Investing is a marathon; it is not a sprint. Any investors who believe they can make a lot of money over the long run repeating the same short-term trades, again and again, are likely to be disappointed.
That's not to say that it can't happen. Nothing is impossible in the stock market. However, it is improbable.
Uncertain environment
The stock market is dominated by individual businesses. Every business has a different set of managers, employees, products, strengths and weaknesses. Some companies in the same sector may follow very different paths and achieve similar results. Some businesses run themselves, and others don't. Some have too much debt to survive, and others have a lot of borrowing but can manage it effectively.
The point is, the market is dominated by different businesses, and the ground is always shifting. Investors need to have a strategy to deal with this changing environment. Sticking with one strategy or investment style all the time without adapting to the changing environment can work, but over the long-term, the chances of the same strategy working consistently are greatly reduced.
I think Warren Buffett (Trades, Portfolio) is the perfect example of this. He started investing in the 1950s. Back then, it was easy to find deeply undervalued stocks trading at a significant discount to net asset value because it was difficult to get hold of financial information. That started to change in the 60s and 70s, so Buffett began to change his strategy. Rather than focusing on deep value stocks, he moved on to businesses that look cheap compared to their competitive advantages, or what he would call "moats."
Then in the 2000s, Buffett's style shifted again. As markets become more efficient, valuations started to increase, and it became harder for him to find attractive and underpriced securities. Instead, Buffett used his firepower to become a lender of last resort, offering struggling companies massive credit lines at double-digit rates of interest.
Buffett has always followed a strategy based on the idea of buying high-quality assets at attractive prices. That's one of the reasons why he has been so successful.
Design your strategy
Seth Klarman (Trades, Portfolio) has also stated that finding a strategy and sticking to it is one of the most important routes for investors to follow.
In a speech in 2012 at MIT, Klarman stated:
"Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets. Momentum investors become lost when the momentum wanes. Growth investors - who pay a premium for the fastest growing companies - don't know what to do when the expected growth fails to materialize. Highly leveraged investors, like some quant funds in the headlines, were recently forced to sell regardless of value when their methodology produced losses rather than gains. Counting on a government bailout for every market crisis seems a dicey proposition, especially when supposedly impossible events happen on Wall Street every few years...
By the time the market drops and bad news is on the front pages, it is usually too late for investors to react. It is crucial to have a strategy in place before problems hit, precisely because no one can accurately predict the future direction of the stock market or economy."
There's no better way of putting it, in my opinion. The world is highly unpredictable, and the only way to be prepared for all eventualities is to have a plan.
Buffett and Klarman have both developed plans and strategies based on the idea of value investing. They've not been perfect, but no process will ever achieve this goal.
However, the techniques have enabled them to navigate uncertain times and stick with their investments during periods of volatility.
Disclosure: The author owns no share mentioned.
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