Last week investing great Lou Simpson, former chief investment officer for Geico—a Berkshire Hathaway subsidiary, did a Q&A with Robert Korajczyk, a professor of finance at the Kellogg School to discuss his successful investment strategy. Simpson provides a warning to investors saying, “If somebody’s going to invest using hot tips, or listening to CNBC, or investing with so-called wealth managers at brokerage firms, I think it’s a loser’s game for them.”
Here’s an excerpt from that interview:
Bob Korajczyk: What would you say is the essence of your investment philosophy?
Corsair Capital was down by about 3.5% net for the third quarter, bringing its year-to-date return to 13.3% net. Corsair Select lost 9.1% net, bringing its year-to-date performance to 15.3% net. The HFRI – EHI was down 0.5% for the third quarter but is up 11.5% year to date, while the S&P 500 returned 0.6% Read More
Lou Simpson: The essence is simplicity. The base case for investing in any area of the market is a passive product, such as an index fund. That’s something any investor can access.
If you’re a professional investor, the question is: How can you add value? The more you trade, the harder it is to add value because you’re absorbing a lot of transaction costs, not to mention taxes.
What we do is run a long-time-horizon portfolio comprised of ten to fifteen stocks. Most of them are U.S.-based, and they all have similar characteristics. Basically, they’re good businesses. They have a high return on capital, consistently good returns, and they’re run by leaders who want to create long-term value for shareholders while also treating their stakeholders right.
Korajczyk: So you concentrate your investments in your very best ideas.
Simpson: You can only know so many companies. If you’re managing 50 or 100 positions, the chances that you can add value are much, much lower.
So far, this year we bought one new position, and we’re looking pretty seriously at one more. I don’t know what we’ll decide to do. Our turnover is 15, 20 percent. Usually we add one or two things and get rid of one or two things.
Warren [Buffett] used to say you should think of investing as somebody giving you a fare card with 20 punches. Each time you make a change, punch a hole in the card. Once you have made your twentieth change, you have to stick with what you own. The point is just to be very careful with each decision you make. The more decisions you make, the higher the chances are that you will make a poor decision.
One thing a lot of investors do is they cut their flowers and water their weeds. They sell their winners and keep their losers, hoping the losers will come back even. Generally, it’s more effective to cut your weeds and water your flowers. Sell the things that didn’t work out, and let the things that are working out run.
Korajczyk: Is there a way for somebody to be an active investor, but only spend a few hours over the weekend doing research?
Simpson: You probably could. But even among professionals who trade full time, the majority do not add value. Because, again, you have fees, you have transaction costs.
Yes, I think there are people who have the right mindset and maybe contacts, and certainly luck, who could outperform the market. But if somebody’s going to invest using hot tips, or listening to CNBC, or investing with so-called wealth managers at brokerage firms, I think it’s a loser’s game for them.
You can read the full interview at KelloggInsight here.
Article by Johnny Hopkins, The Acquirer's Multiple