Investors buy stocks with the intention of holding them for 1 to 5 years based upon information that really only applies to a short-term time horizon. While the information they are using to invest may be valuable, it is often the wrong information for their investment timeframe. If people invest in a company based on current information, they have to be prepared to act on any changes in that information in a much shorter time frame than most investors are prepared to do.
Driehaus rebuffs a lot of paradigms:
- "Buy Low and Sell High" - I believe that more money can be made buying high and selling at even higher prices. I would much rather be invested in a stock that is increasing in price and take the risk that it may begin to decline than invest in a stock that is already in a decline and try to guess when it will turn around.
- "Just Buy Stocks of Good Companies and Hold onto Them" - I would say: buy good stocks of good companies and hold on to them until there are unfavorable changes. Closely monitor daily events because this will provide the first clues to long-term change.
- "Don't Try to Hit home runs" - I couldn't disagree more. I believe you can make the most money hitting home runs. But, you also need a discipline to avoid striking out. That is my sell discipline. I try to cut my losses and let my winners run.
- "You Must Have a Value-based Process" - I'm convinced that there is no universal valuation method. In fact, in the short run, valuation is not the key factor.
- "The Best Measure of Investment Risk is the Standard Deviation of Return" - volatility only measures risk over the short-term. We are discussing long-term objectives. For most investors, a major long-term risk is portfolio underperformance, due to insufficient exposure to high returning, more volatile assets. In my opinion, investment vehicles that provide the least short-term volatility often embody the greatest long-term risk.
Posts
1 comment:
Hi Mark,
I found this interesting and as is the case with many interesting things there is a lot to disagree with.
I think that sound investment is based in risk adjusted returns. If you are perusing high risk assets you need higher returns to compensate. To me this is logical. If you are looking at risk you inevitably compare risk and beat a path to risk-less assets in the pursuit of comparison. Once you are at the hearth of risk-less assets as a comparison you need some idea of intrinsic valuation in order to make a comparison. How can you compare things unless you do things like look at projected cash-flows, asset values, liquidation values? The idea of holding onto a good company is an attractive one. A company is nothing more than a "machine" that makes money, a good one is one that is good at making money - if you get one at a reasonable price why would you sell it? A low risk one has, amongst other things, stable cash flows. If I have a reliable car that has worked for many years you would have to offer me well over "book" to sell it simply because I know what I have. Similarly I have paid well over book for a second hand car that was what I was looking for (it had "dream form" one lady owner in her mid fifties, full service history from a reliable local garage). Good car - I paid close on twice book, it was a bargain.
I guess what Richard Driehaus is talking about is the short term. Sure the short term is all about momentum. If you are doing short term it is all about getting into the twisted head of Mr Market. You have to understand the grim reality of mind of a total nutter. Ron Hosen had a phrase that I really liked "If you want to understad the market pretend that the participants are on acid, speed, valium or some combination". If you can do it good luck. Some people are natural traders. I heard a great quote from a trader "an investment is just a trade gone wrong" (you have to wait for it to come good). As I remember you had some bad luck with Pace. It happens. If Pace is a good company, manageable debt, good management, some kind of sustainable competitive advantage (it is not a company I know much about) it will recover. With a reasonable immune system and fitness you can survive some pretty serious illnesses.
The final thing I have issue with is his talk about volatility - not that he is not half right but I don't feel that he is completely right. I agree that volatility is not the best way of getting a handle on investment risk. The issues are more to do with sample size and having a liquid enough market to get a meaningful sample. What volatility does is, generally, to give you an idea of the elasticity of the market into which you sell. If you are selling into an elastic market demand for your goods could dry up. Sure you can invest in such a market but you want higher returns to compensate for the higher possibility of failure.
Like I say an interesting article.
Best regards
Alan Shouls
Post a Comment