July 24, 2007 – Hello, the topic this week is important enough that this is a rare occasion where I am posting the same article on my blog AND sending it out in newsletter format. This month, Business Week ran an article that examined that traits of the most successful investors in the world. The article actually could have made a solid advertisement for my company as it described all the important characteristics of my investment strategies and philosophies. The article stated that “Each saw opportunity well before the pack. John Templeton pushed international investing way before it was cool. Warren Buffett was buying up undervalued companies long before his brand of value investing became popular. David Shaw used high technology and smart PhDs to make money on countless split-second trades, now a common hedge fund strategy.”
The article further stated that the world’s most successful investors “didn’t follow in the footsteps of others or copy wholesale the investing styles of others” and “perhaps this is why any list of the world’s top investors represents a vast array of political beliefs, personality quirks, and strange hobbies.” In the article, John Merrill, chief investment officer for Tanglewood Capital Management, stated that sometimes top investors’ quirks can make the rest of the market doubt their judgment. “They’re out of sync with markets very often,” Merrill says. “They don’t get buffeted by the news or the noise,” says Georges Yared, chief investment strategist at Yared Investment Research. Finally the article discussed George Soros, another one of the top investors in the world that occasionally profits on the perfectly timed trade. However, timing the market necessitates independent thinking as well because conventional wisdom in the investment industry is that market timing is impossible. Obviously Soros has proven conventional wisdom wrong. Top investors not only challenge conventional wisdom, but challenge and prove it wrong with their unique investment systems.
The above paragraph should sound extremely familiar to all of our maalamalama members. They know that our maalamalama strategies do not rely on either fundamental or technical analyses as our primary screening tools. They know that our proprietary strategies that rely on the strength of banking-government-corporate relationships to identify the best stocks in the world are years ahead of current conventional thinking in the investment industry. Our strategies are very often out of sync with the market and rely on having unwavering commitment and courage when other investors waver in uncertainty. Furthermore, our strategies frequently utilize market timing strategies to enter positions in stocks at very low-risk, high-reward points in share-price. I firmly believe that all of our members will eventually become extremely successful portfolio managers if they can learn all of our lessons, many of which are counter-intuitive given the horrible advice most investors are bombarded with everyday.
Sometimes I would wonder why I didn’t hear more from our maalamalama blog readers regarding the free advice we granted last year, considering that there was not just one, two, or three pieces of information investors could have utilized to earn significant profits, but literally tens upon tens of different articles that contained advice that would have led to significant profits. Only once, a reader contacted us and thanked us for a tip on Chinese internet stock BIDU that earned him $25,000 in a couple of weeks. I used to think that people were in general just too lazy to even take a minute to write a note of thanks in which they used a specific piece of advice from us to make lots of money. But then I realized that this was not the case. Though substantial numbers of readers were accessing our blog everyday, I realized that hardly any of them were taking our advice to heart, even if it was free, and even it was solid advice. Why? Because the advice I posted on my blog was frequently out of sync with general market beliefs at the time, and most investors were unwilling to break free of the thundering sheep herd and act in opposition to the rest of the herd. The few that were made some tidy profits from our advice, such as the reader that made $25,000. But from the rarity of such emails, I’m guessing that the few were extremely few.
Sometimes, my clients embody the behavior of the average investor that directly opposes all the behaviors I discussed above that are required to become one of the world’s top investors. As a perfect example of this, years ago, one of my clients used to consistently question my strategies with the management of his portfolio even when it was on pace to earn 40% to 50% annual returns. You see, the complaints did not arise when his portfolio was running higher. The problems occurred just during the downturns in the natural ebb and flow of his portfolio valuation. Every time there was a dip (as I had significantly concentrated his portfolio in a volatile —but not risky- investment sector ), my client listened to MSNBC and Bloomberg and immediately called me saying that we should sell and that he didn’t want to lose everything and that all the experts say that I’m doing the wrong thing for him.
I inevitably and repeatedly told him to stop watching the “cartoon channels”, which are what every major financial and investment TV shows are, and asked him to listen to me instead. I had gone through this client uncertainty & worry/ manager assurance cycle multiple times and knew that each time his portfolio cycled down, I could expect a panicked, unreasonable phone call even when his portfolio was sitting on substantial gains in spite of these downturns. In response to my assurances, this particular client, though he always stuck with my strategy, always voiced his lack of confidence with a reply of, “We’ll see”. In response, I always replied, “No. It’s not we’ll see. I know,” to which he again would reply, “We’ll see.”
Upon hearing his responses, I could only smile to myself, because I knew that my client’s behavior typified the behavior of 99.9% of investors- behavior that has been shaped, molded and hard-wired into every investor’s synapses , behavior that causes them to do the exact opposite of the correct thing 100% of the time. 99.9% of investors’ decision-making behavior has been conditioned by the investment industry and media in erroneous ways so much so that they put much more faith in horrible advice than rock-solid advice, and they can not recognize rock-solid advice even when it stares them in the face. They have been pre-conditioned to dispute, argue against, and cry like infants when told to behave differently than the rest of the thundering sheep herd in their investment decisions. Maybe this is a sub-conscious reason as to why I am more interested in teaching trail-blazing investment strategies to people rather than in taking on more clients at this point in my life.
