Investing Lesson: Following Those With Great Short Term Results Without a Long Term Track Record

Something that took me way too long to learn

I am trying something new here and sharing some lessons I have learned during my years in the market. Some of my lessons I learned right away, more often though it has taken longer than it should have.

To be honest, I don’t feel comfortable giving advice. I do not feel qualified enough to give guidance to someone I do not know personally. What I can do is share my experience. Maybe this will help you and maybe it won’t.

Top Performers

This one feels like now is a good time given the how we all just told everyone how good our returns were in 2023 if you beat the index, or why it’s not important to pay attention to one year’s performance if you didn’t (like me). The last year there seem to be only two investors, those who own (some or all of) the MAG7 and those who don’t. As well Twitter/X is always full of people boasting about performance. Most will focus on the last 3-12 months. Few will focus on 3 and 5 year returns.

Most of the time the top performers over the course of one year have picked some sort of macro theme and have made purchases that were levered to that specific call. This could be leveraged businesses, leveraged securities, or both and they have subsequently shot the lights out. It’s so seductive and tempting to jump on board with them. Thematic investing is easy to market.

My Initial Experience as an Investor

When I was first starting out as an investor I wanted the highest returns possible to reach my goals as soon as possible. I willing to take a bunch of risk. I mean, in theory more risk = more reward right? At least that’s what the academics say. I wanted out of the corporate world asap and I wanted people to think I was smart.

I started during the tail end of the bull market right before the financial crisis (2006/07). The companies that thrived during that market were commodity producers, miners, banks, and anything exposed to Emerging Markets. Since this was the only market I experienced personally and I could really only grasp the basics of the prior market cycle (the tech bubble), I assumed that this was “normal”. I cut my teeth listening to gold bugs on BNN touting how the FED was useless and oil was going to 200. Crazy stuff. Though many of these companies went on to perform well immediately after the financial crisis, they have lagged the market overall for essentially a decade now. Those former rock stars where now washed up has-beens.

That didn’t stop me from sitting at my computer and attempting to will my stocks to go up each day lol. Month after month of underperformance was painful and I was too thick headed to think critically.

Fast Forward to Today

What I have noticed is that investors still gravitate to who has performed the best in the last year or two and try to replicate what they did from a top down standpoint rather than from a bottom up and process standpoint. I too was like this for many years. I would see who did the best, listen to them intently on BNN, regurgitate what they said and then convince myself that they would continue to outperform. To be fair, many managers do continue to outperform for decades, but they don’t make regular TV appearances to strum up more AUM. The truth is many most fail to outperform. For every Turtle Creek there are probably 100 laggards (maybe 1000).

What am I really getting at here? Well, the promotional investors/managers are great at marketing. They will remind you of their winners, and rarely (if ever) discuss their losers.

So what was my lesson?

It’s pretty simple…. The investors I listen to have been around for several cycles. They have seen what works in one market won’t work (or work as well) in the next. They also tend to be way less promotional and many times have less than 1000 followers. They have good and bad years, and I have noticed that they are usually not the top performers for each every year. They seem to consistently be in the top quartile or decile consistently. They have found what works for them and have executed.

I want to learn from someone who has been an investor for 10-15 years, not 10-15 months. Surviving is (at least) half the battle. It’s easy to stuff $1,000 into some illiquid microcap or do a paper trade on a spreadsheet, but actually putting large sums (or large to me) to work while keeping all the other plates spinning is borderline heroic. The phycological toll is something you need to experience before truly understanding it. I’m not saying I don’t get ideas or learn from investors with less experience than me, it’s just that I like to follow someone with some battle scars and big winners. Many of these younger investors are likely to outperform me over the next 10 years FWIW. Though I am always trying to outperform the market, I am not trying to shoot the lights out every year. I have more of a balanced approach to risk and reward as I see it.

Wrapping Up

What took me too long to learn was to look beyond the last 1, 2 or even 3 years and see what the performance was of the investors I held in high regard. Having a blowout year then giving most or all of it back seems a it counterproductive to me. Look at the covid winners and ARKK or some of the SPACs. Insane stuff. If I was to follow the top performers of 2020-2021 I would be back to being a working stiff. The very idea of working on another person’s schedule gives me the cold shivers.

Is this something you experienced? Or where you smarter than me and learned this right away? Feel free to comment below.

Thanks for reading.

Dean