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Part 2: Stay or leave?

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Part 2: Stay or leave?

In our last article we demonstrated that ‘time in’ the market is clearly important but let me first remind you that if you are investing for the long-term, you must stick to ‘quality.’

By quality, I mean quite simply, in companies that have the ability to generate high returns on their incremental equity.  A company that is regularly and sustainably able to retain a large portion of its annual profits, and reinvest those retained profits at high rates of return, will generate very pleasing results for shareholders over the long run.

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To revisit Part 1 of this article, please click here.

[1] “rolling ten year returns” means 1927 to 1937, 1928 to 1938, 1929 to 1939 and so on.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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14 Comments

  1. First a question/comment and then a question on stocks that may one day disappear then hedge funds or portfolio managers.

    (1) Your quote “As a very successful investor once told me: ‘Roger you’ll get rich buying and selling, but you’ll get wealthy buying and owning, buying and owning, buying and owning.’ He stressed the absence of the word ‘selling.’” Is the dollar cost averaging that the previous poster was talking about?

    (2) Suppose you are buying low and buying high as in (1) in a particular equity. Suppose this equity was in the slide rule industry. The slide rule industry becomes redundant because of calculators, computers and spreadsheet programs. When you invested in the early days of the issued equity, everything was going well for a number of years. Related to impossiblity or difficulty of timing and taking a long term look, when does one see that new technologies will supplant the old technology and when to withdraw/liquidate that particular equity?

    (3) It seems that markets comprise of long term investors and short term investors. Please correct me on the following if I am incorrect. If long term investors is the most successful way of achieving above-average returns, then how do hedge fund managers and portfolio manager achieve returns when they are constantly buying and selling equities? I am aware they use metrics such as betas (not option betas) and the decision to drop or keep equities is based among other things these metrics. Even though you mentioned a fund manager saying the best returns were from deceased investors or those who forgot they had investments with a particular fund manager had the best returns.

    At the same time, one of the ‘youngest’ rich in Australia (Mr Simon Coffey) was a hedge fund investor. What tools did this former fund investor use to have great returns. Yes I am aware of risk being proportional to returns, and also aware that the originators of the Black Scholes models went belly up with their investors. But there are successful hedge fund managers. I am not saying to imitate them, but what additional tools do they have that enables them to have above average returns and buying and selling in a shorter time frame.

    Thank you
    Anthony of Belfield

    • Sounds like you have some research ahead of you Anthony. There are indeed hundreds if not thousands of ways to generate returns from securities. Indeed there are as many variations on major approaches, as there are managers themselves. The interesting question to ask yourself is; if you discovered a method of long term investing that worked, what would motivate you to find something shorter term. if quick gains are motivating you, you may be taught some very expensive lessons that are easily avoided by sticking to the long term approach. Also google Warren Buffet’s bet against a portfolio of hedge funds.

      • Dear Roger,
        Thank you for the reply. I found a couple of references to Warren Buffett betting US $1m that he could beat the hedge funds. Buffett invested in an index fund which achieved a return of 125% versus 36% by the hedge fund. Mr Buffett won the bet.
        Anthony of Belfield

      • Thank you again for the reply. Suppose you invest for long term in a stock. By virtue of the technology/IP , it’s a high barrier-to-entry stock. Over a couple of years, bar the patent expiration of 20 years, there comes another technology not even based on the patent but is “better”.

        Again you have been in the long term with the original stock, but there are competitors who offer a better, faster, more efficient application.

        Since you cannot predict the time of any major turning point, low or high points, when is it time to withdraw from your long term investment. For example, invest in slide rules for the long term, but then comes calculators, computers and spreadsheet programs.

        Keywords: initial stock high tech, long term, new technology, when to liquidate stock.

        Thank you again,
        Anthony of Belfield

  2. Brett Edgerton
    :

    Interesting read, Roger. Thank you. Just wondering if you have been buying Tencent (or Alibaba) in the current turbulence? Would be interested to read an update on yours and the Montgomery’s team’s views on Tencent in particular (following the August 23 note) – it is down over 40% from the March peak – historic buying opportunity or real concerns over America’s “re-framing” of it’s (and much of the western world’s) relationship with China? (Disclaimer – I have bought two tranches of Tencent stock this month)… (Also bought some more MOGL today, too :) )

  3. Hi Roger, Your comments regarding timing the market surprise me a little, possibly directed at busy people, who don’t live and breathe the market, company reports, interest rates, economics, social trends etc, like me …(and you). Clearly, you have been of the opinion that the market is way too expensive, and has been for a long time. I’ll bet your funds hold lots of cash. I find myself agreeing almost everything you say. Its just that you seem to think of things first. Ha. Consequently, I am now heavily in cash and look forward to your future comments in regard to buying quality companies at great prices.

  4. Hi Roger, Your comments regarding timing the market surprise me a little, possibly directed at busy people, who don’t live and breathe the market, company reports, interest rates, economics, social trends etc, like me …(and you). Clearly, you have been of the opinion that the market is way too expensive, and has been for a long time. I’ll bet your funds hold lots of cash.

    • The people reading our site are generally investors with Montgomery, or investing in their own capacity, so the common questions we hear are being answered in our posts.

  5. Hi Roger
    Whilst I agree with you that random decsions to buy or sell will likely lead to underperformance those who trade a system with an edge can achieve outperformance. If you can find time in your busy day have a look at Gary Stone’s Share Wealth System and their equity curve based on traded fact not fiction as it’s beeen traed with real money not just theory.
    Best regards
    Tim

    • Thanks Tim, The question is not whether the system is profitable after transaction costs, the question is whether it beats a buy&hold strategy. I have seen plenty of marginally profitable tradings systems, which if leveraged over many trade are profitable but they often fall over when compared to simply buying and holding.

  6. Hi Roger

    Isn’t holding cash to buy businesses when they are priced attractively and avoiding buying when prices offer poor future returns “timing the market” ?

    I agree that “timing the market” is hard to achieve, so a “dollar cost averaging strategy” is a way of mitigating timing issues for Investors with a greater than 10 year investment horizon , but for Investors with a short investment horizon, sequencing risk makes timing critical. Timing issues have different outcomes depending on an Investors time horizon – there is no single strategy that applies to everyone. Your article correctly points out that the longer you stay invested in “Quality Businesses ” the better the outcome , but even that strategy is somewhat flawed if the price you originally paid for those ” Quality businesses” were overvalued. I still believe that “timing is everything” even though it’s hard to consistently achieve and “time in the market” is an OK strategy for those Investors that have long investment horizons ahead of them.

    • dollar cost averaging or what I once termed dollar crash averaging can make sense. Obviously loading up when the price is very attractive will work better than dollar cost averaging if the market price then tears off.

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