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.