Tim Hanson’s recent post flips the value investing mantra of “Margin of Safety” upside down into the “Margin of Danger” :
“…the search for margin of safety has given rise to its inverse: the margin of danger. This is the notion that by concentrating capital in the ideas they perceive to be the most undervalued, investors may actually be making themselves worse off.”
Ben Graham is rolling over in his grave. But should he be?
In a market that’s full of really smart people and things (algorithms) that have all read The Intelligent Investor and have access to the exact same fundamental data that everybody else has…does it make sense to pay a manager to spend time and energy searching for what everybody else has missed? The chances they find something that’s overlooked are much smaller than the chances of them being wrong.
To effectively accumulate wealth in the markets, you have to win more than you loose or win bigger than you loose. The former is extremely difficult, leaving us with one option for long term investors. Rather than pay somebody to be smarter than everybody else, we think it makes sense to focus on process and the evidence supporting it. Can they win bigger than they lose? Is their process repeatable? Do they have the conviction to do what they say even when their actions fall out of favor for a time period?
If your goal is to make money in the markets – the answer to those questions matters much more so than your ability to find somebody who can outsmart everybody else.
Check out Tim’s post when you can – it’s worth the read: Margin of Danger