During discussions with potential clients. I have learned most people have a very short time horizon. Most people are looking at short term results. They want to know what the best strategy is for right now.
In fact many advisers are guilty of this same thing. They are constantly marketing the latest ‘hot’ strategy or ‘hot’ investment class. These ‘advisers’ are actually investment salespeople. Constantly looking to market what people want right now.
True advisers show you what is right for you over the long term. While investment salespeople show you what is hot ‘right now’.
This is the result of everyone’s short term thinking. We base our decisions on short term emotions. We believe the truly successful investors are always in the investments that are always profitable ‘right now’.
This is far from the truth. Successful investors find a strategy that they believe in and stick with it. There will be times that their strategy will underperform others or even underperform the market in general.
A great example of this is Warren Buffet. Mr. Buffet has a strategy that he has stuck with throughout his very successful career.
During the late 90’s the tech stocks were earning extraordinary returns. In 1999 many funds were earning 80, 90% I even recall one fund earning 200% in 1999. At this same time Mr. Buffet stuck with his strategy and earned a negative 15%. That’s right while everyone else was doubling their money. Mr. Buffet’s fund LOST money.
As an investor with short term thinking. You would avoid his fund like the plague. Subsequently, the tech bubble burst and investors were devastated losing substantial amounts of money. Mr. Buffet on the other hand flourished.
Long term Mr. Buffet was proven correct.
Part of what I believe is a successful investment strategy includes the Three Factor Model developed by Doctors Eugene Fama of the University of Chicago and Kenneth French of Yale.
To make it short the Three Factor Model states that over the long term
- Equities have a premium over fixed income
- Small stocks have a premium over large stocks
- Value stocks have a premium over growth stocks.
Remember this is over the long term which is how investors should be thinking. Short term investing is really speculating and not investing.
Both small and value are making a significant comeback. Over the long term, in my opinion, these premiums are real. As true investors we must remain disciplined to our strategy and not seek out what is working for ‘right now’.
Ultimately you have to decide whether you are an investor or a speculator.
Because finding the strategy or investment class that is good for ‘right now’ will result in short term gain and long term pain.
To be a success investor, Long Term, you must own equities along with high quality short term fixed income…globally diversify….rebalance.
