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By Robert M. Campbell
Publisher of The Campbell Real Estate Timing Letter
"When you know of strategies (and money managers) that appear to offer
high returns with bearable, controlled risks – and when reasonable judgments
can be made about the probable outcomes – it’s failing to concentrate your
portfolio on high-probability investments can be your biggest mistake.”
Caution can help you avoid mistakes, but it can also keep you from great accomplishments. Says Marks:
“If you can put your money to with investment strategies (or money managers)
that your analysis shows you can rely on, load up! In evaluating strategies,
there has to be an element of boldness if you hope to enjoy superior returns.
Too large a dose of caution in where to concentrate your investments can keep
portfolios from outperforming the norm.”
So now the ball is in your court. If you strive for superior performance in the
markets, you have to Dare To Be Great. And with the right attitude, the right strategies, and the right financial help, you can win in the markets – and even win big.
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As small investors, some of you will take advantage of the thoughts of Howard Marks and some won’t. You alone must select your investment strategies – and those choices will be based on your financial goals, your objectives, and whether you are willing to boldly step away from the crowd and Dare To Be Great.
I learned a lot from Howard Mark’s April 2014 memo to his clients. I already knew that investing money is a tough job.
But as Howard Marks says:
Towards the end of his Dare To Be Great memo to his clients, Howard Marks listed some of the most common mistakes he has seen investors make – and what they must do to stamp some of them out.
1. Money Management. When you manage your own money, you make the decisions according to what is best for you. When you let other people manage your money, the decisions made may also be influenced by what’s best for them.
As protection against potential criticism (and loss of clients), large institutional
money managers largely do what everyone else is doing. This generally ensures that their portfolio will never be too different from the herd. But if they mirror the pack enough to make sure that they won’t underperform, then it’s also unlikely that they will outperform.
2. Over-Diversifying. While it’s true that only large positions can get you into trouble, it’s equally true that only large positions can make big contributions. (This is one of the great dilemmas in investing.)
3. Moderation. People often prefer to take baby steps, go slow, and invest less than the maximum possible. But in the pursuit of superior investment results, moderation is no a virtue in and of itself.
When you look at the portfolios that do better than others over time, like the Yale and Howard endowments, you usually see very substantial commitments to individual strategies and specific investments.
Avoiding Common Investment Mistakes
As shown above, Version #2 would have given you annualized returns of 16.40% per year with a market volatility reading of 12.39%. The maximum drawdown on your investment capital would have been 27.52% during the 35 year period used for the back-test.
With less risk (and stress) than the buy-and-hold – e.g. market volatility was lower by 20% and the maximum equity drawdown was lower by 38.5% – the Dare To Be Great Investment Strategy #2 outperformed by over 7% per year. The strategy outperformed the buy-and-hold during approximately 70% of the years. As with my REIT investment strategy, so much for “buy high, sell higher” not working!
I’d like you to think about those performance results for a second. What other investments do you know of that give you the opportunity to make 16.4% annual returns over a long period of time? Real estate? Nope. As much as I love real estate investing – especially when you buy low and sell high with market timing – the Case-Shiller 10-City Index shows that U.S. housing prices appreciated by an average of 6.9% per year from 1987 to 2014.
[Note: While leverage can work for you or against you depending on market conditions, please understand that the 16.4% and 6.9% returns shown above would have been produced without using any borrowed money.]
The bottom line is this: If you want to
Dare To Be Great in the markets, this strategy
can make you a superior investor. It not only gives
you the opportunity to make outstanding
returns- but it can do so without you having to
unduly suffer the stress of painfully high market
In evaluating the performance results from 1973-2008, the table below shows how
the three different versions of the Dare To Be Great Investment Strategy would
have compared against a buy-and-hold strategy for the S&P 500. To each his own, but I like Version #2 best for the simple reason that I believe it offers investors the optimal trade-off
between risks vs. rewards.
Let's take a look:
Risk vs. Reward
Achieving superior returns does not have to be synonymous with taking a lot of investment risk. While this may be true most of the time, it’s not true all of the time if you use the right investment strategy.
Most investors put almost all their money in stocks. While stocks have performed better than all other asset classes in the long-run, they are volatile and can deliver stomach-wrenching declines in the short-run.
Even though they love the historically high returns, some investors simply can’t
live with the high market volatility of stocks. And that’s what I like about the Dare To Be Great Investment Strategy. Among its many attributes,this strategy shows you:
1. How to better manage market volatility and lower your downside risks;
2. The best place to concentrate your investment positions for maximum upside growth.
You have six major asset classes to pick from.
