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Seth Klarman: Investors Always Need A Strategy To Guide Them
"Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets," Seth Klarman told his audience in a speech at MIT in 2012. Q3 2020 hedge fund letters, conferences and more Klarman was talking about the benefits of having a strategy, such as value investing, to provide a Read More
By David Merkel, CFA of Aleph Blog
Happy New Year to all of my readers. May 2015 be an enriching year for you in all ways, not just money.
This is a series on learning about investing, using my past mistakes as grist for the mill. I have had my share of mistakes, as you will see. The real question is whether you learn from your mistakes, and I can say that I mostly learn from them, but never perfectly.
In the early 90s, I fell in with some newsletter writers that were fairly pessimistic. As such, I did not do the one thing that from my past experience that I found I was good at: picking stocks. Long before I had money to invest, I thought it was a lot of fun to curl up with Value Line and look for promising companies. Usually, I did it well.
But I didn’t do that in that era. Instead, I populated my portfolio with international stock and bond funds, commodity trading funds, etc., and almost nothing that was based in the USA. I played around with closed-end funds trying to see if I could eke alpha out of the discounts to NAV. (Answer: No.) I also tried shorting badly run companies to make a profit. (I succeeded minimally, but that was the era, not skill.)
I’ve been using my tax returns from that era to prompt my memory of what I did, and the kindest thing I can say is that I didn’t have a consistent strategy, and so my results were poor-to-moderate. I made money, just not much money. I even manged to buy the Japanese equity market on the day that it peaked, and after many months got out with a less-than-deserved 3% loss in dollar terms because of offsetting currency movements.
One thing I did benefit from was learning about a wide number of investing techniques and instruments, which benefited me professionally, because it taught me about the broader context of investing. That said, it cost time, and some of what I learned was marginal.
But not having a good overall strategy largely means you are wasting your time in investing. You may succeed for a while with what some call luck, but luck by its nature is not consistent.
Thus, I would encourage all of my readers to adopt an approach that fits their:
- Available time
You have to do something that you truly understand, even if it is hiring an advisor, wealth manager, etc. You must be able to understand the outer edges of what they do, or how will you evaluate whether they are serving you well or not? Honesty, integrity, and reputation can go a long way here, but it really helps to know the basics.
Picking fund managers is challenging enough. How much of their good performance was due to:
- their style being in favor
- new cash flows in pushing up the prices of the assets that they like to buy
- a few good ideas that won’t be repeated
- a clever aide that is about to leave to set up his/her own shop
- temporary alignment with the macroeconomic environment
- or skill?
Personality is another matter — some people don’t learn patience, which cuts off a number of strategies that require time to work out. Few things also work right off the bat, so even a good strategy might get discarded by someone expecting immediate results.
Time is another factor which I will take up at a later point in this series. The best investment methods out there are no good for you unless you can make them fit into the rest of your life which often contains the far more important things of family, recreation, faith, learning, etc. It’s no good to be a wealthy old miser who never learned to appreciate life or the goodness of God’s providence in life.
And so to that end, I say choose wisely. My eventual choice was value investing, which isn’t that hard to learn, but requires patience, but can scale to the time that you have. For those that work in a business, it has the side-benefit that it is the most businesslike of all investment methods, and can make you more valuable to the firm that you work for, because you can learn to marry business sense with your technical expertise, potentially leading to greater profit.
For me, I can say that it broadened my abilities to think qualitatively, complementing my skills as a mathematician. The firms I worked for definitely benefited. Maybe it can do the same for you.
Till next time, where I tell you how value investing is *not* supposed to be done.
PS — one more note: it is *very* difficult to make money off of macro insights in equities. Maybe there are some guys that can do that well, but I am not one of them. Limiting the effect of my insights there has been an aid to doing better in investing, because it forces me to be modest in an area where I know my likely success is less probable.