Investing is more than just luck! How can you tell if an investment has a lasting business model? [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Hello, everyone. Happy midweek!
We’re excited to share with you another investing insight in today’s “The Independent Investor.”
Every Wednesday, we publish articles about these kinds of topics with hopes to help you strategically think about your financial decisions and achieve true wealth in the long run.
Ready to know more about today’s feature?
Keep reading to understand the importance of studying not just the results but also the process of investing in certain stocks.
The Independent Investor
If you were asked to choose which is more important, what would you choose: Process or results?
Highly likely, some of you would pick the first one while there are also others who would pick the second one.
Generally speaking, both process and results are important. However, according to psychology coaches, while results are always desirable, the process is more critical especially in creating the desired result.
It’s because you gain much understanding by learning and working through the process.
This concept also applies to the investing scene…
Photo from James Clear
In April 2023, Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, delivered a coaching comment to his workforce at Valens Research.
According to him, in January 2023, some macro hedge funds came out of the woodwork to brag about their 2022 gains.
For example: Odey Asset Management, a boutique asset management firm in the U.K., returned a record 152% in 2022. Like other macro funds, it had bet on rising inflation. When inflation hurt the bond market, such funds profited big time.
As a result, Odey and its peers were quick to highlight their investing acumen. However, they’ve all gone mysteriously silent since then.
Professor Litman said he and his team at Altimetry haven’t heard anything from Odey since it gloated about its great performance in 2022… and they’re not surprised. Months ago, they warned readers not to get too excited about macro funds’ performances.
Why did Professor Litman and his team say this?
It’s because hedge funds have been relying on luck for years! Sadly, that’s not enough to succeed in today’s market.
Let’s dive deeper into these funds’ case studies…
Odey had been making the same inflation call for years… and for years, it was wrong. Between 2015 and 2020, the company lost 68%. During that time, the S&P 500 was up 82%. This shows Odey’s gains in 2022 only recovered its past losses.
Other macro hedge funds are also getting hit this year. In March 2023 alone, London-based Maniyar Capital and New York-based Haidar Capital Management lost over 20%. These funds were also known to bet on high inflation and rising interest rates.
Several hedge funds were even forced to shut down, especially when the banking sector took a hit. After the Silicon Valley Bank collapsed and the bank panic took hold, the odds of another rate hike vanished and took with them the macro hedge funds’ gains.
See? When institutional investors research a hedge fund, they tend to hyperfocus on the result. If they only look at last year’s performance, they would expect a similar performance in the future.
According to Professor Litman, that’s where the danger lies.
Process vs. Results
Today’s tough lesson from the hedge fund world also applies to stocks. Simply said, investors who put short-term performance over long-term strategy are putting their portfolios at risk.
Think about this: Some individual investors tend to place too much emphasis on what a stock did—if it went up, down, or traded sideways. While there’s nothing wrong with that, such focus on just the results causes investors to miss the bigger picture.
Sure, many investors get lucky, and many portfolios grow by being in the right stocks at the right time. However, take note that that’s what also happened with macro hedge funds in 2022. They got lucky. As plain and as simple as that.
That’s also what happened with lots of pandemic-era stocks. Case in point?
The “Buy Now, Pay Later” (BNPL) business Affirm.
In 2021, BNPL became a popular business model as more people were shopping online than ever before. They loved the option of paying for expensive items in interest-free installments. Because of that, Affirm looked like a great investment.
In January 2021, the stock went public at USD 49 per share. By November of the same year, it had peaked at roughly USD 168 per share. That’s an increase of over 240% in less than a year!
The thing is, Affirm didn’t do well because it’s a good business. It did well because online shopping took off. People were stuck at home with stimulus money to spend.
Unfortunately, things changed as lockdowns and other restrictions started to get loose. Today, Affirm’s stock is sitting at just around USD 11 per share.
Like macro hedge funds, Affirm’s success was short-lived. Those who bet on the company in 2021 are in for some pain today.
So, what can you learn from these examples?
The best investors are those who understand that process is as important as performance. In fact, they might even believe that process is more critical!
According to Professor Litman, you should be careful not to get fooled by one or two great years in a particular stock. If you invest in mutual funds or actively managed exchange-traded funds (ETFs), you have to resist the urge to quickly jump into one that’s coming off a record year.
Besides, it’s not surprising that when the market is going strong, nearly everything rises with the tide. Companies without a strong process tend to come crashing down when things go south.
That’s why when researching a company or fund, don’t be fooled by short-term gains. Instead, check first whether or not the investment has a long history of success through all kinds of market conditions.
Look for green flags, such as innovation history or a sound business strategy. That’s one of the ways you can tell an investment has a lasting business model AND isn’t simply relying on luck.
Take note of these investing insights and apply them to your financial decision-making!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
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Valens Dynamic Marketing Capabilities
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