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The good of any investment strategy will only be realized if investors can stomach the bad.  As we say repeatedly, a strategy’s return is less important than an investor’s return while exposed to the strategy (BIG difference).  Success for investors is dependent on their ability to stick with the strategy through the ebbs and flows of good times and bad times that are a part of any investment style.

90% of what passes for brilliance or incompetence in investing is the ebb and flow of investment style” – Jeremy Grantham

Investment Styles, for the most part, are mean reverting with their benchmark acting as the mean.  Good times (performance above the mean) are followed by bad times (performance below the mean).  Time spent below the mean creates risk for the manager (Assets flowing out) and behavioral risk for the investors (leaving at the wrong time).

The nature of mean reversion is a risk, but drawdown is a killer.   You show me a strategy that allows a 50% drawdown and I’ll show you an enormous gap in strategy returns vs investor returns.  No amount of education can walk the majority of investors off the ledge during a large drawdown – they are not sticking around to find out when things will recover.

Your investor’s success is dependent on their ability to stick with you as an asset manager.

Do you have the conviction to stick to your process when you are out of favor?  As an investor, do you have the understanding needed to stay put during the difficult times?