People love to play games for the sake of excitement. Hence, it is not surprising that many individuals (especially the ones who think they are smart) generally like to manage their own investments thinking they can outperform key market indexes year after year. Unfortunately, many tried and failed. Many more are still trying without meaningful results. Hence, majority of them finally (after multiple trials & errors & failures) and eventually hire qualified investment managers whom they trust to manage their investment assets. They invest in mutual funds, hedge funds, and separately managed funds. All these funds obviously have performance and/or asset management fees as the investment managers/advisors and their employees and organizations need to make a living and profit managing other people's money. However, it is a fact that majority of investment managers clearly overall have not been able to outperform the major market indexes over the long-term net of fees (there are all kind of fees such as: asset management fees, performance fees, sales fees, administration fees, fund distribution fees, etc.) While these fees are good for the providers, they are not that friendly for the investors.
However, there are exceptions. There are some great investment managers who have consistently delivered great results over the long-term to their loyal investors such as:
- Warren Buffett (Berkshire Hathaway),
- George Soros (Soros Fund Management),
- the late Sir John Templeton (Templeton Funds),
- Bob Rodriguez (FPA Funds),
- and several other emerging investment managers with great skills, shrewdness, outstanding track-records, passion to excel and high integrity to match.
These outstanding investors are extremely rare. They were likely born with the raw talents to allocate capital, to understand risks from multiple angles, and to withstand volatility with patience. In addition, they have endured rigorous training & experience in the business & investment field. In many cases, outstanding investment managers & investors in the past had the opportunities to work for and learn from other outstanding investors (their masters/gurus/mentors.) For example: Warren Buffett studied under the late Benjamin Graham., an intellectual giant in the finance & investment area. Outstanding investment managers are also very avid readers and observers of markets and economy.
Investing successfully is not easy.
Successful investors devote 100%+ of their minds, focus, energy & time to research, read, invest/trade, monitor, and keep sharpening their investment knowledge, wisdom, and strategies daily if not hourly. Their full-time jobs and hobbies are managing capital. Everyday and every second they think about investment. Successful investors dedicate their life almost 24/7 to business, finance & investment management . If you don't really understand end-to-end about economy, accounting, financial analysis, & investment strategies, and don't have passion, energy, and time to invest, and your daily job does not involve investment reasearch & management, it is unlikely you can manage your own capital and outpeform major market indexes successfully in the long-term.
If you are individual investors who are not involved in the investment management field daily, you probably should focus on your true circle of competence and skills. In our view, unless you can identify and have access to great investment managers whom you can trust, majority of individual investors who are not full-time investors, should rethink their priorities in life, their circle of competence, their historical investment and trading activities vs. results. If the results have not been good (underperformed the markets by significant margins), then perhaps you should not continue investing yourself and/or likely you need to change your investment strategies, attitudes, and trading habits.
In general, one will likely to do well in life by focusing on one's circle of competence (core) and outsource the non-core activities that are not within one's circle of competence. If you are highly-paid intelligent engineers or doctors with stable/growing earnings, you had better focus on growing your successful professional careers. There is nothing wrong with focusing on what you do best. There are simply too many unfortunate stories of very smart intelligent individuals working in non-investment areas who have tried their hands managing their own investments (including day-trading) and eventually (almost always) failed and got decimated in the markets after spending significant amount of focus, time and energy doing things that were really not within their true circle of competence (and reducing their focus, time and energy on their jobs/careers.) Investing is not a game. It is a career.
Investing successfully can be simplified.
It seems that there are no specific ways to invest successfully without focusing your time 100% on investing. However, we believe there is a potential solution to this problem. Investing successfully can be simplified only if you want to:
- keep it simple
- keep it low-cost
- keep it long-term
We propose the following simple strategies (it does not mean they are easy to implement) for individual investors (especially the ones whose full-time/day job are not traders/investors) to simplify their investment activities and accomplish keep it simple, low-cost, and long-term:
- Invest in low-cost non-leveraged index funds (could be mutual funds and ETF's) especially when markets historically and fundamentally (based on valuation analysis) are cheap, undervalued & be ready to hold the investments for at least 15-20 years,
- Diversify your holdings to several index funds that track key long-term trends working in your favor as investor.
- Think very long-term (15-20 years) and be a very patient investor,
- Ignore market volatility and unexpected ups & down during the entire long-term holding period and focus on what you do best in life and let the low-cost index funds do the work.
What are the key long-term trends?This is very difficult to answer in the short-term, but not so uncertain in the long-term. We do not think most investor are able to predict with accuracy any particular companies, sectors/areas that can outperform other competing or even non-related sectors/areas consistently both in the near term and long-term. Although most investors do not have crystal ball to know exactly what is going to happen in the next 3 months or even 5 years on sector-by-sector and company-by-company basis, we think majority of smart intelligent individual investors who can read and watch business & financial news online and offline including fund managers, individual investors, professionals, recent graduates, college students are smart enough to know that the following long-term trends were proven to be true historically, are now still in-progress and will likely continue for the next 15-20 years:
- Emerging countries (not sectors) on aggregate will likely grow faster and outperform many developed countries over the long-term.
- Small cap and mid cap companies on aggregate will likely grow faster and outperform large cap companies over the long-term.
Why emerging markets, small caps, and mid caps? Why not technology or energy or any other sectors? Our explanation is simple: for most individual investors, identifying specific sectors and companies that are going to outperform the markets year after year for the next 15-20 years is extremely difficult and requires significant focus, time, energy & monitoring. Why not large cap or mega cap; why not developed countries? Mathematically and historically, on aggregate, the bigger the company/country size, the harder it is to grow and move fast. E.g.: $1 to $2 is 100% up. $2 to $3 is 50% up. $$10 to $12 is only 20% up. Identifying high quality, lean and mean assets with great long-term upside potential is what long-term investors should focus on; and, do not forget to diversify and hold them for the long-term.
Although the key trends above are not difficult to spot (everyone knows these trends), the buy & hold long-term investment strategies (with min of 15-20 years holding period) is not designed for everyone. The long-term strategy is low maintenance & low-cost but very hard to implement for investors who do not have long-term mindsets, means and conditions to do so.
The material published above is intended solely for your general information. It is not intended as a recommendation and should not be construed as an offer to sell or the solicitation of an offer to buy any funds or securities. This material is not intended to address every situation, nor is it intended as a substitute for the legal, accounting or financial counsel of your professional advisors with respect to your individual circumstances. Any entity, sector, fund, and security referenced herein is solely for your information and does not constitute a recommendation or endorsement by the author. Author's opinion may change at any time without any notifications. Author is neither responsible nor liable for any gains and/or losses incurred by readers after reading this material.