Tag Archives: Long-Term Investing

Pirkt un turēt – vienkārši, ne viegli

Ja tev būtu jāizvēlas starp ieguldījumiem divos uzņēmumos, tikai skatoties uz akcijas cenas grafikiem, kurā tu būtu vairāk gribējis ieguldīt 2000.g. sākumā?

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Esmu pārliecināts, ka lielākā daļa no jums izvēlētos pirmo variantu. Apsveicu! Šis grafiks ir Amazon, pasaules 2. vērtīgākais uzņēmums. Ja būtu nopircis šo akciju 2000.g. janvārī, un turējis to līdz šodienai, tavs ieguldījums būtu pieaudzis par 2 157%!

Ja Amazon grafiks likās pievilcīgāks redzamās straujās izaugsmes dēļ, šeit ir daži pārsteidzoši fakti. Ja būtu pircis Amazon 2000.g. janvārī, 2001.g. oktobrī tu būtu zaudējis 93% no savas ieguldītās naudas. Paietu vēl 6 gadi, pirms tu būtu atguvis savu pamatkapitālu 2007.g. septembrī. 20 gadu griezumā bilde ir smuka, bet diez vai tu šajos pirmos gados baigi lepotos par savu izvēli.

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Should we buy the dip?

Last Wednesday we saw a broad sell off in global equity markets. We had not seen this degree of a sell off for quite some time. For instance, the most widely used ETF (QQQ US) of the NASDAQ 100 Composite Index fell 2.54%. The next day QQQ rose by 0.87%, and on Friday it rose again by 0.42% – closing at a level that was just 0.87% away from recent highs.

Our foremost mission is to safeguard our clients’ capital. Therefore, when faced with drawdowns of a significant amplitude, we must decide whether fight or flight is the most appropriate response. In other words, should we be selling, or should we buy the dip?

In this particular case, we have investigated the historical price movements of the NASDAQ 100 because it better represents our current heavy overweight in technology stocks.

Over the past five years, there have been 1257 trading sessions. The average daily move of QQQ was 0.07%. There were 554 down days and 703 up days. On the average down day, QQQ was down 0.69%, while on the up days it rose by an average of 0.67%. What is immediately evident is that QQQ’s movement was larger on the down days than it was on up days. Moreover, QQQ’s positive performance was attributable to a greater number of up days than down days.

In order to define the dips, we have looked at the distribution of returns. Moves that were two standard deviations from the mean started at approximately -2%. Over the period analyzed, there were 32 days when QQQ declined by more than 2% in a single trading session. On average, during these 32 days, QQQ fell by 2.71%. The next day, on average, QQQ fell a further 0.17%. It is important to remember that these are averages. In one instance, after a 3.13% drop, the next day QQQ rose by 2.82%. In another instance, after 4.37% drop in one day it fell a further 3.85% the next day. Therefore, if you were looking to earn on a bounce-back the following day, the past five years of trading history indicate that you would have ended up disappointed.

Ok, but what about the next five days? By doing some more calculations, it turns out that after a more than 2% daily drop in QQQ, two days later you would have averaged a -0.02% return. After three days, returns become positive at +0.34%. Four days later returns averaged +0.52% and increase to +0.6% after five days. Of course, these results spanned a wide range and these are just averages. For example, five day returns ranged from -5.71% to +5.51%. However, we can conclude that on average, investors would have realized a +0.6% return by buying QQQ after a more than a 2% drop and holding it for 5 days.

What about a month later? Taking out non-trading days, we will assume that ‘a month later’ implies the return after the next 22 trading sessions. On average, buying right after the dip and holding QQQ for the next 22 trading sessions would have returned +2.55%. Here the returns also vary quite considerably: from -7.17% in one instance, to a +14.03% return on the positive end.

What are the conclusions? Over the past five years, there has been no point to try to game the market by buying it right after the dip. The next day’s return on average was negative, as was the average return of the next two days. On the third day, average returns became positive, and a month later such a strategy would have returned an average of 2.55%.

As you can see from QQQ’s price graph for the last five years, buying dips would have resulted in higher returns:

For those with a long investment horizon, buying and holding, or adding to QQQ on dips would have been beneficial.

How does this relate to our asset management strategy?

