Weight Loss vs. Investment Returns

Most things in life are weekly or monthly.   Think about that for a moment.  Most people receive a bi-weekly paycheck (some weekly or monthly).  If you are trying to lose weight, you have probably set a goal for weekly or monthly weight loss.  If you are training for a 5k or a marathon, you are probably trying to increase your training each week, say from 1 mile to 2 miles, etc., each week until you are ready to run your race.  There is an end goal with predictable intermediate points between now and the end point with a specific time duration attached.

Investment returns and investing in general is one of the few areas of life that runs completely counter to this idea of intermediate checkpoints along a timeline towards an endpoint.

Not only is the timing aspect of investment opportunities different, but the source of these investment opportunities is not necessarily tied to our own actions.  Very few goals are passively achieved (I am hoping my marathon training will be the exception).  Investment results, even actively managed funds, have or should have a large passive component.  Let me explain with an example.

Earlier this year, Michael Lewis published an interesting book about high-frequency trading.  Lewis is a well-known financial author, earlier books include The Big Short and Liar’s Poker.   Without getting into the details of the book, brokerages were earning high-margin income through a controversial, but not illegal means.  Around the time of the book’s release, an SEC investigation was opened, a segment of 60 Minutes aired and a congressional panel heard testimony on the topic.  In the days following the book’s release, TD Ameritrade’s stock dropped approximately 20% or roughly $3.5B (Schwab and E-Trade also experienced a similar drop).

Imagine you started studying TD Ameritrade at the beginning of the year.  Michael Lewis’ book was published on March 31.  You had nothing to do with the timing of his book’s release and you certainly didn’t write the book, creating the firestorm and causing a nearly 20% stock price decline.  All of the events were completely outside of your control, both in substance and in timing.

Buffett likes to talk about waiting for your pitch and that there are no called strikes in investing.

Additional baseball metaphors:

1. You can spend hours in the batting cage practicing, it doesn’t mean the pitcher is going to throw your pitch in the near future.  There is no timeline on your pitch, don’t create one.

2. Sometimes your pitch might come from the first baseman, instead of the pitcher.  Investment opportunities arise more often from unexpected events.  I seriously doubt Buffett was anticipating the salad-oil scandal in his American Express investment.



More to Explore

Returns for Great vs. Bad Businesses

Munger and The Cattle Rancher

Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

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