I have discovered that the overwhelming majority of investors are sheep that are ALWAYS afraid of breaking away from the pack and thinking independently even if I am doing their thinking for them. And that is why there are always just a handful of superior investors in this world. My client’s incessant questioning of my strategies originates from a comment Warren Buffet once made of “risk comes from not knowing what you are doing.” Because my style of management is so different than anyone else this client had ever used, he believed that my style was risky. The risk in his mind originated entirely from his lack of understanding and his 30 years of being brainwashed by the investment industry to believe in investment concepts that would cause him to dwell in mediocrity for the rest of his life. Undoubtedly, the greatest obstacle that every average Joe investor has to overcome in order to become a superior investor is a losing investor psychology. It is this unwillingness to question the investment “authorities” and to break away from the thundering sheep herd that continually prevents the average investor from not only attaining, but from ever approaching, superior investment results.
As a further example of some of the principles above, let’s examine one of my favorite topics – gold. In my maalamalama Issue #046, June 26, 2007, I stated “I can assure you that the gold bears are wrong. This doesn’t mean that this correction is necessarily over. In fact, with so much uncertainty and volatility in the gold market today, it certainly is very unpopular to have conviction that gold prices will start edging their way much higher again sometime in the not so distant future, and possibly as early as the end of this summer. The trend is, as demonstrated by the commentaries in this newsletter, is to jump firmly on the trend bandwagon, and that trend is decidedly gloomy now.” Back then, I didn’t state, “I think”, “I would guess”, “I believe”, but my exact words were: “I CAN ASSURE YOU that the gold bears are wrong” even as the majority of experts that demand the financial media spotlight at the time were decidedly gloomy about gold’s outlook, including one expert that warned of a potential drop to $510 an ounce in the very near future. Again, my confidence was not simply a contrarian viewpoint, but it was based upon my understanding of the underlying fundamental economics that drive the price of gold long term and not an unyielding adherence to silly gold:oil ratios or even gold:dollar strength relationships.
In fact, www.marketwatch.com , a website that fairly regularly offers opinions about gold had offered several doomsday outlooks on gold from various journalists not less than four weeks ago. Do you want to know what headlines it ran this week regarding gold? – “Gold’s on a roll (again)”! And again, I was able to find very faulty information even in this article. The author of the article wrote: “Most of the junior gold shares, which historically far outperform the big gold companies in serious gold moves, have not budged yet.” Tell that to most of my clients, who have seen their investment portfolios recently soar specifically on the strength of junior gold shares. If you are invested in the wrong junior gold shares, perhaps they haven’t budged. And this is not even mentioning silver stocks, which in many cases have outperformed gold stocks at this juncture. So the important lesson if you desire to achieve returns on par with the world’s best investors is this — don’t ever turn to the mass media or the investment industry for advice. Perform your own research and think for yourself – unless of course you are satisfied with the path of mediocrity.
Famously successful investor Ben Graham once stated, “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” However, I would add a qualifier to this statement. “To achieve superior results is much harder than it looks, but it is not as hard as you might think.” What do I mean by this? Throughout my investment career, I have always discovered that there are Monday morning quarterbacks out there — people that believe they could be superior investors because they utilize 20/20 hindsight to discuss things they could’ve done, but in reality, never did. For example, I’ve heard time and time again from other people, “Well I could’ve matched your 18% gains in the last quarter if I had just __________ (fill in the blank here with “bought Hong Kong real estate, purchased Tokyo office space, bought New Zealand dollars, etc.)”. Of course, all these people that always bring up these points, in reality, never achieved any of the things, but only spoke of them with the benefit of hindsight as things “they could have achieved.” With the benefit of information that many times seems obvious in hindsight, every investor in the world is a George Soros. If I used the same hole-filled argument as these investors, I could look at portfolios I manage, find a stock that has appreciated by 260% in a year and counter with the argument, “If only I had invested my client’s entire portfolio in just this one stock, he or she would know have $4 million gains now instead of the actual gains.”
So back to Warren Buffet’s statement of “risk only comes from not knowing what you are doing.” Obviously, had the Monday morning quarterbacks knew what they were doing, they would have actually invested money in the opportunities that they claimed were “easy money” instead of just discussing them in hindsight. And this is precisely what I mean when I say “to achieve superior results is much harder than it looks, but not as hard as you think.” It is only hard when one doesn’t know what he or she is doing, and thus becomes risky. If you pursue your own strategies, think independently, ALWAYS challenge the thundering sheep herd, form your own conclusions and do not ever waver from them unless there is sufficient reason to do so, then you effectively remove much of the risk from investing. With a solid investment system, this is not nearly as difficult as it sounds. In fact, once you re-wire your brain to stop paying attention to the actions of the thundering sheep herd, these actions become like second nature. Should you take these steps, you will find yourself firmly on a pathway towards a portfolio comprised entirely of low-risk, high-reward stocks and superior returns.
[tags]wealth literacy, investment strategies, word’s greatest investors, George Soros, Warren Buffet, gold, blue ocean investment strategies[/tags]
