How do you get an investment edge?

Is it having the smartest analysts on board who can tear through quarterly SEC financial filings to discover hidden gems of information overlooked by everyone else in the world?

No.

Is it having high-speed data lines that allow us to conduct flash trades, hundreds per second, trying to scalp minor basis points of performance that could come with rapid fire trading?

No again.

Is it being plugged in to the rich and powerful who might give us the proverbial wink and nod before all others realize what is going on?

Nope, not that either.

Does BCM even have an edge?

Oh yes, we certainly do.  In fact, we have two.

  1. A long-term investment orientation as opposed to the short-term, quarter-to-quarter performance derby that most professionals are hostage to.
  2. A recognition that managing our investment behavior, particularly during times of duress, is what has the potential to dramatically separate us from the crowd.

You may be thinking that these two points cannot be a “real strategy” for achieving investment success.  Too simple, too elementary of a concept that it is impossible to logically rationalize this as a valid solution.  But you would be incorrect, as many shareholders of Fidelity’s Magellan fund during the 1980’s can attest.

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One of the most successful mutual funds of all time was the Fidelity Magellan fund when Peter Lynch was the investment manager.  Lynch, who managed Magellan from 1977 to 1990, compiled what is arguably the greatest performance record of all time as the Magellan fund compounded at 29% per year under his fourteen-year watch.

Because this performance record was no secret, money poured into this fund, and by 1990, Fidelity Magellan was the largest stock mutual fund in the world.

Given this background, you would think that the average investor in Magellan made out like a bandit.

Nope.  Not even close.

After reviewing internal records, Fidelity discovered something amazing – the average investor in the Magellan fund actually LOST money.  How can that be?  If you have a fund that compounds at 29% per year for fourteen years, how do you lose money???

I’ll tell you how.  Behavior.  Or more specifically, bad investment behavior (hello behavior gap!)  Because investors often act emotionally, they tend to jump in and out of investments based on recent short-term  results.  When Magellan went down, investors got scared and sold, often at the bottom.  Likewise, when the news was good, and Magellan was going up, they got greedy and jumped back in more times than not, near or at a short-term market high.  Wash, rinse, repeat until broke!

A countless amount of wealth has been left on the table by investors not understanding that your behavior is by far the greatest determinant of your ultimate outcome (recall another Fidelity study we’ve highlighted that revealed the group of investors who did best across all of their stock funds were, in fact, dead!).

As Howard Marks, one of the greatest investors of all time put it, “To have an investment edge, you have to do something different, and I think the main difference comes in refusing to be part of the emotional swings. You have to resist those emotions if you are going to outperform.”

Charlie Ellis (Winning the Losers Game) further wrote, “The hardest work in investing is not intellectual; it’s emotional.  Benign neglect is, for most investors, the secret of long-term success.”

As Bo said in his last blog, “Ignore Everything”, today’s headlines truly will be tomorrow’s footnotes.  Do not succumb to ever occurring near-term hysteria in ways that act against your interest.  Understanding this truly is our edge.