Monthly Archives: February 2014

Learning from our Most Painful Successes

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I think that every investor dreads the end of the quarter portfolio review—even when your quarter was successful.  Why? Because even in the best of quarters there are always the zombie stocks of your portfolio stumbling around for all to see.  We all struggle with defending these stocks to our peers and clients after they failed—even if the stocks were sold and it was the right decision to sell them at the time.  And we spend a lot of time analyzing these undead. All too often our successes go unanalyzed in these reviews because we attribute success to our intelligence, foresight and ingenuity of our investing process.  Unfortunately lots of avoidable future failures can be learned from our investment “successes”.

The Holy Grail of investing is developing a winning process that is unique, repeatable and sustainable. Achieving that goal means asking tough questions about success as well as failures. Investor hubris often comes from mistaking your intelligence for stumbling upon a bull market or your investing style coming into vogue for one’s clairvoyance. The key question, which rarely if ever gets asked, is what did you do differently this time that you did not do last time and is it repeatable? Equally as important is what insight drove you to that successful decision?  Why did others miss that insight? Will that insight continue to be overlooked? If an investor cannot answer those questions, success probably didn’t have anything to do with your stock picking skill. It probably had everything to do with luck.

Don’t get me wrong, luck is great as long as you can identify a particular success as such. It makes exiting out of a lucky position much easier of a decision. But again, achieving this takes some tough self-analysis and self-questioning, and not being afraid to admit to one’s weaknesses and misjudgments openly—even in the face of “success”.  Not always the easiest thing to do! Therefore long-term success means asking difficult questions about our winners as well as our losers. If they are truly winners, we can learn from them, incorporate what worked into our investment process and have (hopefully) even stronger results in the future.

We know how to question ourselves in our failures. They are there for all to see. Honesty is required in these situations. But good results don’t lie do they? Yes they do. Therefore brutal honesty is required here as well.

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You Gotta Know When to Hold ‘Em

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Disciplined Growth Investors

The inspiration for this article came from two blockbuster investment pieces published in the early 1980’s. The first was titled “The Greatest Financial Story ever told”, written by Greg Smith, the lead investment strategist for Prudential Securities. The second was titled “Revenge of the Nerds”, written by Stan Salvigson, a strategist at Merrill Lynch. Both titles were clever and a clear signal that these pieces were going to be different. And they were. Both correctly laid out the investment framework for the foreseeable future, a future in which financial instruments (primarily bonds, derivatives and stocks in financial service companies) would be the winning investments. Remarkably this strategy lasted until 2008, a span of over 25 years.

We hope to convince you that the U.S. financial markets are entering a new era, in which the key to investment success will be to invest in the stocks of winning companies at fair prices or less and hold them for long periods of time.

Innovative enterprises will be the champions of the new era. Their springboard for success will be their successful exploitation of the massive technological innovations which have been brewing for over thirty years. Enterprises must learn to think and behave differently in order to prosper in the new paradigm. There will be at least three major variables which will need to be addressed:

  • People – The winning enterprises of the future understand that their most important assets are their people. Long-term success will be contingent upon an enterprise’s ability to attract and retain the right knowledge workers. At a minimum, this means establishing a culture defined by a high level of trust and transparency.
  • Tools – Once the enterprise has the right people on board, they will need to provide the tools that help maximize individual potential. We define tools broadly to include both the devices and domain knowledge that will spur productivity gains. This means each enterprise must have a proactive stance toward new technology and the ongoing education of its personnel.
  • Systems – Finally, the winning enterprises of the future will understand that maximizing individual potential is not the same as maximizing the potential of the enterprise. To be successful, the organization must design and implement systems that act as a multiplier to individual contributions.  The most obvious of which is developing an innovation engine that leverages the collective insights of the organization

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