In his book – Investing for Growth, Terry Smith says investing is like a marathon, requiring long-term commitment rather than short-term strategies. He compares investing to using 400-meter sprinters instead of a steady marathon runner.
Constantly changing fund managers or stocks is risky, akin to frequently passing a baton, which can result in timing errors or dropped batons. Unlike relay races with pre-selected runners, investors must make decisions on the fly, increasing the chance of mistakes.
This highlights the difficulty and risks of trying to time the market and the importance of a consistent, long-term investment approach over reactive, short-term changes.
Here’s an excerpt from the book:
I will leave this subject with a sporting analogy. We are often told that life is a marathon, not a sprint. So is investing. Most of us will be investors for the majority of our lives. If we start investing in our 30s, with current average life expectancy, most of us will be investing for over half a century.
It makes Mr. Munger’s 40-year example seem a bit short. So why we should think about what happens over shorter time periods, like quarters or even years, is a bit of a puzzle.
However, some people behave as though the best way to win this marathon is to engage the services of one hundred and five 400-meter runners (26 miles 385 yards or 42.195 kilometers divided by 0.4 = 105.5), who could surely run the distance faster than a single marathon runner.
The analogy in investment is a strategy in which every so often you change the fund manager or stocks in your portfolio to suit whatever change you expect in market conditions. The problem is this: if you choose the one hundred and five 400-meter runner route, I presume that to make the contest against the marathon runner realistic, you have to carry a baton that you hand over to the next runner.
This is the equivalent of you making the decision to sell all your high-quality stocks and switch into somewhat cheaper (although maybe not cheap) cyclicals and value stocks.
However, I seem to recall that very often that baton gets dropped, or the changeover is not made within the allowed zone and the team is disqualified. I suppose the investment version of this is that you get the timing of your switch wrong, or you sell one strategy but remain in cash.
The problem in trying to apply this sprint strategy in the real world of investment is even worse. In a relay race, the runners for each stage are selected in advance. Whereas in an attempt to apply this technique in investment, you would need to select whom you wish to receive the baton as you enter the changeover area each time.
After all, do you know in advance whether you want to go from high-quality consumer staples to financials, commodity stocks or industrials, emerging markets, bonds, or some combination of these? The scope for fumbled handovers is endless. And you have to do it many times to succeed with this approach.
You can find a copy of the book here:
Investing for Growth – Terry Smith
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
One Comment on “Terry Smith: The Marathon Approach to Investing”
The implication is that you should always be patient with poor results. It seems to me that the missing critical concept is judging when you should switch managers or philosophies.