Lessons Learned During Our Investment Careers
Our investment careers began at different Wall Street firms in the early 1990s, but we were both trained in a similar value-oriented approach. Since we joined together in partnership at Saybrook, we are especially proud to have guided clients and managed their portfolios safely and successfully through the 2007-09 financial crisis and to have generated strong investment results in the years that have followed. Below are some critical insights gleaned over our time in the investment business:
Successful investing requires time, patience and perseverance.
Learn from history and maintain a curious, open mind – Life-long fascination with the confluence of events and people that impact investment decisions is why we were originally drawn to investing and why we have chosen to build our careers in this field. We relish the intellectual stimulation of constantly being challenged as students of political economy: the interplay of philosophy, politics, economics, international relations, trade, psychology, markets, business, and management. As investors, we must keep learning, be pragmatic, revise previous conclusions as warranted, and be willing to think anew.
Embrace that which we have the capacity and ability to control – Economic cycles, magnified by a widespread human tendency to overreact to impulses of greed and fear which often drive markets to extremes, cannot be controlled. However, market fluctuations can be either sensibly ignored or prudently acted on. As Benjamin Graham wrote about the stock market in The Intelligent Investor (1949): “Mr. Market lets his enthusiasm or his fears run away with him… [But] the true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation… He [is] entitled then to disregard the market decline as a temporary vagary of finance, unless he [has] the funds and the courage to take advantage of it by buying more [shares] on the bargain basis offered.”
Think like an owner-investor not a speculator – We seek to own shares of sound businesses which we have the competence to understand and assess and which we believe can generate attractive returns over time. We aim to avoid market timing, which is akin to speculating or even gambling. As Benjamin Graham wrote in his first classic book, Security Analysis (1934): “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
Adhere to a disciplined yet flexible investment philosophy – At its core, our philosophy is to invest alongside clients and balance safety of principal and growth of capital. Through our Undervalued Growth approach, we seek to only invest in businesses that can grow profitably and be acquired at reasonable valuations. This discipline in making each individual investment decision helps us avoid trouble. For example, during the late 1990s we didn’t buy tech stocks that offered much potential growth but were trading at unreasonably high valuations. The reverse proved true in 2006-07, when we avoided bank stocks that appeared undervalued but didn’t offer sufficient growth prospects. We maintain concentrated diversification across a range of attractive industries with a limited number of high-quality portfolio companies which have sustainable competitive advantages, demonstrated profitability, low debt, and ethical management with long-term orientation. We gain exposure to international growth by investing in multinational companies with long histories operating overseas.
By adhering to these investing principles, our portfolios overall have avoided permanent impairment of capital (how we define risk). Our investment philosophy encourages long-term ownership of sound businesses to build and maintain wealth over time from steadily rising dividend payments and the compounding effects of tax-deferred share price appreciation. As Albert Einstein quipped, “compound interest is the eighth wonder of the world.” Successful investing requires time, patience and perseverance.
Balance humility and fortitude – We have made numerous investment mistakes over our careers thus far, and we are sure to make many more in the future. More often than not (we hate to admit) our mistakes come from simply failing to adhere to our basic disciplines listed above. Examples include: buying a newer company that does not have sufficiently demonstrated returns; continuing to hold a company that has taken on too much debt and/or made a large acquisition that erodes the underlying franchise; or not quickly recognizing fundamentally negative changes to a once great company or industry. When we make such mistakes we take some solace remembering the wise perspective of a late mentor and client of ours who often told us: “If you don’t make mistakes, you aren’t doing anything.” We are determined to learn from our mistakes, and we do become better investors through the often-painful process. Ultimately, when we get it wrong we take our lumps and move on, with losses mitigated by prudent portfolio diversification. While we are not always good sellers, we do cut our losses and let our winners run. As the great Fidelity investor Peter Lynch said: “Pick your weeds and water your flowers.”
Our optimism, tempered by our pragmatic investment approach, gives us the conviction to own enduring businesses through good times and bad. Letting emotions and headline noise drive investment decisions is a mistake we strive to avoid. As Warren Buffett has said about successful investing: “…what you need is the temperament to control the urges that get other people into trouble in investing.” Perhaps the biggest challenge investors face is themselves.