Vol II, No. 12

January 2015   

 

 

A monthly commentary about the role of behavior (and misbehavior) in investing

 

 

The Misbehaving Investor
     

The recent ups and downs of the market aren't always a lot fun - but they can provide opportunities to investors with the willingness to act when many others aren't. 

  

John Feb 5  

John Heldman, CFA

President
jheldman@triadim.com


Dave Hutchison, CFA
Managing Director
dhutchison@triadim.com
About Us

Triad Investment Management manages equity and balanced portfolios with a focus on Research, Behavior and Ethics.  We invest in companies with a business-buyer's perspective.  Founded in 2008, Triad is a 100% employee-owned SEC registered investment adviser.  Learn more at www.triadim.com

 

Triad has $138 million of assets under management as of December 31, 2014.  The Concentrated All-Cap Equity composite return, annualized and net of fees since inception, is 10.9% vs. 8.5% for the S&P 500 Index  (April 30, 2008 to December 31, 2014). 


Please read the above performance in conjunction with our Concentrated All-Cap Equity composite presentation. Past performance does not guarantee future results.


 
 
Triad Small 1-24

Mr. Market Meets Mercury

 

I don't remember much Greek and Roman mythology from high school, or college for that matter.  Let's just say I was more interested in other things.  But I do remember a few things about Zeus, Jupiter, Apollo, Mercury and the other cast of characters.

 

Mercury, for example, was the messenger of the Gods, able to jump from place to place.  It's also thought that the name Mercury is related to the Latin words merx (merchandise), mercari (to trade) and merces (wages), all terms of commerce.  Today, we call a person who can jump from nice to nasty in no time a mercurial individual.

 


The Robinson Library

 

Mercurial can also describe markets, whether stocks, interest rates, currencies or commodities, which can switch from nice to nasty, pleasant to petrified, in a very short time.  We call this effect volatility.  Up and down.  We don't mind the up volatility.  But the down part grabs our attention every time.

 

Volatility is an inevitable part of most long-term investing.  Of course, volatility is avoidable.  Just park your assets in a mattress or savings account.  Guaranteed no volatility.  But of course, no earnings either.  Darn, always a tradeoff in life.

 

We're no great fans of volatility, except we believe increased volatility generally creates more opportunity for higher long-term returns.  It's sort of like going to the gym to exercise.  I don't always look forward to going, but once I get there and am exercising I feel great.  So it is with volatility.  When volatility arrives, the feeling isn't great.  But when the opportunities are seized and you look back months later, the satisfaction from taking action amid market turmoil can be quite fulfilling.

 

We believe that the long-term results of many patient investors have been enhanced by the periodic market turmoil we've witnessed over our careers. Volatility tends to create occasional but meaningful disparities between stock market price quotes and business values.  

 

But, the critical behavioral trait is this: YOU MUST ACT when others won't.  Market turmoil tends to cause investors to sit on their hands, doing nothing while waiting for volatility to subside.  Sitting on the sidelines, or maintaining the status quo feels more comfortable.

 

Eventually, markets recover, and the sidelined investor is sitting there, sucking his or her thumb, having missed an opportunity.  So the ability to act when others won't is critical, but is psychologically difficult when turmoil and uncertainty abound.

 

We prepare for these conditions by acknowledging the psychological stress that can occur when some investors are hitting the panic button.  We remind ourselves that our actions MUST be independent of what others are doing, for the "crowd" is often wrong during these periods.  It can be lonely, but we think what matters is getting the investment right, not running with the herd.

 

We believe that successful investing requires a mindset that accepts, if not embraces, volatility.  As Warren Buffett has remarked, "I'd rather have a bumpy 15% than a smooth 12% return."  We agree.

-John Heldman, CFA
Past performance does not guarantee future results.
Results are presented net of fees and include the reinvestment of all income.

     

2015 Triad Investment Management, LLC