Our overweight in technology stocks has been an important driver in our investment returns. There have been occasions when we have bought on dips, but is important to remember that this only possible if you have capital available. As such, we are very critical of our holdings, and do not hesitate to sell if we believe that a stock has risen too much too soon.

Most of our clients have long-term investment horizons, but that does not mean that we ignore short-term market movements. Our main goal is to never be forced to do anything, but rather to be selling when everyone else feels they have to buy, and buying when everyone else is forced to sell. Taking profits on short-term moves plays a large role in positioning our portfolios to take advantage of cheaper prices during the next sell-off.

It just so happens that last Tuesday we were making sales. By Friday, we had already put some of the proceeds to work… read more

How Most Investors Underperform The Market

In our January commentary we wrote:

Although we have been taking profits on some of our high-flying stocks, we do not intend to try to time the market by selling stocks that we like in the hope of buying them back more cheaply in the future. This is called being ‘cute’. ‘Cuteness’ is the domain of babies and puppies, not investment managers.

We continue to abide by what we wrote.

LINK: Our January Results

However, it seems as if cutting and running is a huge problem for retail investors. Panic induced selling leads to missing returns as markets recover and trade higher.

Here is a great summary of this phenomenon by Josh Brown of “The Reformed Broker”:

Investors Underperforming Their Own Investments

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Peter Thiel, Hamlet and Investing for the Long Term

Not too long ago, Peter Thiel gave a commencement speech at Hamilton University. Commencement speeches are given at university graduation ceremonies to impart a last bit of wisdom to students as they head off from academia into the wider world.

LINK: Thiel commencement speech

In his speech, Thiel entreats his listeners to continue to make things new and to keep advancing all technologies. He finishes by addressing two common pieces of advice that they should ignore: 1) “to thine own self be true,” and 2) “live each day as if it were your last.”

He falls flat on the first, but hits it out of the park on the second:

1) The first comes from Shakespeare, who wrote this well-known piece of advice: ‘To thine own self be true.’ Now Shakespeare wrote that, but he didn’t say it. He put it in the mouth of a character named Polonius, who Hamlet accurately describes as a tedious old fool, even though Polonius was senior counselor to the King of Denmark.

*** Shakespeare often uses fools to impart wisdom, signifying that it is not the sole dominion of the powerful. Often it is the inverse.

And so, in reality, Shakespeare is telling us two things. First, do not be true to yourself. How do you know you even have such a thing as a self? Your self might be motivated by competition with others, like I was. You need to discipline your self, to cultivate it and care for it.

*** Had he read the entirety of Polonius’s speech, he would have understood that discipline was the main point of his words to his philandering son Laertes (Hamlet, act 1, scene 3)

Second, Shakespeare’s saying that you should be skeptical of advice, even from your elders. Polonius is a father speaking to his daughter, but his advice is terrible.

*** His advice is actually to his son Laertes, not his daughter Ophelia.

Speaking of Ophelia, she hits the nail on the head in terms of being skeptical of advice, when she graciously refuted her brother’s ‘wisdom’ by responding to him:

I shall the effect of this good lesson keep
As watchman to my heart. But, good my brother,
Do not, as some ungracious pastors do,
Show me the steep and thorny way to heaven
Whiles, like a puffed and reckless libertine,
Himself the primrose path of dalliance treads
And recks not his own rede.

Shakespeare 1 – Thiel 0*

(*This is either proof that you can’t “hack” Shakespeare, or Thiel a has in fact ingeniously enacted “a play within a play”. Either way, the “play within the play” didn’t quite work out for Hamlet…)

On to the second piece of ‘bad’ advice:

2) ‘Live each day as if it were your last.’ The best way to take this as advice is to do exactly the opposite. Live each day as if you will live forever. That means, first and foremost, that you should treat the people around you as if they too will be around for a very long time to come. The choices that you make today matter, because their consequences will grow greater and greater.

That is what Einstein was getting at when he supposedly said that compound interest is the most powerful force in the universe. This isn’t just about finance or money, but it’s about the idea that you’ll get the best returns in life from investing your time in building durable friendships and long-lasting relationships.

Here Thiel makes a very nice recovery. We determine the quality of our lives by investing daily in what will bring value to us in future. This rings true in both our personal lives as well as in financial markets.

