understand it that rare. It is not the sort of environment that encourages long term thinking.
Whilst I have used perhaps one of the more extreme examples the reality is that most professional investors operate within a requirement that too keep their job they must operate against short term metrics. As individuals their success is about not underperforming in the short term rather than over-performing in the long term.
This is played out in a hundred ways throughout the financial services industry every day. Invariably any newspaper reporting covers some level of short time periods (quarterly, annual) that even the reporter would say are not realistic judges of ability. In reality most professionals are remunerated somewhat in line with their Assets Under Management, as such their key skill is in getting more AUM. So the news reports become very important advertising and getting the short term positive news is usually more important than the planning for long term success. Meb Faber of Cambria Investment Management talks about dealing with investment professionals who want to buy into the Cambria fund that has performed best in the last year. Despite Cambria advertising itself as believing largely in mean reversion and providing funds to meet specific strategies. In short they believe you should be investing on the strategy not the return and if you pick on returns pick the one doing worse.
There is also the widely acknowledged process in which professionals window dress their portfolio at period reporting end. Say company x has done well over the quarter a professional might buy some at period end so they can claim they owned the share in the quarter and didn't it do well. They do not need to point out that they only owned it for the last 2 days or bought it at its high, they just need to create the right drumbeat to keep their superiors and customers happy and boost AUM. A few positive stories from journalists after a lunch do not hurt either.
Warren Buffet, (sorry to come back to him but he is widely known and well reported), has over the last year invested quite a bit into Apple. He has been asked a number of times about this and his predictions for iphone sales. His response is invariably he has no interest in the quarterly forecasts for sales he just sees Apple as a great company with a strong hardware/software combination and an ability to develop products people want and will pay for. However if you use Google Alerts on AAPL you will get daily updates on what broker x or y think the next quarter will be for iphone unit shipments.
To use a Buffet analogy you do not buy a farm based on the next month’s weather report. But most of the market is trying to predict tomorrow’s weather to keep their job so being able to operate to a different timescale is probably still a real advantage.
As a private investor you can aim for success over much longer periods than most professional investors.
This may also play into a consideration of strategies;
Frederick Rowe in a Google Talk discussed why he went from being a short seller to a growth investor. His argument is given the short seller can have an indefinite loss they need to be very sure they are the cleverest guy. Value investors need to think they are cleverer than many and each time they prove themselves correct they have to sell the business as it has reached full price and look for another mispricing. All a growth investor needs to do is find a bunch of bright guys with an excellent product and let them grow the business and with it the share price and sit on the investment until he thinks the guys are no longer so bright or the product no longer so excellent. From this perspective the easiest strategy is too sit and wait, but few “managers” of funds can afford to sit and wait as people object to paying for nothing to be done.
This happens to even the most successful of investors. Seth Klarman mentions being asked by a large investor why they should pay him to hold money. His response was that they are not paying him to hold money, but to know when to hold money.
Mikael Syding who was MD of Futuris/Brummer when it won European Hedge Fund of the Decade (2000-09) suggests that most real winning investments, (as opposed to trades), particularly “value” investments take about 4 years to play out.
Dimson talks about why certain professional investors may happily hold underperforming shares. The contention is that as a professional they are faced with potential redemptions at any time and as such need a certain level of liquidity more than returns. As such for part of the portfolio holding liquid shares is more important to portfolio management than absolute performance. As a private investor you do not need to buy in underperformance.
Another factor to be taken into consideration is the often misused definition of risk that pervades much of the financial markets. Howard Marks defines risk as the absolute impairment of capital, but much of the finance industry defines it as volatility. To an investor with time this is clearly rubbish, as an example, if every Monday a share could be bought and sold for 1p, on Tuesday 2p, Wednesday 4p, Thursday 8p, Friday 16p and then back to 1p the next Monday etc, clearly it is very volatile. But it is not risky, just buy on Monday, sell on Friday. However many models define this as high risk and of course it can be made to be if you buy on a Wednesday and might sell on a Monday.
I do think Time Advantage exists, continues to exist and is perhaps the most readily available advantage to the private investor. Particularly when you accept that compounding is one of the most successful ways to grow your wealth.
“Being a successful investor is having the crowd agree with you later on” – Jim Grant.