In his book – Investing For Growth, Terry Smith discusses investing lessons from the Tour de France. Here’s an excerpt from the book:
Searching for an investment strategy or fund manager who can outperform the market in all reporting periods and varying market conditions is as pointless as trying to find a rider who can win every stage of the Tour. But this is precisely what many investors do. We persist in examining our funds’ performance in every reporting period, as often as every quarter, and sometimes exiting when a manager underperforms.
An element of this is sensible – investment performance has to be measured over some time period, and some funds are persistent “dogs” in almost all market conditions.
But a quarter is too short a period to judge performance reasonably, and even a year is just the time it takes the earth to go round the sun. It is not a natural time period over which to measure the performance of any business or investment unless it is linked to the earth’s orbit. To assess an investment strategy or a fund, you need to see its results across a full economic cycle with both bull and bear markets.
There is a lot of evidence to suggest that where investors are switching between funds and changing investment strategies, their timing is almost invariably wrong. Professional investors, in the form of trustees of endowments and pension funds, are just as guilty of this as retail investors.
They often ditch managers after a poor streak only to find those managers recover their touch, while those they have adopted start to underperform. That would be like Team Sky parting with a cyclist who failed to win a mountain stage, only to see him triumph in a time trial.
Even worse are any strategies which rely upon an element of market timing. As the old saying goes, there are only two types of investor: those who can’t time the markets, and those who don’t know they can’t time the markets.
Like the Tour, investment is a test of endurance, and the winner will be the investor who finds a good strategy or fund and sticks with it.
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