Investors benefit from developing their own checklists based on their own criteria, experiences and circles of competence. I consider myself a value investor. In “The Little Book of Value Investing” author Christopher H. Browne writes, “The beauty of value investing is its logical simplicity. It is based on two principles: What’s it worth (intrinsic value), and don’t lose money (margin of safety).” Though logically simplistic, value investing is challenging because it requires one to be patient.
In “Value Investing from Graham to Buffett and Beyond,” authors Bruce C.N. Greenwald, Judd Kahn, Paul D. Sonkin and Michael van Biema very eloquently state, “Value investing demands two virtues: humility and patience. Value investors have to know what they know and know what they don’t know. Value investors have to wait.”
But can you be patient and emotionally passive? It’s not an easy balance.
In 2001 Dalbar, a financial-services research firm, released a study entitled Quantitative Analysis of Investor Behavior, which concluded that average investors fail to achieve market-index returns. It found that in the 17-year period to December 2000, the Standard & Poor’s 500 index returned an average of 16.29 percent per year, while the typical equity investor achieved only 5.32 percent for the same period — a startling 9 percent difference. It also found that during the same period, the average fixed-income investor earned only a 6.08 percent return per year, while the long-term Government Bond Index reaped 11.83 percent.
The problem is that gambling has not paid off; emotion gets the better of most investors whether they are individual stock pickers, holders of professionally managed mutual funds or index investors. A portfolio is like a bar of soap, the more you handle it the smaller it gets.
The most important part of investing is not stock selection or even style of investing. It’s about being able to stay the course. If you are an investor that has an incredibly high risk tolerance level (a very rare breed indeed), then it makes sense to seek out the assets that might deliver the greatest potential returns, risk can take a seat.
For the risk averse investors (arguably that list would include the majority of investors), the greatest total return is achieved through the act of matching your portfolio to your risk tolerance level and simply taking the returns offered by that asset mix. The most important factor that might determine an investor’s success is patience, and being able to stick to the plan through thick and thin. Having a plan is key, sticking to that plan is crucial.
In a Business Insider article with a discussion between Barry Ritholtz and James O’Shaughnessy, O’Shaughnessy said that “Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was … They were the accounts of people who forgot they had an account at Fidelity.”
Now that’s not to say that an individual stock picker cannot be a successful investor. If a stock picker is well diversified, is investing within his or her risk tolerance level, and that investor is then very patient and able to stay the course, that investor might do quite well.
Umberto Fedeli is president and CEO of The Fedeli Group.
He is an investor in numerous ventures. He is on the boards of directors of the Cleveland Clinic Foundation, John Carroll University, the Cleveland Chapter of the Young Presidents’ Organization and The 50 Club.