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Imagine you were to set aside all of your pre-conceived notions about how to invest in stocks and start over with a clean slate. Where would you begin?

I believe the place to start is with a very simple but powerful question: What works?

That is, what goes into a winning, enduring investment strategy? Does it require an advanced degree in finance, accounting or economics? Does it involve superior intellect or judgment? Does fundamental analysis work, the kind that relies on the informed opinions of a company’s management, industry and competitors? And what does one really need to know about the economy? Which (if any) of these factors predict success? Can one actually ‘beat’ the stock market?

If you have found yourself asking these same questions and haven’t yet found a satisfactory answer, or you’ve been frustrated with your own investment performance, I welcome you. I make no claim to having answers to all of the aforementioned questions – and I certainly make no guarantees about investment performance. But I do promise a fresh perspective, one that might be new to you. And I believe I have a good handle on what doesn’t work when it comes to investing, which alone might prove to be invaluable in your quest.


Does this sound like you: the harder you try to beat the market, the more elusive a goal it seems? Or perhaps you’ve turned your investment affairs over to a professional adviser, only to be disappointed with their performance? If so, you’re not alone.

Any experienced investor knows that active investing in the stock market is not easy. Unlike many endeavors, more financial experience or knowledge does not necessarily translate into better investment performance.

A Healthy Dose of Skepticism

It’s axiomatic that only ½ of participants in any endeavor can be “above average.”  The same is true, naturally, for investing.  For every buyer there is a seller, and therefore for every successful investment there is one that fares less well. And yet the “Lake Wobegon” effect persists – the majority of us – well over 50% according to most surveys – believe we are above-average investors.  For those of you who think your intellect will carry the day in your investing, we’ve got news for you: most investors possess above-average intelligence.  You’re going to be matching wits with a very smart crowd.

Let's start with some hard facts: the average investor does not achieve even an average performance. Yes, you read that right.

Take one such published in The Wall Street Journal.  Ove a recent 30-year period the market returned 11.1% annually.  And yet the average investor earned just 3.7% per year.1 “How is that possible?” you might ask.  Because the average investor invests at precisely the wrong time, buying stock prices are high and euphoria is rampant, and selling when prices are low and fear is prevalent.  Investor funds flow into stocks at market peaks and back out near market troughs.  If only they could remember Warren Buffet’s adage, “Be fearful when others are greedy and greedy when others are fearful.”

What about the so-called “professionals”, the investment advisers who devote their careers to this endeavor?  Surely they must succeed at this endeavor. The data says otherwise.  Professionally trained investment managers fail to match the performance of a simple index time and time again.  How bad is it? In the most recent trailing ten-year period, fully 80% of mutual funds trail the performance of the overall stock market.2

So what is an investor to do about it?  For many, the answer may be to invest in an index fund like the S&P 500 or Dow Jones Industrial Average and be done with it.  Considering that most investors fail to match the performance of the overall stock market, it’s not an unreasonable solution.


Why? Because the typical equity index is poorly constructed.

For example, the Dow Jones Industrial Average is a ‘price’ index, meaning the 30 stocks that comprise that index are weighted by the price at which they trade on the stock exchange.

The S&P 500 weightings are only slightly more rational, employing what is known as a ‘market-capitalization’ index, meaning that its 500 stocks are weighted by their relative market capitalization (which sounds reasonable, except that it carries the all-too-common risk of over-weighting stocks with higher price multiples than their earnings potential justifies).

Notice what’s missing in these indices – any mention of fundamental factors such as the current price in relation to the company’s intrinsic value, earnings potential, growth opportunities, etc.  It’s almost like assembling a baseball team by the numbers on the players’ uniforms, or choosing a fantasy football team with a system that favors the heaviest players.  Personally, I’m more interested in the potential for outstanding performance than in a weighting system that has little to do with a company’s prospects.

My Approach

My objective for investors is straightforward: give yourself the opportunity to achieve superior long-term investment performance through a systematic process of disciplined investing.

Many investment advisers talk about discipline, and yet in my observation very few actually put it into practice.  At the end of the day most advisers rely on their judgment, which sounds appealing until you examine it more fully.  First, judgment is impossible to measure by any objective standard, and so it’s impossible to know whether past performance is the result of skill or luck. Furthermore, judgment is subject to the whims of our emotions, biases, herd thinking and other factors, whims which few investment advisers will ever acknowledge, and yet subsequent investment performance is often the first casualty.

I prefer a quantifiable, evidence-based process, not judgment, and not narratives, when making investments.  I want to know those factors, that is to say those business qualities, that historically have some predictive power (i.e., give us some indication of how that investment might perform).  If there isn’t a correlation in the historical record between a fundamental business metric and subsequent stock performance, then in my view it has little use to investors, no matter how popular it might be in the financial media.

It’s true that the past is an imperfect guide to the future, but the past is all we’ve got when it comes to reliable data.  And it’s also true that no formula, no model, is guaranteed to work all of the time.  But by that same logic, the same is true of judgment.  Investing is largely about assessing probabilities, and I believe a quantifiable investment roadmap is vastly preferable to judgment when the latter has such a dubious track record.


If any of the above resonates with you, why not join me on my investment journey? I promise you we’ll make some new discoveries and gain a fresh perspective that you won’t hear elsewhere.


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