INVEST LIKE THE GURUS
For investment professionals, the last 2 decades have brought about what amounts to an existential debate over the best way to invest. Should one use actively managed mutual funds to invest, or is index investing the way to go? Proponents of active investing argue that managers, with good research and opportune timing, can achieve superior performance to that of the general market indices. Conversely, fans of index investing cite a Morningstar research piece published in the early 1990’s that showed the overwhelming majority of money managers are unable to beat the indices that they are benchmarked to.
For a while, the evidence seemed to indicate that the indexers were right. According to the Wall Street Journal, “Between 1992 and 1998, the theory appeared to be borne out as the S&P 500 beat 95% of large-blend mutual funds.” Then, new research came out a few years ago indicating that the active approach has actually outperformed over the last decade.
This leaves investors in a quandary. What’s the most effective way to invest? What makes this question even more important now is that we are in the middle of the ‘lost decade of investing.’ The U.S. major market indices are at the same level they were 10 years ago. This fact alone, in my opinion, will push investors away from index investing and back towards the actively managed approach. Whether right or wrong, the perception is that, by definition, something that is actively managed will be able to avoid some of the pitfalls that have befallen the market over the last decade.
Follow the Gurus
One fact that no one can deny is that there are some well known investment managers who have continued to outperform the broad market for more than 20 years. Famous investors like Peter Lynch, Benjamin Graham, Warren Buffet, and Joel Greenblatt have put up staggering investment returns. Most investors perceive that in order to put up guru-like investment returns, they need multi-million dollar portfolios and access to information they just don’t have. While this used to be true, thanks to technological improvements, you too can invest just like these pros. You can now track each strategy employed by these experts and invest just as they are doing. Basically, you now have the ability to piggyback these expert investors by cloning their portfolios. Keep in mind that their past performance is no indication of their strategy’s future performance.
Stick to a Strategy
A big mistake that investors make is that they don’t stick to a certain strategy. We live in the remote control generation. If you don’t like something, switch to something else. Unfortunately for investors, constantly changing investment strategies is a recipe for disaster. Even the Gurus themselves say that their specific strategy will underperform for a year or two over the long-run. The point is that over the long-run, these strategies will produce potentially market superior returns. Investment manager John Reese says, “Many investors don’t stay the course. For these strategies to beat the market, investors have to stick with them. David Dreman and Ken Fisher both say that you have to ride it out. No matter what, we’ve found that you have to resist modifying the strategy. Secondly, every single guru has had a down year or two in a row compared to their benchmarks. Nevertheless, these gurus beat most indices and other investment professionals over the long term. If you read Greenblatt, he makes it very clear that investors will encounter 1 or 2 years which appear not to be working.”
Cash In
Speak with an investment professional to choose the most appropriate strategy for your specific investment portfolio, and remember, stay the course and stick to the strategy.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il
