One of the main pitfalls of investing is searching for the
approach that gets it right all the time. If investors think they
can consistently rack up profits month after month, they are not
living in the real world.
I'm hope you're not searching for such an approach, because it's
not out there - nor will there ever be one that can make money on
a consistent basis without having some sort of drawdown. If you
know of any investor searching for such an approach who truly
believes that someone out there really has the Holy Grail of
consistent profits, I suggest that you have him or her pay a
visit to Butner, North Carolina. That's where one will find
prisoner #61727-054, Bernie Madoff.
PICTURE OF MADOFF
Madoff operated what is considered to be the largest financial
fraud in U.S. history. Over a period of 20-plus years he swindled
thousands of investors (many of them sophisticated investors and
very successful celebrities) out of $65 billion.
He didn't do it by promising 1,000% returns. Instead, he executed
his plan by fabricating a track record that was very consistent
and barely showed any down periods. He sold his investors on the
ability to consistently, through every type of market
environment, produce winning months for long periods of time.
In fact, he reported only four losing months over 14 years!
Intelligent and sophisticated investors wanted to believe that it
was possible. They wanted to believe that someone had discovered
a strategy that produced gains month after month. Along with
Santa Claus and the Easter Bunny, there's no such thing.
Consistency is something no one can promise. At times a value
investing approach will be totally out of sync with the market.
The stocks we buy will go down, and the stocks we sell will
continue to go higher. That's normal and nothing to get excited
about. The only thing any approach can guarantee
- is that over the long term there will be periods of
disappointment. This separates successful investors from everyone
else. Most investors will bounce around from one approach to
another when the approach they're using goes through a rough
patch. Instead of building their net worth, they actively do
everything possible to continuously lose money.
For an investing approach to be considered sound, Ben Graham said
that it needs to be:
- Based on sound logic,
- Be simple to apply, and
- Have an excellent track record.
Many approaches might be based on sound logic and have excellent
records but are almost impossible to replicate. Other approaches
might be simple to apply and have excellent records over the
short term but are not based on sound logic; eventually they
disappoint and ultimately fail.
For those who stick with an approach that is based on logic, is
simple to apply, and has an excellent track record - the world is
their oyster.
After 30 years of investing, I have yet to find an approach that
is better than buying stocks of businesses that are trading for
less than their underlying worth. If you know of one, please get
in touch with me ASAP.
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