Disclosure: At the time of publication, John Reese and/or his private clients are long ManpowerGroup, Athene Holding, Vale and GameStop.
At the annual SkyBridge Capital industry conference (SALT) held last month in Las Vegas, billionaire Bill Ackman told a room full of hedge fund managers that after two years of double-digit portfolio losses (for his firm Pershing Square Capital Management) he is “ready for a comeback,” according to a recent Reuters article.
In a sideways reference to his firm’s doomed bet on Valeant Pharmaceuticals, Ackman proclaimed, “The next investment you will hear from us isn’t going to be some successful company trading near its highs.” Ackman asserted that, instead, the firm would focus on high quality investments, adding, “When you put your hand in the fire and you get burned, you go back to a real focus on your core.”
While we might not know the specifics underlying Ackman’s comment, it does seem to suggest the merits of taking a step back when things haven’t gone well, of returning to basics and core principles–a notion that’s applicable not only to fund managers but to investors as well.
For Vanguard founder Jack Bogle, the core concepts that he has offered clients over his lengthy career also focus on basic, common sense principles. In a recent essay for the CFA institute, Bogle lists these tenets, and I’ve highlighted seven of the key concepts below.
A lot of these concepts may not be foreign to investors who follow highly successful investors like I do. Warren Buffett, Howard Marks, Joel Greenblatt, Peter Lynch, Ben Graham and other greats have espoused similar words of wisdom over the years:
1. Invest you must
Bogle says that the failure to earn a sufficient return is a bigger risk than short-term volatility in the market. Joel Greenblatt puts it this way: “The strategy of putting all your eggs in one basket and watching that basket is less risky than you might think.”
2. Time is your friend
Start investing as early as possible to enjoy the “magic of compounding returns.” Even modest investments, says Bogle, can grow to “staggering” amounts over time. Benjamin Graham referred to compounding as the “eighth wonder of the world.”
3. Impulse is your enemy
“Eliminate emotion from your investment program.” He says investors must have reasonable expectations, and “avoid changing those expectations in response to the ephemeral noise coming from Wall Street.” Graham echoed this notion, “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
4. Basic arithmetic works
An investor’s net return is simply calculated as gross portfolio returns less fees and costs. It’s important, therefore, to pay attention to investment expenses that can eat into returns. In the words of Warren Buffett, “Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
5. Stick to simplicity
Focus on maintaining a “sensible” allocation among stocks, bonds and cash reserves that embodies a “diversified selection of middle-of-the-road, high-grade securities, a careful balancing of risk, return and (once again) cost.”
6. Never forget reversion to the mean
“Strong performance by a mutual fund is highly likely to revert to the stock market norm—and often below it.” Howard Marks simplifies the idea: “Nothing goes in one direction forever.”