The Aleph Blog » Blog Archive » It Works, But It Doesn’t Work All The Time

It Works, But It Doesn’t Work All The Time

One of the constants in investing is that investment theories are disbelieved, prosper, bloom, overshoot,  die, and repeat.  So is the only constant change?  That’s not my view.

There are valid theories on investing, and they work on average.  If you pursue them consistently, you will do well.  If you pursue them after failure, you can do better still.

How many times have you seen articles on investing entitled “The Death of ____.” (fill in the blank)  Strategies trend.  There is an underlying kernel of validity; it makes economic sense, and has worked in the past.  But any strategy can be overplayed, even my favorite strategy, value investing.  My style of value investing tries to adjust for that, but it is not perfect there.  (And to tell the truth, September has been a bad month for me, though 2013 has been a very good year.)

So what are valid strategies?

  • Value
  • Price Momentum
  • Long-term mean reversion
  • Insider Buying
  • Neglect (Low volume relative to market cap)
  • Accounting Quality (Net Operating Accruals)
  • Low Equity Price Volatility (which isn’t working now, because it became too popular)
  • Shrinking Assets
  • Shrinking Shares (Buybacks)
  • High Gross Margins as a Fraction of Assets (“Quality,” a quantitative measure of moats.)

This list is not exhaustive, but it is what I use.  The main idea here is to be aware of what is out of fashion, and to be ready to invest when that which drives a strategy to be out of fashion stops getting worse.

So, don’t lose confidence in winning strategies.  Rather, trade out of winning strategies when they are too good, and revisit them when you see the “The Death of ____” articles, or things like them.  This can apply to sectors and industries as well.  Be willing to pick over industries that have underperformed, and buy strong companies that can survive the downturn.  As I have said before, failures occur in weak industries, and after they do, the remaining companies gain pricing power, and thus you invest in survivors.

Value investing is emotionally hard.  You have to be willing to take short-term pain in the interests of long-term gain, if there is a sufficient margin of safety.  No strategy works every month or year.  Returns from valid strategies are most often lumpy.  The markets are almost always lumpy.

Prepare yourself for volatility.  It is the norm of the market.  Focus on what you can control — margin of safety.  By doing that you will be ready for most of the vicissitudes of the market, which stem from companies taking too much credit or operating risk.

Finally, don’t give up.  Most people who give up do so at a time where stock investments are about to turn.  It’s one of those informal indicators to me, when I hear people giving up on an asset class.  It makes me want to look at the despised asset class, and see what bargains might be available.

Remember, valid strategies work on average, but they don’t work every month or year.  Drawdowns shake out the weak-minded, and boost the performance of value investors willing to buy stocks when times are pessimistic.






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Portfolio Management, Quantitative Methods, Value Investing | RSS 2.0 |

13 Responses to It Works, But It Doesn’t Work All The Time

  1. […] Why do investors fail using valid strategies?  (Aleph Blog) […]

  2. […] There are valid theories on investing, and they work on average. If you pursue them consistently, you will do well. If you pursue them after failure, you can do better still. The idea is to be aware of what is out of fashion, and to be ready to invest when that which drives a strategy to be out of fashion stops getting worse. (Aleph Blog) […]

  3. […] It works – but it doesn't work all the time: Every investment strategy or system has a catch.  (AlephBlog) […]

  4. […] Investors Need To Identify Valid Strategies And Learn To Act When Whatever Drove Them Out Of Fashion… (The Aleph Blog) […]

  5. […] Inveztorz Nee' Ta Idintify Valid Strategiez An' Learn Ta Act Wen Whateva Drove Them Out Uv Fashyun S… (Da Aleph Blog) […]

  6. […] Investors Need To Identify Valid Strategies And Learn To Act When Whatever Drove Them Out Of Fashion… (The Aleph Blog) […]

  7. […] Investors Need To Identify Valid Strategies And Learn To Act When Whatever Drove Them Out Of Fashion… (The Aleph Blog) […]

  8. […] Investors Need To Identify Valid Strategies And Learn To Act When Whatever Drove Them Out Of Fashion… (The Aleph Blog) […]

  9. […] Inveztorz Nee' Ta Idintify Valid Strategiez An' Learn Ta Act Wen Whateva Drove Them Out Uv Fashyun S… (Da Aleph Blog) […]

  10. […] Anle­ge­stra­te­gien funk­tio­nie­ren, aber nicht immer… (Eng­lisch) […]

  11. […] Investors Need To Identify Valid Strategies And Learn To Act When Whatever Drove Them Out Of Fashion… (The Aleph Blog) […]

  12. […] Why do investors fail using valid strategies?  (Aleph Blog) […]

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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