Creating real wealth
by Alan Friedman
When we think of Warren Buffett, Bill Gates, Jeff Bezos or Elon Musk we all recognize the obvious. They are billionaires. Enormous wealth that was created by owning amazing businesses over very long periods of time. Through good and bad times the fruits of their labour took decades to harvest.
Investing is a marathon. Yet today the markets are dominated by short-termism.
The recent third quarter report from Cymbria Corporation resonated with me and I want to share it with you:
“While society continues to make advancements in many areas, one area that’s going backwards is people’s attention span. According to a study by Thomson Reuters, the average holding period for U.S. stocks by retail investors has declined from eight years in the 1960s to less than five months as of August 20201.
Although we know that having a long-time horizon is extremely important for long-term success, the average holding period for investors has shrunk by 95%. Most self-made fortunes are largely the result of owning and growing a business over years, possibly even decades, but surely not mere months.
Stocks represent ownership interest in a business, not just pieces of paper to speculate on the marketplace.
Are professional investors any better?
Even though they’re highly skilled with advanced education and often CFA designations, most professional investors still underperform the index. Why? They’re also impacted by short investment time horizons.
On average, the clients who invest with these managers only stick around for a couple of years, so fund managers are under immense pressure to produce immediate returns. If they don’t, then clients may leave, and if that happens too often, the manager may lose their job.
This short-termism creates two results among professional fund managers: closet indexing and excess portfolio turnover—which both work against the best interests of investors. Closet indexing occurs when professional investors clone their portfolios to basically match the index, all in the name of not underperforming. The problem is you can’t outperform when you own essentially the same stocks as the index, and you’re almost guaranteed to underperform when you factor in the higher fees and expenses the active managers charge.
Over the last quarter, inflation has been an increasingly important topic of discussion. As seen by the historically high relative valuations in the market today, it seems that investors are betting on inflation being transitory.
The world is unified in their view of the future meaning they are positioned for the same outcome, which includes low interest rates and “big grower” companies continuing to trade at historically high relative valuation premiums2. Similar unified views have occurred every decade dating back to the 1980s.
If history is a guide, we don’t believe this will end well for investors who share this common view. Understanding this and learning from the past provides us with an edge over other investors.
We’re seeing a record level of trading volume in the market today coming from retail investors3. The average retail investor is likely not performing a proper analysis of a business prior to purchasing their ownership stake. Our investment team has decades of experience analyzing and applying our investment approach. We believe we have an edge over the average retail investor.
Managing career risk on the investment team is not rewarded. Members of the investment team are rewarded for managing our investors’ interests. We develop proprietary insights around each business that we own. Cymbria would not purchase a business just to try and match the performance of the index. Staying true to our investment approach is an additional edge we have.”
Successful investing is not for the faint of heart or for those focused solely on immediate gratification. Successful investing requires discipline, a definable process and the kind of steely determination necessary to handle the market’s inevitable roller coaster ride.
What I recognize is that the billionaires, the investing icons like Charlie Munger and Warren Buffett and all successful investors stayed the course. Instead of concerning themselves with the market price of their companies during the typical ups and downs of the market, they persevered and built the value of their enterprises.
Their reward can be counted in billions. We should take note.
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1Source: Chatterjee, Saikat & Adinarayan, Thyagaraju, “Buy, sell, repeat! No room for ‘hold’ in whipsawing markets,” Reuters.com, Aug. 3, 2020.
2Big Growers are a group of approximately 75 large-capitalization stocks classified by Empirical Research Partners, LLC to have faster and stronger growth credentials than the rest of the market.
3McCabe, Caitlin, “It isn’t just AMC. Retail Traders increase Pull on the Stock Market,” WSJ.com, June 18, 2021.
Alan Friedman is an Investment Advisor with CIBC Wood Gundy in Toronto. The views of Alan Friedman do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client please contact your Investment Advisor. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.