Imagine for a moment you owned stock in a very good business… but the stock just did nothing for years. It lagged behind your other investments. Let’s say those shares under-performed the S&P 500 by 2% annually. Would you sell? How long could that investment under-perform before you finally gave-up and decided to sell it?
This is one of the most important investing questions that every investor needs to answer for themselves — How do you know when to buy or sell an investment? Do you have a investing strategy to help make those decisions?
Re-balance, Find Value, Or Never Selling?
Knowing when to buy, hold, or sell investments are the decisions traditionally directed to investing strategy. If you’ve read all the “classic” investing books, your probably well acquainted with the three major schools of thought on the topic: Regularly re-balancing your investment holdings, investing in undervalued assets, or buying growing assets and then “never selling”.
Rebalancers tend not to worry about individual investment performance, but instead fuss about maintaining set percentage ratios in their favorite investing categories — i.e. 30% in tech, 30% in real estate, 30% in financials and 10% in bonds.
If a given investment declines (say for example, a technology fund), the investor will rebalance his or her portfolio every year to maintain a “balanced” percentage in his or her portfolio. This regular rebalancing means the investor is moving capital from a higher-performing investment into a under-performing investment. In some situations this could be a smart move — investing more money when the prices of cyclical stocks are down (for example). Or, this could mean the investor is throwing good money into a bad investment if they rebalance at the wrong time and then the category declines even further.
Value investing is the direct opposite of the “rebalancing” school of investing. Instead of adjusting assets in direct response to market movements, value investors try to distance themselves from the wild machinations of Mr. Market as much as possible. Instead, they choose to pay close attention to the accounting value of an asset, as well as numerical calculations like discounted cash flow (estimating the discounted sum of current and future cash flows).
It’s all about buying dollars when those dollars are selling at 50 cents apiece!
The third major school of investing is the Buy-and-hold forever category of investor. These investors tend to subscribe to the Phil Fischer school of investing, wherein the investor buys a high-quality growing asset and then holds it forever (or at least until that asset ceases to be a “quality growing asset”).
Warren Buffet epitomizes this strategy as a very successful buy and hold investor. He might have started-out as a hardcore value investor, but these days he’s moved-on to buying higher quality assets at much higher prices. For example, Buffet purchased shares of Coca-Cola way back in 1988 for a PE of 16 times 1988 earnings. That wasn’t a terribly cheap price, but obviously the investment worked out extremely well for Buffet (with a multi-thousand percent gain)! He still holds those shares today — 31 years later.
One of the major problems with this “never sell” strategy is that the market can disagree with you for extended periods of time. You might go to your grave “waiting” for the market to finally value your assets correctly. Other times, investors can over-estimate the quality of a business and get badly bitten when the market realizes it’s actually a poor-quality business (Enron anyone?)
So which investing strategy is the right one?
That’s entirely up to you! This is the craft of investing. All of these strategies have had proven successful track records at some point in the past, but I think we can definitively state that none of them have worked all of the time.
For example, the current bull-market hasn’t been kind to value investors. They’ve had a rough time of it. It’s nearly impossible to find undervalued assets using traditional Ben Graham methodologies — hence value investing has lagged behind other strategies in recent years.
Most investors sign-up for one of these “investing styles” early-on in their investing career and then stick with it for most of their investing life.
In the beginning, I can’t say I was any different. As a beginner investor, (with nary a million to my name) I signed-up for the value investing “camp”. This style of investing worked out pretty-well for me in my early investing days, and I actually realized my largest percentage gains this way.
My most recent example of “value investing” has to be bottom-fishing for preferred shares after the 2008-2009 financial crisis. There were some great value investments back then.
Eventually though, I began to realize that traditional value investments were getting extremely hard to find. You see, good value investments only pop-up occasionally, when the market does extreme things. You can keep hunting for good value, but sometimes the hunting just really stinks.
So, I traded “camps” and shifted to more of a buy-and-hold-forever strategy. I describe this on my blog as being more of a farmer — maintaining the best quality assets on my “farm”. This strategy also worked-out great for me because I caught the big-wave of U.S. growth following the Great Recession.
Then, once I reached financial independence back in 2015, I found myself starting to pay more attention to my asset allocation — managing my cash levels a lot more carefully, and paying more attention to how much capital I allocate in any given category. While I don’t perform a regular rebalancing of assets yet, I’m at least paying more attention to my portfolio allocation these days.
What does all this mean?
It means I follow something of a hybrid of popular investing strategies! I’m a entirely pragmatic investor — I don’t “stick” with any one strategy. Instead, I’ve shifted my assets around as necessary to capture whatever is working in the current environment (not too often mind-you). Sometimes I’ve bought value and sold when that value is realized by the market. Other times I’ve bought growing investments and held those shares extremely long-term.
These days I’ve completely embraced my hybrid investing strategy — I find myself belonging to multiple camps at the same time. I’ll buy good quality investments at good prices and happily hold them as long as they remain good-quality assets. But, if the market suddenly decides to provide quick re-valuation gains, I’m happy to harvest those gains when they outpace other strategies.
In other words, my investing strategy is really doing whatever the hell works.
Don’t Be Afraid To Invest Different
Traditional investing advice tells investors to find a strategy and “stick with it”. The theory being that if the investor consistently “sticks” with a strategy they’re more likely to capture investing gains when that strategy is working….
Nothing wrong with that, it’s great for beginners. But, if I’ve learned anything from my two decades of investing it’s this: Don’t be afraid to invest different than the crowd.
Following the crowd is not the path to riches — it’s a great way to find investing mediocrity. Instead, find your own strategy! Find what works for your unique knowledge, experience, and circumstances. This is probably the most important piece of investing advice I can give to anyone. What worked in the past in investing won’t necessarily work in the future. You don’t need to follow the most popular strategies to earn good returns.
Maybe stocks aren’t your thing either. Maybe your thing is investing in laundromats, or buying small businesses. You’re going to have to look at the investing world and see what’s working. The world is changing rapidly, so pay attention!
Don’t get stuck on all the popular dogma and strategies of the past. Adapt. The ideas about what makes a good investing strategy will absolutely change in the future. I can’t predict what the future will bring, but if history can teach us anything, it’s that change is constant.
Don’t be afraid to adapt and invest differently from everyone else. Being different from the crowd just might make you A TON of money!
Quit Like A Millionaire Book Giveaway!
If you’re reading this blog, then you’ve probably already heard of bloggers Kristy Shen and Bryce Leung. They’re those world-traveling Canadian early-retirees that blog over at Millennial Revolution. I consider them one of my “blogging buddies” and I’ve followed them for years!
They’re also extremely entertaining writers, and they’ve recently published a book called Quit Like A Millionaire. You’ve probably heard of the book too, because it’s gotten A TON of positive press this last week. Everyone and their mother has been publishing glowing reviews and giving away promotional copies!
I haven’t finished reading my copy yet, but Mr. Tako is NOT going to be outdone by anyone’s mother!! I’ve been able to secure a free copy of Quit Like A Millionaire for my dedicated readers, and I’m giving it away today. Yay, free stuff!
To enter this little giveaway, you can either:
- Leave a relevant comment about your investing strategy in the comments section below.
- Sign-up for my blog email mailing list. You can do that here.
- Or both! You can get two entries this way!
That’s all there is to it! I’ll randomly select the winner from the entries provided on Thursday July 25th. Then, I’ll reach-out to the winner via their provided email address.
[Update: A winner has been selected. Thanks for playing everybody!]
For everyone that doesn’t win a free copy of Quite Like A Millionaire, you can still secure a copy from all the usual places.