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On Long-Term Systematic Investing

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On Long-Term Systematic Investing by Ben Reynolds, Sure Dividend

I started Sure Dividend to help individual investors invest better.

Does that mean I’m some sort of stock picking guru?  I will be the first to tell you, that I am not.

I get things wrong from time to time.  Every investor does.

“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” — Peter Lynch

The sad reality is that individual investors tend to underperform the market.  If it’s any consolation (and it shouldn’t be), the professionals are no better.

Why do investors underperform?  I believe it’s primarily because they trade far too often.  Investors tend to buy when stocks are rising and sell when they are falling…  The exact opposite of ‘buy low sell high’.

Source:  Investment Company Fact Book

Investors also tend to hold for short periods of time – even when the market is going up.

Systematic Investing

Source:  Investment Company Fact Book

The above image shows equity mutual fund turnover; the buying and selling of mutual funds by investors.  The turnover within those funds is even higher, coming in at around 85%.

With this high level of turnover, the typical investor (institutional or individual) is not investing.  They are trading.

Can you imagine if people behaved this way with actual businesses?  It would be absurd to buy a business for a little over a year and then immediately sell it.  Somehow, this behavior is perfectly justified when we are talking about owning fractional shares of a business.

The Case for Long-Term Investing

“The single greatest edge an investor can have is a long-term orientation.” — Seth Klarman

Seth Klarman is one of the most successful investors around.  He has become a billionaire through the success of his hedge fund, Bauposte Group.

The quote above is powerful.  One of the best investors of our time says the single greatest edge you can have is to invest for the long run.

Finding an edge in a landscape as competitive as the investing world is not easy.  There are a lot of very smart people working long hours to find attractive investments.

To do better you have to think differently.  Average portfolio turnover shows that most investors think in short time frames.  They are looking for good performance over the next month or quarter – not over the next 5 or 10 years.

“Only buy something you’d be perfectly happy to hold if the market shut down for 10 years.” — Warren Buffett

When you think in longer time frames, you have much less competition.  You aren’t competing with the people looking to beat the market over the next month.  You are looking for investments that are going to perform well for long periods of time.

Some of Buffett’s longer holding periods are shown below:

  • American Express (AXP) first purchased in 1964
  • Coca-Cola (KO) first purchased in 1988
  • Wells-Fargo (WFC) first purchased in 1989

Having a long-term perspective helps to buy during recessions instead of sell.  If you are looking 10 years out, buying at lower recession prices makes perfect sense.  If all you are thinking about is performance over the next month, buying while the market is falling (or not selling) becomes much more difficult.

There are other structural advantages to long-term investing as well:

  • Lower transaction costs due to less trading
  • Having capital gains taxes owed compound for you
  • Saves time; when you only need to buy and sell every 3 years instead of 3 months, you need less new ideas

Long-term investing works.  One of the most compelling cases I’ve seen is the outperformance of the Voya Corporate Leaders Trust Fund (LEXCX).  The fund has outperformed the S&P 500 over the last 40 years – despite not buying any new stocks since 1935.  Yes, you read that correctly.

Systematic Investing

Source:  Voya Investment Management

The Voya examples shows that it doesn’t take a stock picking guru to do well by investing for the long-run.

How to Become a Long-Term Investor

I believe the best way to help investors invest better is to invest for the long run.  This means significantly reducing turnover.

To accomplish this, I believe 2 things must happen:

  1. Adopt a systematic investment approach
  2. Change your mindset

The first is easier than the second.  Changing ingrained mindsets is very difficult.  It happens slowly over time, not all at once.

But by adopting a systematic investment approach is something any investor can do.

Systems significantly reduce human error.  Investing decisions are rife with ‘gut feels’.  Unfortunately, all of us are prone to significant behavioral errors.  This gets in the way of investing returns.

Those who can foster the discipline to ‘get over themselves’ and invest with lower ego will likely do better than those who feel they are God’s gift to stock selection.

Approaching investing systematically shows that you have ‘gotten over yourself’.  You trust in a system with well defined rules.  This prevents knee jerk buy/sell reactions and can help streamline the investing process.

That’s what The 8 Rules of Dividend Investing are for.  Of course, your investing system should be based on metrics that have either historically increased returns or reduced risk.

You will notice that there are only 2 sell rules in the 8 Rules of Dividend Investing.  One is to sell when a business becomes absurdly overvalued (as measured by a price-to-earnings ratio over 40).  The other is to sell when a business cuts or eliminates its dividend (the reason for owning it was rising dividends – that’s no longer happening).

Having well defined sell rules that do not trigger often will create an investment plan with very low turnover.

Final Thoughts

Combining systematic investing with long-term investing creates a plan that will minimize behavioral errors and investing expenses.

Together, the reduction of these two sources of return drag help investors to perform better than they otherwise would.

Long-term investing systems need not be focused solely on dividend stocks (like Sure Dividend), but the rules that govern the system should be well thought out before implementation to avoid costly mistakes.


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