The hardest thing to do.

The hardest thing to do is to know that today’s uninvestable sectors and geographies and strategies are tomorrow’s huge winners. It has always been thus and every great investor has trained himself to think this way – from  Warren Buffett to Howard Marks to Wilbur Ross.

It is in this way that investing bears very little resemblance to trading, which is about getting more aggressive in what’s already been working, riding the big, fat trends once they’ve already been established. Sometime between the midpoint and the end of a trend, a trader is getting bigger in his position while an investor is beginning to get much smaller.

In theory, anyway, this is how it’s supposed to work.

Here’s David Merkel on the concept:

Ideas in investing tend to streak, get overinvested, then die.  This is one reason why I don’t believe articles about the death of various investment concepts…

The thing is: strategies go in cycles.  They are born at a time when no one loves them.  They gain currency from the good returns of those who adopt them, leading to a frenzy where many adopt the strategy, and returns are great, but now companies that fit the strategy are overvalued.  The process goes into the reverse gear where the strategy is garbage, until enough parties abandon it and the prices of stocks that would be a part of the strategy are attractive.

No established strategy always works.

No established strategy ever truly dies.

“The Death of _____” is almost always a buy signal and the obvious popularity of a strategy is almost always your sign that there are too many people in the pool and returns will be diminished.

It sounds so simple when laid out this way, but it remains one of the hardest things to do in all of investing.


The Rules, Part XLV (Aleph Blog)

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