Long-term strategy in a short-term world
GREAT ARTICLE BY O'SHAUNESSY AND **VERY ** APPLICABLE TO PPHM
EXCERPTS FROM AN UNEMOTIONAL SUCCESSFUL INVESTOR:
Sticking to a long-term strategy in a short-term world
23 hours ago
What Works on Wall Street
CNBC asked me to participate in a program called the Platinum Portfolio, in which each manager was asked to come on Squawk Box in the spring with three stocks they thought would do well over the next year. I happily accepted the invitation – and picked my stocks in April. I participated in my second interview on Monday – the official checkpoint on the performance of my picks. Spoiler alert: the interview drove home the very nature of our time-tested, long-term approach to investing.
Now, back to my Platinum Portfolio segment.
The three stocks I focused on for CNBC’s Platinum Portfolio are:
Canadian Oil Sands Ltd ($COSWF), which has a market cap of $8.7 Billion; a dividend yield of 7.14% and is cheaper than 68% of the stocks in our Large Stocks Universe based on our value composite.
Ecopetrol SA ($EC), which has a market cap of $64 Billion; a dividend yield of 7.55% and is cheaper than 81% of the stocks in our Large Stocks Universe based on our value composite.
Telefonica Brasil ($VIV), which has a market cap of $14.1 Billion; a dividend yield of 3.95% and is cheaper than 93% of the stocks in our Large Stocks Universe based on our value composite.
So far, so good.
Wait. Not so fast. At the time of segment earlier this week, the three stocks were down on average 6.42% since I debuted them in April, whereas the MSCI ACWI ($ACWI) was up 4.61% over the same period. (We use the ACWI because all three names are non-U.S. companies.) So, the question becomes, do we keep these names or switch to better names? It’s a natural question – and one that gets at the very heart of my investment view: look long term. Because if we as investors let the short-term drive us, the results will be predictably bad. And I passionately believe the only way to have long-term success investing in equities is to have a rules-based buy and sell discipline.
Don’t listen to your gut
I can’t imagine how someone who isn’t using a rules-based process could handle having three of their picks down when the market is up. The stress of making gut decisions must be killer. But I think the long-term results of making gut decisions in investing is overwhelmingly negative. According to a study by Dalbar, for the 30 years ending in 2013, the average equity fund investor earned just 3.69% a year versus a total return for the S&P 500 ($SPX) of 11.11% per year! Indeed, the average equity fund investor would have been better off leaving their money in U.S. T-Bills, which earned 4. 01% a year over the same period. What’s worse, Dalbar said that “attempts to correct irrational investor behavior through education have been futile.” (Story here.)
Now, I have no idea how the three stocks I selected will end up doing when they reach the one-year mark (we use an annual rebalancing method), but I do know what the odds of our strategy of buying cheap, high-quality global stocks are—high. Without the discipline of our automated buy and sell rules, I am quite sure that I would behave just as emotionally as the next guy. But my experience on Squawk Box really drives home the difficulty conventional investors must face in trying to achieve long-term success in a short-term world.
Finally, if an investor can’t embrace a quantitative, rules-based investment strategy, my recommendation is simple—put your money in an index fund and remove the stress and uncertainty that all of the short-term news throws your way.
