Changing your strategy or be patient?

By | Investing, Randomness

(Excerpt from The Laws of Investing by Morgan Housel)

Benjamin Graham published several editions of his book The Intelligent Investor, with each new edition swapping out old formulas for new ones that worked. This wasn’t an error or covering up bad mistakes. A good strategy will catch attention, and attention can sanitize opportunity in an instant.

Jim Grant’s quote that “successful investing is about getting everyone to agree with you … later,” has so much wisdom in it. A metric can influence you, but it won’t make a difference unless masses of other investors decide it should influence them as well. The hard part is that the things investors pay attention to and agree on change over time.

In one era it was price to book value that mattered most. Then dividends reigned supreme. Then earnings per share. The P/E ratio was popular for a while. Over the last decade it’s brand and maybe revenue growth, with anything happening below that line having little significance.

The hard balance is determining what’s timeless and is owed patience and what’s expired and should be discarded. If there were an easy answer to that question we’d all be at the beach.

… When volatility and out-of-favor periods are guaranteed, it’s hard to diagnose whether your investing strategy is broken or merely requires patience. Most other things in life aren’t like that. Most things are like cars – there’s no ambiguity that something is wrong.

The difficulty in diagnosing portfolio problems creates an incentive toward action because doing nothing when something might be wrong feels irresponsible. And action tends to repel potential performance, because the more knobs you fiddle with the more chances you have to screw up and the more you rely on short-term moves that are influenced by changes in investor moods more than changes in data.

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