You know it makes sense
Stanley Druckenmiller, one of the titans of the hedge fund industry and the man who famously made $1 billion shorting the British pound with George Soros in 1992, was recently asked about the most important lessons that he learned from Soros during his time as the lead portfolio manager for the Quantum fund.
He says: “I’ve learned many things from him [Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
It’s hard not to agree with the logic. To materially outperform the broad Index benchmarks over long periods of time, two things need to be performed consistently well. Do everything you can to protect your capital at all times, and invest with conviction only when your investment process says everything is lining up.
Whilst many investors attempt to try and just pick winners we believe it’s as important (if not moreso) to avoid the losers. The logic for doing so falls back on some simple investing principles that we are all aware of, but perhaps because they are so simple, often ignore.
In particular, we are referring to the fact that if you incur a loss, simple math dictates a larger return is required just to get back to where you started. A loss of 50 per cent will require you to make a 100 per cent gain (and double your money) just to get break even. That’s not easy to do.
Which is why at Montgomery Investment Management, we have a different bent to most. Unlike many of our peers who are forced to be close to fully invested at all times, we don’t have to be.
Our investment process is deliberately structured so that at any point in time, we can protect our investors’ funds by holding cash – and we can hold lots of it – in our portfolios.
For we have the luxury of being able choose when to deploy cash into investments such as listed Australian equities
We believe this is important, and it naturally affords us the luxury of only buying shares in listed businesses when we collectively perceive that the risk-to-reward ratio is in our favour.
Protecting capital and waiting for the more obvious opportunities is just as important to us as picking winners. This is something we believe is plain common sense. And by doing so, we can be more confident (but never certain) of a positive return, rather than hopeful of one.
Sure, the ‘value add’ from picking winners is admirable and something everyone loves to gloat about. But a focus first on minimising disasters and downside risk, whilst not as exciting, is a better goal, and one that results in an improved, long-term outcome for our investors and hopefully, less of a roller-coaster ride.
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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Tony C
:
Hi Roger
Thank you for clarifying that. When i initially made my investment in the fund i rang and spoke to David and he told me only the flagship fund would move to cash in the case of a overvalued market so i only invested half of the amount i wanted to invest
I feel much more comfortable about my investment and adding to it now
I also regret not investing the full amount with you as i have been very happy with the returns
Roger Montgomery
:
Hi Tony,
Likewise, we’re delighted to be working for you.
Tony C
:
Hi Roger
But what about the poorer investors hear in the retail fund. If i understood the mandate of the fund correctly the retail fund will move to a maximum of 25% cash when when there are no more fairly priced assets to purchase or we move to a over valued situation
Roger Montgomery
:
Hi Tony, That 30% weighting is a “soft” target. In extreme situations (which we expect may only occur every six years” The fund can have 50% cash or even more, but I must emphasise this would be rare and we expect only once every half decade or so. If you think about how many corrections there have been since 1900 and how relatively quickly the very high quality companies have recovered, you should not be so worried about corrections, indeed you should wish for them!
Chris B
:
Good article.
Charlie Munger played poker in his military days and learnt from that that when the odds are strongly in your favour, you must back yourself and throw some weight behind your decision.
Stock allocation is very important for your portfolio. There is always risk in investing and to allocate according to upside potential and downside risk is important.
Investing is different to gambling in that you can monitor the risk far more. You may not know if the horse will run good on the day or in the wet but you can see sales are deteriorating and exit the investment without being hurt to much if you monitor things well.
Andrew Legget
:
Nice made points Russell.
This has been some of the biggest lessons i have learned during my time educationg myself on investing. As a result i have come to the opinion that minimising the negatives is a very important thing indeed.
Being able to spot the bad companies is just as important as spotting the good ones and i have spent considerable time teaching myself to spot both.
Also, the psychological side of investing is something that needs to be worked on. Increasing your will power against premature buying. That itchy trigger finger can be very dangerous even if the company is a quality one.
I am a big fan of the model you guys use at montgomery and think that it is the logical way that fund managers should be acting for their clients. If i invest money in a fund, my chief concern is that it will be protected and grow rather than donating my money to a hunger games style investment game between fund managers trying to outwit each other as they are forced to invest in not just their A opportunities, but ther B,C,D and beyond opportunities.
I know some people might have issues with that considering they pay fees etc but to me your style does, as the title says, just make sense.