I am an IOI Alumnus. I consider myself an intelligent, disciplined investor. I’ve been educated by one of the top business programs in the world, am an engineer by training and spent the past few years managing my family’s investment opportunities across a variety of asset classes – some better than others. When I read through an article this week in the Financial Times, Valuation investors have got it all wrong on US stocks, I read it with the realization that, at times in my past, I’d been guilty of being a closet “market timer” – trying to invest on my guess at the “valuation” of the market relative to something. Oh, I invested in companies on a value-driven basis, but I was worrying about and doing all kinds of silly, inefficient things by also “watching the markets”. I think it’s important for all engaged investors to ensure they check themselves on this and at least consider the implications.
Market timing has been proven over and over again to be a relatively quick way to make a small fortune out of a large one. And I know this. I have read the research and seen the data. I also know that the big money is made at the margins. Said differently, when the market makes a big turn or a company does so, that is where significant returns are possible. I also don’t like to lose money and so I’ve been tempted to place hedges in times where “it looked like” the market was pointed down.
I am writing this as a confessional to all of you that investing successfully is a challenging job. IOI’s courses and the subsequent mentoring I’ve received have made a material difference in my investment behaviors.
Macro driven investing of the sort I describe above is a dangerous trap. Why? Because it is impossible to have disciplined rules. The game changes all the time – this week it is the Fed, next week it is Russia, the week after that oil prices are rising due to geopolitical issues and two weeks later those prices have reversed thanks to a “surprise” producer agreement. All this time, we delude ourselves into “participating” in the world events and investing around them. “Hey, I’m doing something every week or every day to stay on top of my investments!” Its exciting and it gives us something exciting to talk about with others. “Oh I am short Sterling on the back of Brexit.” But, in the end, returns (which are the reasons we ought to be investing) don’t show up.
Watching the markets is like an illness fueled by our own internal, X-System reflexes. Fundamental, value-driven investment skills are challenging to obtain because they do require some work and some practice – our C-System at work. But, here’s the secret – those principles give us an anchor – a cash-based reason to make an investment. Further, they allow us to track those investments against a set of success criteria that is beyond the stock price. Short term returns are one thing, but the real money is made on materially large dislocations in price to value. Those things are a) hard to time and b) take some time to work out. Finding the exact bottom is impossible. But, if we’ve made the investment on the back of a good understanding of the business, they will work out over time and the returns will show up.
Ready for the Macro Events
Oh, and there’s one other interesting outcome from this skill set. By applying this process over and over again, one develops the business and industry knowledge to “see” big events in an industry take shape before they happen. Because I understand grocery, for example, I can read about something in the food supply chain in China and know, at some level, if that will affect things one way or another. I can then own companies or commodities that stand to benefit disproportionately from that “macro event”. And, in this way, I participate in those big turns with a much more rational approach and a far more probable positive outcome.
Don’t get pulled into being a closet market timer by watching the financial and news media. There will always be something happening. Only rarely WILL it actually impact your investments. What I noticed about myself was that I “thought it might” and spent a lot of time thinking about what I’d do or what I “needed to prepare for”. In contrast, focusing on understanding a company’s ability to generate value for me not only focuses my time on understanding a “probable outcome”, but it prepares me, over time, to see and take advantage of big macro events by understanding what things impact the value drivers of the businesses I own.
IOI’s research, courses and mentoring support have made a huge impact on my family office’s returns and on how I invest every day.