September is the month when cohorts of fresh-faced young graduates descend upon the City of London to begin careers as professional investors – usually as analysts charged with coming up with stock ideas for portfolio managers. Ever willing to help, here on The Value Perspective, we thought we would offer three pieces of advice that, while important, are unlikely to have been mentioned in the official induction sessions.
1. Get used to being wrong – you are your own worst enemy.
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2. Some of your investment ideas will make losses – get used to that.
Show us someone who has worked as a professional investor for three or four years who has never had a had a day when one of their stocks fell by a third or more and we will show you a liar.
Profit warnings happen and losses – big ones – will come.
This can cause some portfolio managers to be grumpy but do not allow the inability of someone else to cope with the realities of their job to ruin your day
In the various portfolios we run, here on The Value Perspective, we have had losing positions that have cost us £100m and we have had winning positions that have made us £100m.
Fortunately, the nature of our job is that we are both analysts and managers – in other words, we recommend stock ideas to the wider team and we also make the investments. In short, we are responsible for our own profits and losses.
As such, we are keenly aware the price of the outsized win today is – statistically-speaking – the outsized loss lurking in the portfolio that will rear its ugly head tomorrow, next week or next year.
Over the long term, value investing has served us very well but often we did no better a job analysing our outsized winners than the average stock – and, we assure you, we did not lose a moment’s sleep over our losers.
We appreciate it is harder if you are new to investing and will probably be harder still should favour visit you before misfortune.
One day your stock will fall dramatically
One approach you might like to adopt therefore is to take note of every stock that falls dramatically and accept that “one day, that will be mine”, which – at the risk of over-intellectualising our point – takes us into the realm of classical philosophy, specifically Stoicism.
As the First Century Greek Stoic Epictetus observed of those who wished their loved ones could live for ever:
“You are stupid for you wish to be in control of things which you cannot – you wish for things that belong to others to be your own. So likewise, if you wish your servant to be without fault, you are a fool – for you wish vice not to be vice but something else.
“But, if you wish to have your desires ‘undisappointed’, this is in your own control. Exercise, therefore, what is in your control. He is the master of every other person who is able to confer or remove whatever that person wishes either to have or to avoid. Whoever, then, would be free, let him wish nothing and let him decline nothing that depends on others – else he must necessarily be a slave.”
3. When considering how to invest, look at what has actually worked.
One of the great platitudes of investing tends to be witnessed when a portfolio manager is talking about somebody else who has a totally different style to investment they completely reject.
If they are in a good mood – no profits warnings in their portfolio that day, perhaps – they might finish up by saying: “I don’t follow that approach – but, of course, there are plenty of ways to make money.”
No. Unfortunately, there are not.
Investing is a ‘zero-sum game’. To make money I must buy shares from someone that then appreciate – thereby denying them those profits.
I must also sell my future losers to someone else, so they suffer the losses instead. Investors cannot shuffle stocks from Fund A to Fund B to Fund C and back again and make an excess return each time.
There’s no way that all the fund managers can beat the market after fees. Of course there will be those that do, but there will always be losers.
You won't know if you're a good investor or a bad one initially
At the beginning of your investment career, you do not know if you are a good investor or a bad one – so give yourself every chance of being the former and start with a tailwind.
Say you were starting your career at a medical school that offered courses in acupuncture, surgery, homeopathy, pharmacology and voodoo – would you not consult the literature to see which one added the most value in the most cases?
For investors – new and old – we would recommend reading anything by Cliff Asness, and particularly the paper Value and Momentum Everywhere, which he co-wrote with Tobias Moskowitz and Lasse Pedersen.
The Alpha Architect blog also has great reviews and links to academic evidence. We wish you luck in your new career – that always comes in handy – but trust these three tips will prove helpful too.