If you aren’t willing to do that, you’ll end up questioning the investment beliefs you do hold every time you underperform the market. Many proven investment techniques have lagged the market over short periods of time. Occasionally, the performance gap has been very wide. Regardless of whether you adopt a primarily qualitative or primarily quantitative approach to investing, this short-term underperformance is unavoidable.

It’s avoidable in the sense that a good investor can get lucky and not suffer a down year for a decade or so. Likewise, it’s possible to outperform an index year after year – if you’re lucky. But, it isn’t possible to adopt a strategy that guarantees such outperformance.

The best you can do is adopt a strategy that offers the right odds. A series of investment operations undertaken in accordance with such a strategy will not guarantee favorable outcomes in every case, but it should provide satisfactory results over the long-term.

There’s more than one way to skin a cat. I don’t want to encourage dogmatism. But, I do want to make sure you do not confuse that which is conventional with that which is reasonable. There is a lot of conventional, moderate sounding advice given to investors that does not hold up to careful scrutiny.

The most obvious example is diversification. Making a series of bets on separate high-probability events is an excellent idea. Diversifying across several different asset classes and hundreds of securities is something entirely different. Even if there are hundreds or thousands of excellent investment opportunities, it does not follow that an investor ought to make every reasonable bet. After all, some will appear to be more reasonable than others. There is no sense in taking on several difficult tasks in the hopes of achieving a result that can be produced by taking on a few very easy tasks.

You don’t have to agree with me on all these issues – most people don’t. But, it is vital that you question the unstated assumptions upon which an investment operation is based. You might come to the same conclusion as those who engage in wide diversification. But, you need to come to that conclusion on your own.

Many investors have not even bothered to consider the underlying premise of diversification. They aren’t really sure why diversification is a desirable strategy. They don’t know how it minimizes risk or at what point the benefit from adding an additional position becomes immaterial. Diversification may be a prudent strategy. But, you can only decide that for yourself after you’ve considered the benefits in terms of risk reduction and the detriments in terms of selectivity reduction.

If I were forced to spend my life betting on horse races, I’m quite certain I would bet on very few races. Whenever I did bet on a race, I’d bet on several different horses.

Why? Because I know more about people than I do about horses. The likelihood that a few horses in a few races get too much favorable attention seems much greater than the likelihood that I could ever make reasonably specific judgments as to which horse is most likely to win a given race. Of course, I would do best if I didn’t bet on any horse races at all.

So, the question is whether stocks are anything like horses. I don’t think they are. When it comes to businesses, I’m a lot more comfortable with the idea of picking the few winners from the many losers – especially when the odds get out of whack. The one tactic that would remain the same is inaction. Acting less and thinking more is sound advice wherever money or commitment is concerned.

A successful investor has to have confidence in his judgments. I don’t know how you can gain that confidence without subjecting your beliefs to honest scrutiny. An unexamined philosophy will never exorcise your deepest doubts – and for as long as these doubts remain, you will be unable to find the confidence you seek.

Page 2 of 2 :: First | Last :: Prev | 1 2 | Next