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No Pain No Gain

Have you found a manager or strategy that claims to beat the market?  If so, here’s a few thoughts to consider before putting your hard earned money to work:

  1. Where will the out-performance come from?  Are they exploiting a market anomaly (value – momentum – something else) and is the evidence there to support it?    Your understanding of that evidence is critical to your avoidance of bad behavior.  Knowledge of the evidence supporting a strategy’s methodology can help fend off the desire to bail when the manager/strategy looks like an idiot.  Which leads me to my second point.
  2. If the strategy or manager truly has sustainable value – there will be periods of awful relative performance.  Think about it – to deliver returns over and above the market, you have to be different.  A manager cannot outperform the S&P 500 by looking like the S&P 500.  They have to be different and if you are going to pay any management fee these days, you should be paying for the conviction in their difference.   Don’t buy a fund that holds 300 stocks and charges a 1% fee when it’s benchmark consists of 500 stocks.  Just go buy the benchmark for next to nothing.

True and sustainable value can only be generated by managers willing to put their necks on the line by being different.  You have to deal with periods of poor relative returns in order to capture the long term benefit.  No Pain – No Gain.  It’s your ability to find a sound strategy that you understand well enough to stick with it during bad performance.  That bad behavior I mentioned above – it’s called performance chasing – and it’s an itch that should not be scratched.

Before putting money to work in any strategy – be sure you can deal with the inevitable pain so you don’t miss the chance to capture the gain.