Table Stakes

In 1999, at the height of the last technology-telecom-media bubble, the Nasdaq index rose by 84%. By comparison, the Russell Large Cap Value index returned 6.7% while Warren Buffett’s Berkshire Hathaway actually declined by 25%.

Following that year, where do you think most new money flowed?  Into the Russell Large Cap Value index?  Into Berkshire Hathaway??  Hardly.  Fear of missing out (FOMO) kicked in as it always does, resulting in most new money continuing to pour into the tech sector like there was no tomorrow.

Do you think the performance chasers of the late 1990’s really understood what they were buying?  Do you think that Warren Buffett understood why he wasn’t buying?  No, and absolutely!

Performance chasing based on recent outcomes –   Recent performance outcomes are a short-term measure which may, or may not, be random.  The only way to know – to evaluate the quality (luck or skill) of that outcome – is to understand the process behind the numbers. 

In fact, the Nasdaq’s late 1990’s performance was anything but sustainable.  You see, over the course of the next year – once the party stopped – the Nasdaq declined by 40%, while Berkshire went on to rise by 29%.  When the Nasdaq finally found a bottom in the spring of 2003, the total peak-to-valley decline was 76%.  It took the Nasdaq index nearly fifteen years to finally climb back to its 1999 level during which time Berkshire nearly tripled in price.

This story offers a textbook example of why chasing outcomes without understanding the process behind it eventually will get you in trouble every time.  (this chasing outcome phenomena happens with amazing regularity, most recently illustrated by the GameStop drama).

Good investing requires you to understand what you are doing, and on occasion, hold an uncomfortable position apart from the crowd.  That can be difficult.  It helps if you have the ability to not care what others are doing or think of you.  To enjoy consistent long-term investment success, that ability cannot be overstated.  You must have independent thought, an investment process you understand, and the ability to stick with it.

These attributes are not optionable for a successful investor.  They are table stakes.

Don’t leave home without them.