Earlier this week, I discussed "Joel Greenblatt's Secret to Beating the Market," where I took a look at some notes from lectures Greenblatt gave at the Columbia School of Business in 2005.
The key takeaways from these lectures are that to succeed as an investor, Joel Greenblatt (Trades, Portfolio) believes you need to invest in a concentrated numer of undervalued, high-quality companies with a long-term outlook.
Every investor wants to succeed over the long term, but whether or not you adopt Greenblatt's approach depends on your situation. Most investors can't invest using the same concentrated approach because it requires hours of research and an in-depth understanding of accounting practices. You don't need a high IQ to analyze companies, but you do need a lot of time and concentration.
There is another way to be successful at investing, however, one that doesn't require as much time or effort.
Using the power of time
The biggest mistake and misunderstanding in investing is overlooking the power of time. One of Greenblatt's critical pieces of advice to his students was that most investors can't hold on for long enough, which gives others, who are prepared to buy and hold for many years, an effortless and effective edge. Even if you are not buying and holding individual securities, having a long-term outlook in investing will put you head and shoulders above the rest of the market.
It is as simple as that. Of course, this overlooks the tricky issue of uncovering the best securities to buy. If you make bad investments, no matter how long you hold on to a stock, the results will be bad.
This brings me to another of Greenblatt's tips: concentration. Greenblatt's portfolio at Gotham Asset Management is highly concentrated. In his lectures, he jokes that it is for this reason he's able to teach the course. There an interesting underlying message here and a sort of circle of benefits.
By being more concentrated, you can spend less time watching your portfolio. If you're spending less time watching your portfolio, you are spending less time thinking about trading and are less likely to make a stupid mistake that will impact short and long-term returns. By having a focused, concentrated portfolio, you are less likely to be distracted by day-to-day market movements and have a longer-term focus.
And not only can you benefit by being diverted from the market, but a smaller portfolio also gives you more time to pursue other interests and make yourself a better investor through education.
What am I getting at here? I'm talking about the benefits of being a lazy investor. Some of the world's most successful investors, most notably Warren Buffett (Trades, Portfolio), are relatively lazy in comparison to Wall Street and the hedge fund community. However, the extra activity has only dented the performance of Wall Street and reputation of the hedge fund industry.
So the solution is to pick your bets carefully.
Select just a few investments and keep an eye on these to the best of your ability. If you've not got the time to do the level of research required to de-risk an investment significantly, an index fund is a suitable substitute. In this example, index funds and single stocks are replaceable.
The goal is to have a simple portfolio, one that you do not have to spend time and effort following constantly and can leave to compound. Bear in mind most investors struggle even to match the market return, so in most cases an index fund is your best solution.
Then all you need to do is sit back and watch the magic of compounding unfold. A simple $500 a month investment, compounded at 9% per annum (the average for the S&P 500 over the past few decades) will grow to $2.1 million in 40 years. Put simply; investing does not have to be elaborate or exhausting. It can quite easily be effortless and straightforward.
