Consistency in investing style pays off

Value investing focuses on investing in companies that could be trading at a price below their intrinsic value, i.e. their book value. These can be companies that manufacture goods or services whose demand is unlikely to fluctuate much, allowing for more predictable cash flow that translates into constant dividend payments. For example, think of companies in the consumer staples sector. These are companies that sell the products we use every day: food, beverages, housewares, and hygiene products. The demand for these companies is inelastic, or to put it another way, they are “must haves”. Even with rising prices, not much changes for demand. These are the types of companies that value investors tend to focus on because they are looking for a constant return on investment that doesn’t necessarily outperform the market.

Another example would be investing in growth or looking for companies with higher sales growth potential regardless of earnings. These are companies whose products or services may not generate sales, but whose future earnings potential is high. These can be companies with great technology and product ideas, but who don’t have the products to sell yet. In fact, they may not even have the products for sale – just prototypes. We have seen this recently in the electric car space, for example. Growth companies typically have higher potential for investment returns; however, they are more likely to mismatch with their returns.

A third style that some investors use is momentum investing. This relies heavily on drawing the price of stocks, assessing their daily moving averages, and then buying with the idea that they will continue on a similar moving average. Examples of momentum investing could include an investor continuing to invest in technology stocks that have shown consistently positive stock performance, or even more recently, investing in the newest “meme” stocks – those that are popular online right now.

All of these styles have a historical track record. The key point, emphasizes Robert, is to choose a strategy that you think best fits your needs and risk tolerances, and then stick with it. If you “chase” styles you can get yourself into trouble.

One of the biggest mistakes some investors make is switching from one style to another because a particular strategy is underperforming. Why? Because one of the most powerful forces on the planet is reversing the mean.

Mean reversion is the principle that returns on assets are generally stable over time and are approaching their average. For example, asset prices tend to go back above their average price after staying below for a period of time to reach a historical average. Conversely, the market tends to move back down when the current value of an asset is above a well-established fair value.

So if you buy during a down cycle and then switch because an asset is underperforming, you have been hit twice because you bought when it went down and then sold before it could go up.

For sports fans, take the 2021 Atlanta Braves World Series MVP Jorge Soler as an example. If his batting average in his career was .250 (baseball pays 25%), would that hypothetically mean that he literally scored every four times in a row? No. That’s just the overall average, or mean, after all the numbers (also called hits) have been calculated.

Let’s say he hit a month with 500. Based on his usual average, it would be pretty safe to bet that he wouldn’t get as many hits in the following month. If he falls into a punch dip of 0-20, you can assume that he would hit more effectively over the next 20 hits. As long as you have enough data, you can find the trendline and make logical decisions. Investment styles work in a similar way.

Find the investment style that fits your goals and risk tolerance and stick with it. FOMO (fear of missing out) can ruin a solid investment strategy. To combat this, Robert recalls the wise words often attributed to JP Morgan: “Nothing undermines your financial judgment like the sight of your neighbor getting rich.” Do not compare your situation to anyone else’s. You have no idea what your neighbor’s portfolio looks like behind the scenes. Focus on yours.

Jorge Soler does not change his stroke technique because of a bad game. He continues to swing with confidence knowing it will bring him successful results over time. The next time you’re tempted to chase styles, just make sure he sticks with his.

This information is provided to you for informational purposes only and should not be viewed as investment advice or recommendation. Investing involves risks, including the potential for loss of capital. There is no guarantee that investment returns, returns or performance will be achieved. There will be periods of fluctuating performance, including periods of negative returns. Past performance is not an indication of future results when considering any investment vehicle. This information is presented without regard to the investment objectives, risk appetite or financial circumstances of any particular investor and may not be suitable for all investors. This information is not intended and should not be used as the primary basis for any investment decision you may make. Always consult your own legal, tax or investment advisor before making any investment / tax / real estate / financial planning decision.