Investing Guru Joel Greenblatt: Focus on the Long Term

From Joel Greenblatt, author of The Little Book That Beats The Market and The Big Secret For The Small Investor, as interviewed at the Forbes [bold emphasis added]

if you look at top performers over the last decade, the top 25% of managers that have outperformed – came out with the best record for the last ten years – 97% of those top managers spent at least three years in the bottom half of performance.

79% spent at least three years in the bottom quartile of performance. And almost half, 47%, spent at least three years in the bottom 10% of performance. So all their investors left if they did that, but these are the ones who ended up with the long-term record. Most people leave them, most people don’t stick around for long enough.

Some important pointers from Mr. Greenblatt’s excerpt

Two lessons from planting (farming) which can be applied to investments:

1) time is essential or a prerequisite for a fecund harvest (in equities, outsized payoffs) and

2) we reap what we sow.

From such perspective one should realize that a portfolio built for the long term would likely undergo or endure early testing periods where underperformance represents a necessary but insufficient groundwork for prospective outperformance “Alpha”.

My experience with the domestic mining sector strongly relates to Mr. Greenblatt’s advise—patience ultimately rewarded by a time induced outperformance (following several years of underperformance).

Next, short term yield chasing activities represents as the common sin or shortcomings by the average investor.

Little has such adrenalin rousing actions been comprehended as a tactical folly based on two cognitive biases:

-hindsight bias or “inclination to see events that have already occurred as being more predictable” (or Mr. Warren Buffett’s rear view mirror syndrome) and

-survivorship bias or “logical error of concentrating on the people or things that "survived" some process” or chasing of current winners or market darlings.

Finally, the short term yield chasing approach vastly underperforms long term portfolios (see chart from Legg Mason’s Michael Mauboussin “A Coffee Can Approach”) since this represents as high risk-low return tactic which significantly diminishes returns.

Bottom line: Focus on the long term on the platform of understanding how the market works or has been evolving. In short, surf the bubble cycles.

From one of Warren Buffett’s best advise ever:

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.