The Pursuit of Outperformance

Investing Pioneer

In providing content that may assist in improving your abilities concerning investing, I must say something is “missing” to a degree, that might be useful to acknowledge. For those who teach about, say, general personal finance (or better yet, non finance topics like engineering), they can say their underlying goal is to make as many people as possible financially literate* to improve the community as a whole (though even for this, the underlying component of credit cycles complicates this subject on an aggregate basis).

* (or in the case of engineering, furthering the field leading to tangible effects for many, or everyone.)

. . .

For matters of active investing however – wherein I presume if you are reading this you are an active investor or wish to be one, (and the reason for this is to beat what you could have done investing in the S&P 500 or something similar) – Howard Marks said (paraphrased) asymmetry is limited to a minority of individuals who possess superior skill and insight.

Upon initial consideration, it may be considered that whatever I deliver is zero-sum on an aggregate global level. 

Indeed, there cannot be 100,000 (representing ~0.00125% of the global population) Warren Buffett’s (in terms of even coming close to his lifetime performance), even though at least that many people have studied him. Millions have read books by or about Howard Marks, Peter Lynch, Warren Buffett, Charlie Munger, Benjamin Graham, etc. However, it is not necessarily all zero-sum. More skilled investors with a good temperament may mean fewer victims of their own emotions (i.e., involvement in speculative rallies and crashes). There are three main ways to guide people away from unideal market activities. 

1) Discouraging any involvement (meaning not owning any stocks, indexes, etc.). 

Surprisingly, Benjamin Graham and Buffett’s father effectively did this, encouraging him to “postpone going to Wall Street until after the next crash.” (Buffett, Making of an American Capitalist, 1995) He rejected their advice to wait.

2) Teaching them to be like Buffett. 

3) Or lastly, DCA into, say, the S&P 500. 

The latter is the most effective and is the only one that has an aggregate effect given the underlying principle of the following heavily paraphrased Munger/Buffet quote: if there weren’t plenty of bad/emotional investors distorting stocks and markets to the upside or downside, we wouldn’t have made as much money as we have (given they were often able to buy companies at below what their commensurate value was).

The stock market is a tool to gain exposure to an almost unthinkable number of opportunities/businesses. However, the way most active traders/investors approach it leads to the same common decisions, thought processes, etc. (which are inherently average and poor and hence underperforming the market must be expected).

To an extent, the name of this website, “investing pioneer”, connects to this idea, but also reflects the duality of the matter, in which many “delude” themselves into thinking that which is the “next best thing is” “innovative” and “pioneering” and hence their investing in the stock, which was likely driven by a rise in share price recently, coupled with social influence, meaning they’re likely doing the opposite of “pioneering” (following a sizable crowd).

The most amount of capital traded often precedes a great reversion to the mean.

On the other hand – considering the stock market is a “voting machine” in the short term (Buffett, 1987) – when few people are “voting” for a business, yet it “weighs” more than the market realizes, you are more a “pioneer” than not.

This may be me in part trying to justify the name of this website (finding a name/domain was an irrational struggle for me), as pioneering is more closely associated with unknowns, and in this case, an unknown concerning the future profitability of a company. Whereas value investing is more “boring”. 

Despite this, particularly for small-medium caps (but now more commonly in recent years large caps) – which high alpha investors linger in before getting too big as Buffett did – there is often a great unknown, yet the market greatly overvalues the company.

Sure, the company may be “pioneering” (which is not necessarily a positive term), but most investors in the company end up being “late to the party”, as the only profit to be made was in the speculative rally, and the company never bears the fruit of its expectations.

So, to conclude, it’s a matter of supply, demand and value. If the demand for a stock is very low, you are more a pioneer than not if, in the long run, it proves to be a 100-bagger, for example.

This analogy is susceptible to misinterpretation and some semantics. For example, a commonly accepted definition of a non-pioneer is one who “observes the success or viability of the innovation and decides to participate after.” In one sense, this applies to value investing, as value investors will invest in proven companies, i.e. they are profitable (though the market may believe it will shrink in profitability, or thinks there are better opportunities when there really aren’t, etc.)

In another sense, however, a value investor does not necessarily fit this description (“observes the success or viability of the innovation and decides to participate”), from the perspective of share price. They will invest when the share price is low, partly for that very reason, whereas “followers” or “non-pioneers” only decide to participate when the stock has risen significantly, and often significantly over its real value. I.E. what separates a good investor from a poor one are their metrics, what they are looking for, and what they consider a good signal.

John Bogle talked about this concerning the past performance of funds. People will invest based on the past performance of the fund, choosing the highest returners. However, chances are, it will experience a reversion to the mean.

Circling back to the idea of only a limited number of people can outperform the markets, I emphasize this in part to recognize that I must also focus on providing universal value. In other words, content that will not only assist with your investing ability but almost anything. 

The philosophy behind passive investing does not apply to everything in life per se, but I think the philosophy behind active investing, and the associated principles, are more broadly aligned.

Thomas Jefferson had some things to say about newspapers. It applies to any form of non-fiction real/near real-time media. “Nothing can now be believed which is seen in a newspaper” “General facts may indeed be collected from them, but no details can be relied on.”  For investors, the value of, say, newsletters is often rejected, which is fair. 

Newsletters have a place, and specific newsletters have their own specific place, and should not infringe upon or extend to something that it is unlikely to assist with. 

For example, a newsletter on the economy is rarely useful, if ever, for people who invest in single stocks for the long term (except possibly in uncommon instances). Yet, many investors spend an outsized amount of time reading about the economy.

If it is for entertainment, general educational purposes, etc., then it’s fair, and the newsletter may have value. If it’s used and implied to assist with active investing, the value is often a net negative, except maybe for rare tail-end events, wherein the writer of the newsletter conferred an exceptional yet evidence-based insight that may not have been “priced in”.

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