Investing greats are often known for their unique style of investing. The moment you hear of value investing, Warren Buffett leaps to mind; Peter Lynch reminds us of growth investing; Howard Marks of distressed debt; George Soros or Stan Druckenmiller are known for their macro trades; Jesse Livermore, a trader. And the list goes on.
It is important to know your own dominant style of investing. There would be something where you would be most comfortable in. For example, my natural inclination is to buy stocks that are compounding in nature and then sit and do nothing as long as they keep on performing both on the business and stock price fronts.
The problem starts when we become slightly successful in our style of investing. Due to our ego, we tend to believe our way of investing is the best and others are sub-par. And then, we look for confirmation from the external world.
If we are traders, we deify eminent and successful traders; if we are investors, we do the same with famous investors. And that is why you will find fundamental-based investors deride technical chartists and vice-versa. This also puts subtle biases into our minds based on the authority and commitment and consistency biases.
For example, a generation of investors blindly followed Buffett and avoided tech stocks just because he said it was not within his circle of competence. And guess what, they missed the best companies and winners in last 20 years â Google, Apple, Microsoft, Amazon etc.
Most of the people typically start investing on either technical or fundamental side, based on how they started their journey and what influenced them. And over the years, they keep on getting better at their craft. Very few have the curiosity and courage to take a peek at the other side.
And even for those that do, it is not easy to be successful. Trading and investing require two completely different and mostly complimentary mindsets, and very few can actually do well in both.
I have friends who are so deep-value oriented that they find even entertaining the idea of studying a company with a P/E value higher than 15 repugnant. Similarly, others would not even look at stocks which are not growing above a 15 per cent CAGR rate.
The following table is from the book Excess Returns by Frederik Vanhaverbeke.
The book is completely ignorable other than this one table! It captures the CAGR returns of investor-trades with long-term track records. When I chanced upon this table a few years back, it triggered a major change in my thought process, and I actually started delving deeper into alternative styles of investing.
If you look closely, people who have the best long-term public track records (greater than 10 years) are the traders who more or less win hands down. And yet their longevity was not there. The moment you increase the investment duration to more than 20 years, investors and quant guys started taking over.
My main takeaway from this table was that it is important not to deride other styles and get âstyle-boxedâ. Style diversification is as important as portfolio diversification, probably much more important. Since my own style was primarily a buy-compounders-and-sit-tight kind, I was perennially missing out on shorter term upswings in stocks of companies that may not merit a place in a concentrated quality portfolio.
But even those stocks had great potential of giving decent returns. I started exploring how people on this list made money. That opened up technical analysis and quantitative investing for me. Now, I try to improve my skills in those areas as much as I spend time doing fundamental research. And the main motivation is to be able to marry my fundamental, technical and quantitative methods to get a smoother return profile over time.
(Abhishek Basumallick is the Head of the Equity Advisory at www.intelsense.in, and author of pure quant-focused newsletter at www.quantamental.in. Nothing in the article should be construed as investment advice. Please do your own due diligence before investing.)