By Miles Clyne
But don’t listen to me, check out Mr. Charles D. Ellis, author of Winning the Loser’s Game, originally published in 1985, now in its 7th edition, and see if he is worth listening to on the subject? Or take my word for it, and read his comments below.
"Time is Archimedes’ Lever in Investing - Archimedes is often quoted as saying, 'Give me a lever long enough and I can move the earth.' In investing, that lever is time. The length of time investments will be held, the period of time over which investment results will be measured and judged, is the single most powerful factor in any investment program. If time is short, the highest investments – the ones an investor naturally most wants to own – will be undesirable, and the wise investor will avoid them. But, if the time period for investing is abundantly long, the wise investor can commit without great anxiety to investments that appear in the short-run to be very risky. Given enough time, investments that might otherwise seem unattractive may become highly desirable. Time transforms investments from least attractive to most attractive – and vice versa– because, while the average expected rate of return is not at all affected by time, the range or distribution of actual return around the expected
average is very greatly affected by time. The longer the time period over which investments are held, the closer the actual returns in a portfolio will come to the expected average.
The following table shows the compounding effect on $1.00 invested at different compound rates compounded over different periods of time. It’s well worth careful study – particularly to see how powerful is time. That’s why time is the “Archimedes lever” of investment management."
. . . Investment Policy, Winning the Loser's Game, by Charles D. Ellis
It is the natural tendency of anyone to assume that if something isn’t working, they should find something that is. Investors often apply this logic to their investments. I wrote about Loser’s Logic this past November; the blog highlighted legendary investor Peter Lynch, and how a study by Fidelity Investments showed most investors during his historical 13-year run lost money with him. This is a case study that goes hand in hand with Ellis’ argument.
Investors should do their homework and know what they are buying. Once your homework is done, unless proven otherwise, stick with your strategy. Ellis makes a very good point. Often it is the opposite of what we are looking for at any given time relative to what we think or believe we want. If it was the right strategy when you bought it, and the process/logic behind the management made sense then, before you quit, review why you originally bought the strategy before making any changes.
Let’s assume you are getting professional advice and for the short term (less than three years) you are not happy with the results of your long-term plan. You return to the professional, and because you are unhappy, they recommend something more aggressive or conservative depending upon how your opinion has changed. If your advisor simply agrees with you, and doesn’t question why you are changing strategies, and alters your strategy to your short-term thinking, how do you think that will work out for you?
How you invest should suit both your desired risk and objectives. Objectives being the expected returns you need over the time frame you are investing and balanced with the degree of risk you are willing to accept. If you need to change your investment strategy, it should be because either your risk tolerance or objectives have changed. If your objectives have not changed, and you alter your investment strategy, then you may be following the loser’s strategy.
Sticking to an investment strategy is akin to sticking with anything. Your doctor says you need to exercise more. You choose to ignore the advice. If you go back to your doctor saying you think you are better off not following their advice, and they agree with you, how good a doctor do you think you have?
The same logic applies to your investment strategy. Improving your health requires doing things you may not be comfortable with and there are times and cycles in the market that surely beg any sane person to question what they are doing, regardless of the investment process.
I agree with Ellis, we need to question what we think and believe. Then follow a proven path, which at times is often the more difficult path.