Time to Make a List

Published:

Authors:
John Micklitsch, CFA CAIA, President & Chief Investment Officer


Fresh off a pair of jam-packed and high-stakes college football weekends (Thanksgiving and Conference Championship Editions), a coaching philosophy I heard espoused recently provided inspiration for this article. Texas Tech’s new head coach Joey McGuire was on a radio broadcast recently and shared how he and the coaching staff figured out that if they did seven specific things during four quarters of football, the odds of winning would improve dramatically. They even looked back and plotted out all the games they had played at a previous school, and the regression analysis was convincing that they were on to something. These were all basic football goals that, when all were accomplished during a game, tilted the playing field in the team’s favor.

Similarly, Tiger Woods famously developed five golden rules for elite-level golf. Lists like these had us thinking about what a similar list might look like for being a successful investor. Since a financial adviser is a lot like a coach in many regards, we thought we would give it a try in the hopes that it would be useful and shorten the learning curve based on our experience. Therefore, here are seven things you can do as an investor to increase the odds of being successful over the long term.

  1. Invest in quality. In the investing world, the term quality carries with it a lot of metrics around things like consistency of earnings, margins, balance sheet strength and management, to name a few. Though in its simplest form, quality is something that you are confident will endure, to the point that if it dropped significantly in price, you would be confident to buy more. This is a good thing to ask yourself as you make investment decisions.
  2. Diversify. Traditionally, diversification has meant to not put all your eggs in one basket, such as investing in all stocks or all bonds. We are in an era, however, where additional layers of diversification are now more accessible than ever. Investors can think beyond stocks and bonds to include alternative investment return streams in their portfolios. This additional diversification benefit can be thought of as a third leg of the stool supporting your portfolio, which can give investors another way to win across different market conditions and economic environments.
  3. Don’t try to time the market. Not only is it an exercise that is unlikely to be successful (the odds of getting two coin tosses correct in a row is 25% (50% x 50%)), but it can also end up costing you far more in the long run than any temporary market drawdown will. Rarely do we see anybody get out of the market and then get back in at a lower price. On the other hand, the odds of generating a positive return from a diversified portfolio of stocks held for ten years is over 95%. Play the high odds.
  4. Avoid things that don’t make sense or seem too good to be true. If you can’t grasp the basic investment pitch in five minutes or understand the core economics driving the opportunity, then perhaps the opportunity is not right for you. As Warren Buffett likes to say, there is no strike count in investing. You can swing how you like to swing, and only swing at the pitches that are right for you.
  5. Shift your performance evaluation horizon. We have written previously about how, in the short-term, markets can be very volatile. Lengthening the time-frame you use for evaluation can shift things into a better perspective.
  6. Save like a pessimist, invest like an optimist. Optimism pays off for investors in the long run as economic clouds of uncertainty give way to the long-term benefits of innovation and growth, but, to build an even higher margin of safety, it is a good idea to save like a pessimist.
  7. Invest in your own human capital. Investing is a wonderful way to accumulate wealth, but it takes financial capital to do so. The best way to obtain financial capital is via your human capital, which is the creativity, problem solving, effort and determination you bring to your business, career and workplace. An investment in human capital (education, public speaking skills, industry certifications, etc.) paves the way for the accumulation of financial capital.

These seven ideas are powerful building blocks for a successful long-term investment program. As the saying goes, “investing is simple, but it’s not easy.” A good coach can step in to make the process easier, but it is still not easy. On that note, after some research in the four major professional sports leagues in the U.S. (football, baseball, basketball and hockey), no team in the modern era has won a championship with a player-coach model. The independent coach who can motivate players, chart a course or strategy for winning and then hold the team accountable, is the coaching model that yields the best results. We believe the same holds true with investing and are happy to serve as your coach. Just like for Tiger Woods and Joey McGuire in their respective sports, we think this list might have the power to transform the seemingly chaotic and uncertain world of investing into something more principled and enduring.

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