What are the Characteristics of Winning Investors?
A Most Impressive Series of Numbers
Happy Thanksgiving from everyone at Cabot! We wish you a happy, healthy and safe holiday surrounded by friends and loved ones.
For the first time in a couple of years, I went to New England Patriots game last weekend. It was a thrill not just for this huge football fan to see the game in person, but also to tailgate and enjoy the company of some good friends. It was a great time ... especially as the Pats beat their division rivals, the New York Jets, 31-14.
Anyway, with a smile on my face, I was driving into work on Monday, listening to a local sports radio show interview Patriots Quarterback Tom Brady. They asked him a question regarding the Jets' QB, rookie first-round pick Mark Sanchez (who threw four interceptions during the game), and why he's been struggling lately. After all, the radio personalities said, Sanchez has all the arm strength and physical ability of some of the top QBs in the game.
To paraphrase, Brady replied that, first and foremost, it's hard being a young QB; you're still seeing coverages and blitz packages that you haven't seen before. Most QBs, in fact, struggle in their first couple of years. (Unfortunately for me as a Patriots fan, I do think Sanchez will be a very good player in time.)
But Brady also said something that I've been harping on for years: That the most important characteristics of a great QB are decision-making and accuracy. The quarterbacks that are best at those two traits are the most successful in the league.
Contrast that, however, with the average opinion held by most football pundits and fans. To them, the number one thing to consider is arm strength. Any college QB with NFL potential is tested on a host of throwing drills designed to reveal whether he has the arm strength to make all the throws required.
Mobility is another aspect commentators love to talk about in the QB. After all, if a QB is good at scrambling and throwing on the run, he's more likely to make "something out of nothing" when the play breaks down.
So why is it that most top coaches, scouts and players themselves know that accuracy and decision making are most important ... but commentators and fans focus on things like arm strength and mobility?
Honestly, I'm not totally sure, though I think some of it has to do with the fact that arm strength and mobility are easily measured. Accuracy and especially decision making are complex, and hence, don't get the attention they deserve. Maybe that's why so many franchises end up spending high draft choices (and millions of dollars) on strong-armed college QBs who never make it in the pros.
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Similarly, I believe there's a misconception about what makes a truly successful money manager ... whether that person is managing his own money, or other people's.
To the man-on-the-street, the qualities that make a successful investor are usually high intelligence--often demonstrated through an MBA and/or a resume chock-full of jobs at places with great reputations--and the ability to foretell the future ... the so-called "Seeing Eye" of investing.
In my opinion, that is totally missing the boat.
First of all, in the stock market, you're probably better off having a master's in psychology than one in business. Don't get me wrong, it is very important to be able to analyze companies, but for growth investing, you usually just need to cover your bases, as opposed to digging into the minutia of financial statements.
Far more important is being able to determine the "ruling reason" for why a stock is likely to grow many-fold in the years ahead. And for that, you need some experience (i.e., knowing how to spot revolutionary products and ideas), not necessarily an MBA.
Second, the so-called Seeing Eye--the ability to look at a bunch of data and determine what's going to happen six months from now--is totally overrated in my book. Yes, the best fundamental thinkers can often get an edge in this department, but in my experience, any edge gained over the course of a couple of years can easily be wiped out by some unforeseen event. Just take a look at last year!
So, you ask, what are the characteristics of winning investors? I can think of three that are particularly important.
First and foremost, discipline is needed. The stock market is such a contrary animal that it acts just about the opposite of a logical person. Thus, it's important to have a system that works, and to have the discipline to stick with it ... something that's particularly hard to do after a streak of wins ("I'm smarter than this system!") or losses ("This system is for the dogs!"). If you invest solely based on your emotions, you're sure to sell near the lows, buy near the highs and lose a ton of money.
Second is the ability to admit mistakes. Too many investors, both novice and veterans, let their egos get in the way of their decisions. If you're a growth investor, the most important thing you can do to improve your results is to never lose big. It's like having a great defense in football--if you don't give up any touchdowns, all you need is a couple of big plays (winning trades) to win the game.
Third, and possibly most important, is the ability to be flexible. As our founder Carlton Lutts has always reminded us, the music is always changing the stock market--when you get used to the market's waltz, it changes to a foxtrot, and when you're used to that, here comes the samba. Thus, you have to be willing to change your opinion in double-quick time ... or else risk being left behind by the market.
Notice that none of these three traits require 10 years of business school or an internship at Goldman Sachs. That's what's so great about the stock market--it truly can be an American dream--if you're willing to put in the work and learn what systems and habits actually work over time.
And that, my friends, is truly something to be thankful for.
Here are the most impressive stock market-related numbers I know of: 8, 6, 5, 2, 1, 6, 2, 8, 3 and 1. What are they? Those are the number of stocks on the NYSE hitting new 52-week lows during the past couple of weeks. In our very long history of data (going back into the 1960s), our studies show that when the number of new lows is this small, the market has basically zero chance of entering a prolonged decline.
In other words, this remains a bull market. And while I'm seeing fewer stocks that really jump off the page at me, one easy way to play a bull market is by investing in ... bull market stocks! What are those? Simply companies that directly benefit from a healthy stock market, companies like investment banks, asset managers, private equity firms, and so on.
My favorite bull market stock is Franklin Resources (BEN), which runs the Templeton mutual fund family. Like every other money manager, Franklin's business fell apart during the crash of 2008, but asset levels have roared back with the market this year--up from a low of $378 billion at the end of February to $523 billion at the end of October. And because the firm takes a cut of every dollar it manages, higher asset levels lead to higher revenue.
Better yet, the top brass has been adept at leveraging these higher asset levels into great earnings growth. The bottom line has jumped from 48 cents a share in the first quarter to $1.29 in the second and $1.60 in the third. Analysts expect $6 per share in earnings over the next 12 months, but I think that will be conservative, as the bull market in stocks drives asset prices higher ... and, importantly, attracts new money from individuals.
The stock has been consolidating for the past four-plus weeks, with good support around 100. A break below that level would be worrisome, but the odds favor higher prices. So I think you can buy some here, and look to add some on a breakout above 116 (hopefully along with a strong upmove in the market itself).
Have a great holiday weekend!
All the best,