Returning to Hamlet for a moment, the depth of his plight was caused by indecision and doubt, which also happen to be common culprits in derailing investment strategies. We define ourselves by the decisions we make, and indecision tends to be the worst choice of all…

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The NHL Draft, the Toronto Maple Leafs and Embracing Cyclicality

Imagine that you are part of an association of 30 investors that have exclusive purchase and holding rights of the world’s best stocks. Every year, the top performing portfolio will be celebrated by tens of thousands of fans and have its name inscribed on a sacrosanct silver cup. The worst performing portfolio will have the greatest odds of winning a lottery that gives them exclusive rights to that year’s hottest IPO at a fixed price, regardless of valuation or upside.

Sounds pretty good right? Welcome to the National Hockey League!

Last weekend, the Toronto Maple Leafs won the NHL Draft Lottery and will have the first selection in this year’s NHL draft. As such, they are in position to draft the best 18 year old hockey player on earth. Moreover, that player will – for all intents and purposes – be contractually obligated to them for at least the next seven years. For Leafs fans this is huge. This is beyond huge!

Whereas the top teams in European football perpetuate their success through excellent youth academies and/or buying the best players in the world for astronomical sums, the Toronto Maple Leafs – the most widely followed hockey franchise on earth – has no such options. Imagine if Real Madrid had only qualified for the Champions League once in the past ten years; the hopes on millions would have been regularly ripped and torn asunder. This has been the plight of the Toronto Maple Leafs.

Despite the size of their long suffering fan base and the ridiculous amount of money the team earns from their sold out arena and their criminally overpriced concessions, the business model of the NHL does not allow for rich teams to buy success. Moreover, locally raised talent fills the ranks of their rivals. Every spring since 1967, home town boys that grew up Maple Leafs fans have won the Stanley Cup for a team that is not from Toronto. Terrible.

But what hurts the most for Leafs fans, is that most of the failure that the team has endured over the past 50 years has been predominantly the team’s own fault. Statistical probability scarcely allows for this degree of futility.

THE NHL & CYCLICAL PERFORMANCE

By rewarding failure, the NHL entry draft system has created a league where success tends to be quite cyclical. Every year, bad teams are rewarded with top draft picks. As this exclusive talent matures, their teams usually begin to rise in the standings. If you look around the NHL, the top teams tend to have a number of core players that were top draft picks. For example, the Chicago Blackhawks were terrible from 2004-2007, and capitalized on their poor seasons by drafting future generational all-stars Jonathan Toews (3rd overall, 2006) and Patrick Kane (1st overall, 2007). Three years after drafting Patrick Kane, they won the first of three recent Stanley Cups (2010,2013,2015).

Top draft picks do not always guarantee success, but they definitely help.

The true crime of the Maple Leafs over the past 30 years is not that they have bad seasons, but that they have constantly put short term results ahead of the probability of larger gains in the future. They continued to damn themselves to mediocrity by trading future draft picks for players that were supposed to help them immediately (most of them did not…). The entry draft is ostensibly the NHL equivalent of dollar cost averaging, and by foregoing future capital inflows at cyclical lows the Leafs constantly undermined their future returns.

As investors, we face similar temptations to sacrifice the possibility of long term out-performance for short-term gains. We also tend to overly discount cyclicality by focusing on what is working right now.

In the past couple of seasons, the Leafs’s new management team has concentrated on assembling a competitive team for the future by building through the draft. This year’s first overall draft pick should considerably help their efforts.

If the Toronto Maple Leafs can learn from their mistakes, then maybe we can too…

Go Leafs, Go!

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“Even God Would Get Fired As an Active Investor”

In this post, Wesley R. Gray, Ph.D. provides a statistical overview of an unlikely, albeit interesting hypothetical scenario: “What if you had invested in the top 10% of stocks over successive five year periods?”

The results are intriguing and a little bit frightening. They show that even the very best performing stocks over a given five year period experienced draw downs that most likely would have discouraged even the boldest of short term investors. However, for those with a long term investment horizon, the returns would have been sensational.

Given the volatility we are currently seeing in global markets, long term investors would be wise to consider which companies are best positioned to grow over the next five years, rather than be swayed by daily price movements.

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