Investing consistency

I enjoy running, maybe something inside me is mis-wired, but I truly enjoy running outside, even in the cold.  I'm competitive and enjoy pushing myself and will occasionally entering a race.  It's fun to compete in a race and try to set a personal best.  I've had races where my times were abnormally good.  Everything was perfect that day, the weather was crisp, the course flat, competition a good match, and I was feeling good.  The race went perfectly and I achieved a time that was unrepeatable, at least until events line up perfectly again.  If you race enough you'll have more than one perfect day, maybe a handful, maybe a few dozen.

Anytime I ran a perfect race I knew it.  I could feel that what I had just accomplished was unlikely to be repeated soon.  I would enjoy my personal best, but in my mind it was always hedged with the thought that I couldn't really do it again, or maybe I didn't quite earn it.

In running like most sports the path to success is consistent practice over a period of time.  You don't train for a race by running haphazard varying speeds during practice.  You build up both time and distance with practice.  Consistently hitting goals in practice results in predictable race times.  If I could run five or six miles daily at a seven minute a mile pace I knew I could run a 5k at a 6-6:30 pace (note I said above I like to run, not that I'm fast.)  My race outcomes were predictable because I had a repeatable practice process, and in practice I ran consistently.

When I think of investment returns the parallel to my running experience comes to mind.  It's possible to have a few fluke races (abnormal years), but if you don't have a consistent process or a repeatable process you won't have any assurance that you'll consistently outperform the market.

Wall Street loves high flying managers and highly successful individual investors.  The financial media complex loves volatility.  A manager who beats the market by 30% one year then trails by 10% sells lots of articles.  Investors love these stories too.  They either evoke envy and a desire to do better, or feeling of accomplishment for not doing as poorly.  The problem is that as investors constantly read read articles like this they begin to think this is what normal investing looks like.  A few great years followed by a minor blow up with a spectacular recovery and then another year or two of underperformance for a record that barely beats the benchmark.  A strategy like this will get you on the front cover of magazines, but it won't build wealth over the long term without either a lot of antacid, or resilience.

I sometimes wonder about Bernie Madoff's investors.  Madoff's ploy was brilliant, a fund that returns 12% annually forever.  A lot of investors, especially recently would scoffing at Madoff's measly 12%.  But this was 12% forever without down years compounding into eternity.  Of course it was a fraud, but the return is what fascinates me.  I'd think it'd be easier to deceive investors by having a few big up years followed by a down year that gives the paper gains and more back.  That way you could just adjust performance for how much investor money remains after most of it is spent.  Yet that's not how it worked.  Madoff's investors were usually successful individuals who understood the magic of compounding.  To these investors consistent results were highly valued, valued above any other strategy.

One of the secrets of investing is that avoiding losses and slightly above average returns beats a volatile return profile with both high highs and low lows.  I consider this a secret because most investors forget the market can fall fast.  The majority of the time stocks are in a bull market with brief downturns, but if one isn't prepared a downturn can take away years of gains or more.

Over the past two years I've heard a number of investors say they are searching for stocks that double or triple in three years.  I believe this was first popularized by Mohnish Pabrai, a value investor who looks for the same thing.  Many of these investors have done well for themselves, but not consistently.  Some stocks do return 2-3x or more in a short period of time, while others fail to do so. Often the large gains from a few stocks are enough to counteract the losses and the portfolio beats the market.  While many of these investors are looking for 2x-3x gains their portfolios are only appreciating at 20-30%.

Long time readers are aware that my goal isn't to set individual year records with my portfolio performance.  Instead I strive for investing consistency like I do with my running.

To achieve consistency in investing one needs to first know what they're looking for.  I look for undervalued stocks by either assets or earnings.  I will buy a growing company if there is a true undervaluation present.  Secondly an investor needs to know how well they've done in the past.  If I say that I like to buy stocks at 50% of private market value implying a 100% return then I should check my statements to see what my success rate at picking these stocks is.  And lastly if I have been successful with this in the past I need to develop a repeatable process that I can use again in the future.  The success and repeatability of a strategy is measured through market cycles.  I haven't been investing through many cycles myself, but the style I use has been tested since the 1930s.

When I find a new stock I ask myself "how is this undervalued?"  If I can't answer it in a way that fits my investment style then I usually take a pass.  That doesn't mean it's a bad investment.  It just means it doesn't fit into my process, my path to generating consistent results.

For me the key is that I believe it's much easier to consistently find stocks at a 50% discount to private market value rather than finding stocks blast off like a rocket and appreciate 2-3-5-10-100 times.  It's not to say that I don't stumble on those gems, I have, and plan to in the future as well.  It's that it's easier to consistently find simpler mis-valuations.  And if I can build a portfolio of simple mis-valuations I can somewhat estimate my future returns.  Just like in running where my practice determines my race times in investing our process and the consistent application of it generates our returns.

The problem with a strategy like this is it doesn't get a face on a magazine cover, and it isn't attention grabbing.  For many years it's boring and it really only pays off after years of compounding.

I don't believe my 'brand' of value investing is what's right for everyone, but I strongly believe in the theme of this post.  Everyone needs to find the style of investment that they're good at, and instead of shooting for the stars look for places where consistent returns can be earned with a small potential for loss.


  1. Interesting post!

    I think your most important point here is to be consistent. Even if you use a Pabrai style strategy, i.e. picking 2-3 stocks per year with the potential to triple or quadruple I believe you will get good results if you do it consistently. I mean, you can misjudge a stock a bit and you will get quite good results even if it "only" doubles every three or five years. Aim for the stars...

    Pabrai has done quite OK with an annual return of 26 % for 20 years, even if his portfolio dropped 67 % during the financial crisis.

    You could also pick some mechanical strategy (really any mechanical strategy as long as it aims on buying cheap companies) and you will do OK if you only use it consistently. Both in good times and in hard times. Basically every value investing study I have read shows these results but the key to getting these market beating returns for real is the consistency. That is where most investors fail.

  2. Nice analogy; value investing requires a fair amount of emotional endurance. Be skeptical of your own short - run market beating performance.

  3. The first line caught me -- I would say the miswiring occurs in those who are comfortable sitting inside for 8+ hours a day, especially in a 5x5 cube under artificial light.

  4. Another great post as always... Thanks for taking the time to write and share these.

    For me, I think part of Madoff's genius was to "only" offer 12% returns. While any serious investor knows that consistent 12% returns is fantastic, I think the general public would consider it on the low side. Hence, his investors didn't consider the return too good to be true. Now, the consistency of the return was clearly too good to be true, but I don't think the general public appreciates how unusual consistency is, so they didn't see that as unusual.

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