You Loved This One: A Little Inspiration
publication date: Jan 13, 2016
author/source: Brian Nelson, CFA
“Whether you think you can, or you think you can't -- you're right.” ― Henry Ford
Image Source: slgckgc
Everyday someone is told they can’t. Everyday someone is told it is just luck. But year after year, investors beat the market. It happens all the time.
Warren Buffett has put up outperformance of such magnitude that the skeptics just ignore his work. Bill Miller’s Legg Mason Capital Management Value Trust beat the S&P 500 for 15 consecutive years from 1991 through 2005, after fees. The manager of the Magellan Fund at Fidelity Investments from 1977 through 1990, Peter Lynch averaged nearly a 30% annual return – more than doubling that of the S&P 500 during that time.
The skeptics won’t have any of it.
Leonard Mlodinow’s “The Drunkard’s Walk” noted that, in Miller’s case, the odds of someone beating the market for 15 years in a row is ~75%, far better than even – as if it were no achievement at all, just luck. Some may even argue the streak was bound to happen – they may go so far as to say it would be unlikely if such an occurrence had never happened. They’ll do their best to explain away Buffett and Lynch, and some may do their best to make sure you don’t even try.
“You can’t beat the market. Just buy an index fund. Those guys are just lucky.” – says the skeptic.
I don’t see it that way.
From my vantage point, it is often the case that the ones that observers call the luckiest are the ones that work the hardest. They leave no stone unturned, they’re not bound by “normal” working hours, they can piece things together in ways others simply can’t. Those that make it big say it takes 10 years or more to become an “overnight” success. It’s funny how that works.
To borrow from one of my favorite entrepreneurs, Henry Ford, “whether you think you can, or you think you can’t—you’re right.”
Let’s assume someone has never swung a baseball bat or has ever seen a game of baseball. He might say, “Are you joking? Nobody can hit a round, laced ball of cowhide thrown at 90 miles per hour with a cylindrical wooden object more than 400 feet over land in the air…”
Seems like a reasonable reaction, wouldn’t you say? After all, the skeptic has never hit a homerun, nor has he ever seen anyone hit a homerun before. Maybe all of his friends have never played baseball either… and they think a homerun is just luck, too, if such a thing was even possible.
The skeptic and his friends then go around telling everybody that they can’t beat the market (sorry: hit a homerun), and therefore they shouldn’t try either. The propaganda works – those skeptics often are quite believable. They wear suits and work for name-brand companies.
The skeptic hasn’t put in the decade-plus of work just to make it to the “Show.” The skeptic doesn’t have blisters on his hands that a good ol’ ballplayer would wear as evidence of his dedication. The skeptic may not even like baseball. He’s in for the quick sale…
But wait… it gets worse.
Let’s say the skeptic tries, but half-heartedly, and after failing, then confirms in his view that hitting a homerun isn’t possible. Or worse, let’s say the skeptic gave it his all, but failed all the same, absolutely confirming in his eyes what he thinks he already knows: a homerun is just luck if not impossible.
In truth, maybe all the skeptic can do is hit a “Texas Leaguer.”
We all know hitting a homerun is possible, and we all know that beating the market is possible. Let’s keep working hard, uncovering new ideas. But in 2016, just like in 2015 and the years prior, let’s keep a good eye and not swing at everything!
We’re going to hit solid line-drives and base hits, but if we do hit homeruns, it will be on a good pitch, a “fat” pitch. With valuations as they are, Mr. Market will be throwing us a lot of curveballs this year, but we don’t have to swing, and neither do you.
As an investor, make sure you get your right pitch! And if you swing, drive it clear over the left-field wall. Leave the “nay-saying” to the skeptics!