Smart Money, Midas Money, Patient Money
At BWM, we acknowledge that there are many ways to make money invested in markets. Finding the best strategy can feel elusive because there is no one strategy that works every time, every year, in every market cycle.
We believe investors need an investing philosophy, not just a strategy. A philosophy is something that will guide the investor regardless of market cycle. Our investment philosophy has been built upon all known market cycles, market conditions, geo-political shifts, the Great Depression, etc.
Let's look briefly at three broad approaches to investing: smart, lucky, and patient.
The "smart" investors and managers are on a quest to make the right NEXT call about market direction, security selection, asset class exposure. They may change tactics or strategies and make their bets based on their interpretation of 'the most important' or salient facts. This method is referred to as "active" management. It is highly competitive and often ego driven, so it is often associated with a commanding leader-figure with a big personality. They use emotions to drive a decision. Many of these strategies have begun to rely on mathematical algorithms.
Evidence from research points us away from trying to be “smart.” A large study of active manager performance has been produced annually by SPIVA (S&P Indices vs. Active) over the last 15 years. SPIVA reveals that the overwhelming majority of active managers cannot beat their comparative benchmark and that much of the reason is due to manager decisions that end up lowering performance.
Many smart people hire managers who have appeared to show uncommon insight in their past decisions. The problem is that the evidence shows that winners this year do not repeat in the next or future years. Manager success in the present is not connected to manager success in the future.
Midas MoneyAccording to Greek mythology, Midas, king of Pessius, was granted a special ability. Anything Midas touched turned to gold. Almost everyone has a friend or relative who appears to have the Midas Touch. One of the hardest things to accept is that some people seem very fortunate or lucky. In reality, no person can know the future. Since the future is unknowable, decisions an individual makes that wind up being correct have the effect of making that individual appear to be endowed with special powers.
All of us want to believe there is a crystal ball. Evidence based investing, which follows the scientific method, points to luck as a false positive. A false positive is a test result which incorrectly indicates that a particular condition or attribute is present. Certainly there are investors who have been seemingly very lucky and in fact are. Yet, the lucky nor the "smart" have no predictive powers. There is no systematic and repeatable Midas Touch.
Patient MoneyA cornerstone of investing is discipline. Disciplined investing is the adherence to your guiding investing philosophy when your emotions are shouting that you should ‘abandon ship’. Discipline requires the difficult mental exercise of judgement to act against your feelings by choosing patience.
At BWM, we use an evidentiary philosophy that requires patience. Do we expect the market to fall -20% to -40%? Yes, absolutely. In fact, in all our plans, we prepare for these events because they are part of what is possible and have actually occurred across the last 90 years of modern markets.
The patient strategy is the active choice to accept the historic ways markets have worked by studying its deviations across asset classes. Then, taking this careful study (which includes the Great Depression) and using that history to build and manage your portfolio.
Ancient wisdom esteems patience by hailing it as a virtue. Any virtue can only be realized through struggle and deliberate choice, which results in a habit. The patient investor can be the most difficult investing course because it requires activating on a virtuous habit through three guiding investment principles.
- To wait and exercise delayed gratification. Markets have offered attractive long term returns. However, investors should not expect to gain access to those returns without living through the years that make our heads or hearts spin.
- To endure market swings in spite of the flurry of emotions. Enduring the motions has historically proven wise because the weight of historical evidence reveals persistent and durable facts about how asset classes work across time,
- To rely on external evidence to guide decisions, not internal feels. One example is to to remain globally diversified. While not true every single year, over time, investing in world markets lower risk and offer more consistent long-term returns.
ConclusionMarket movements to the downside will trigger emotions. The question is how we respond? Will we be blinded by emotions and therefore led to poor decisions that will harm our goals in the long term? Or will we remain deliberative in our thinking to overrule response triggered feeling
At BWM, we believe part of our role is to serve you in deliberative thinking that results in patient investing.
*Chart I & II Source: Dimensional Fund Advisors
**Table I Content Source: Brown, Joshua M. The Grinch Comes to Omaha. thereformedbroker.com/2018/12/25/the-grinch-comes-to-omaha/. Nick Murray, Buffet biographer discussing the late summer of 1998.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities.
Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset categories. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Sector-specific investments can also increase these risks.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates if sold before maturity. Fixed income investments are subject to various other risks, including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
The performance exhibits are generic and educational in nature, and do not pertain to your actual portfolio. The exhibits were designed to illustrate the relationship between risk and return, and the uncertainty of stocks relative to bonds.