This tweet was prompted by the debate – online, and sometime offline between the different approaches to value investing. These debates appear like religious arguments with each side claiming their god is the superior one.I have never quite understood the point of these debates. There is obviously no single way of making money in the stock market. There are short term traders, buy and hold guys, debt specialists and all kinds of people in-between. Each approach has its strengths and weaknesses and no one can claim that a specific approach is inherently superior to the other, unless they are equally proficient in both.
I have come to realize that the most important factor to long term success is to understand which approach suits your temperament.The value of learning
Some of you who have followed me on my blog, would have noticed that I try not be a dogmatic about any specific style. I have tried multiple approaches and continue to do so. I do have a dominant style which suits my temperament – buy decent quality companies and hold them for the long run, but I have tried deep value, arbitrage, options and all other types of investing.
Most of my experiments have been failures (see here and here) from a monetary perspective, but they have deepened my understanding on what works and does not work for me.A valid question would be – why bother? Why not find an approach which works for you and then just stick with it (and maybe even publicly defend it as your faith :) )
Let’s consider an analogy – let’s say you are a sculptor who likes to make figures using wood, stone and other materials. Let’s assume you are exceptionally good at making stone sculptures, but not so great on wood. You go to an exhibition and see some great wood figures and happen to meet the artist. The artist tells you about his techniques and the tools he uses. Assuming you want to get better on wood, will you start laughing at this artist and belittle his tools?In a similar fashion if you are a deep value investor, what should be your reaction to the success of investors who buy and hold seemingly overvalued stocks?
I know what the first objection is to this line of thinking – The success of these investors is just dumb luck. These guys are not really practicing value investing, but a form of momentum investing. It is just that the momentum has lasted for 5 years in some of these cases, and sooner or later this bubble would burst.My counter point – sure that is possible, but what if this bubble has lasted for 10-15 years in some cases. Will you still just wave away these anomalies and label them as flukes?
I prefer to take a different approach. There is no religious debate to this in my mind – if something has worked for 3+ years in the stock market, then it is worthy of investigation. A lot of bubbles and temporary fads usually get washed out in 2-3 years and so 3 years is good cutoff point.Why not 5 years? Well now we are moving from the physical to the meta-physical :) and debating the nature of reality