Why did I say “small investors” – and not include large investment managers like
hedge funds, pension funds, mutual funds, and other large institutional money managers?
The reason is this: Small investors can employ strategies that allow them to change their investment positions quickly and without impacting share prices to any significant degree. The thousands of goliath money managers,however, are less able to do this for the simple reason that most markets can’tinstantly absorb a huge buy or sell order without a considerable short-term increase (or decrease) in price.
Yes, David can trounce Goliath in the markets if he is armed with the right
investment strategies – and while I’m not a billionaire with decades of savvy money management skills like Howard Marks, I do believe that the Dare to Be Great Investment Strategy is an excellent choice for small investors that seek superior returns in the markets.
I do believe one of the easiest ways for the small investor to make superior returns is to
use strategies whose merits have not been discovered by other small investors.
So what can small investors do?
First off, as much as everybody wants above
average investment results, you can’t do what
everyone else is doing and expect to outperform.
That’s because going along with the crowd will, by definition, lead to average performance.
Secondly, while there is no sure-fire route to above-
For superior results, Marks believes it’s absolutely essential to invest with superior
money managers. However for the small investor, this is nearly impossible because most superior money managers require multi-million dollar accounts before they will take you on as a client.
What it all comes down to is this: There is no surefire recipe for success. Instead, superior investment results can only result from a better-than-average ability to figure out when
risk-taking will lead to outstanding returns as compared to when it will end in losses.
As Marks said, “there is no alternative.”
How To Achieve Superior Investment Returns
The Goal of Investing
In Dare To Be Great, Howard Marks described the goal of investing as this: “To expose
yourself to return in a way that doesn’t equally expose you to risk – and to participate in gains
when the market rises to a greater degree than you participate in losses when it falls.”
This does not mean that avoidance
of all losses is a reasonable objective – because it isn’t. Most investors understand and accept the fact that in their effort to make correct investment decisions, they also have to accept the risk of making mistakes.
No one – not even brilliant investors like Howard Marks – can ever expect to achieve a
perfect batting average.
“The truth is,” says Howard Marks, “almost everything about superior investing is a two-edged sword.”
1. If you invest, you will lose money if the market declines.
2. If you don’t invest, you will miss out ongains if the market rises.
3. Market timing will add value if it can be done right.
4. Buy-and-hold will produce better results if market timing can’t be done right.
5. Aggressiveness will help when the market rises but hurt when it falls.
6. Defensiveness will help when the market falls but hurt when it rises.
7. If you concentrate your portfolio, your mistakes will kill you.
8. If you diversify, the payoff from your successes will be diminished.
“The only single thing in the investment world that isn’t a two-edged sword,” says Marks, “is superior insight and skill.” Skill can help in both up and down markets – and superior skill can increase the expected benefit from market timing and where you concentrate your investments.
Superior Investing Is A Two Edged Sword
“Passive investors, benchmark huggers, and herd followers,” says Marks, “have a high
probability of achieving average performance and little risk of falling short.”
This may be perfectly acceptable for a lot of investors, but what if you are the
type of investor that would rather have outstanding returns rather than average returns?
If that’s you, the question becomes whether you are willing to dare to be
great. While everyone would love to achieve above average investment returns, you can’t
be part of the herd and do what everyone else is doing and expect to outperform.
Instead, if you want to be a great investor – you must be willing to break away from the
herd and employ strategies that can significantly dial up your investment
returns. By daring to be different, this is how you can stand out.
And that’s exactly what my Dare To Be Great Investment Strategy is. Even though no
portfolio or market strategy is perfect and without risk – which explains why I suggest you consider using multiple investment strategies to manage your money – you will learn how to
“dial up” the investment returns from "The Best Investment Strategy I’ve Seen in 30 Years" by about 4% per year. That means instead of making an average annual return of 12.0% from
1973 to 2008, you would have made 16.4% during that same 35 year time period.
Mutual funds are propeller planes … the
Dare To Be Great Strategy is a fighter-jet.
The message in both memos was this:
If you are going to dare to be great as an investor – which means your goal is to achieve superior investment results – you have to dare to be different.
Every once in a while I come across articles in the finance and business world
that really resonate with me.
This is how I felt after reading a 15-page client memo sent out in April 2014 by the brilliant billionaire investor Howard Marks, founder and chairman of Oaktree Capital Management. He called it “Dare To Be Great: Part II – and it was a follow up to a memo by the same name that he originally sent out in 2006.