How to beat the experts at investing (including Warren Buffett).

Screenshot 2017-05-20 11.44.58
Performance of US Shares (S&P500; yellow), Australian Shares (blue), International Shares (orange) and Australian Bonds (brown) since 1970. Source: Vanguard Investments Australia.

As a bit of light reading this week, I perused an investor newsletter by Mike Taylor, CEO & CIO of Pie Funds (Pie Funds is a small New Zealand funds management firm). Mike recalled the story of how Peter Lynch wondered what return investors in the fund which he managed – Fidelity Magellan – were  getting versus the fund’s actual return. During the period 1981-1990, the fund returned a very decent 21.8% p.a. The average individual investor however, actually achieved an annual return of 13.4%.

How can an investment in such a stellar fund perform so poorly on a relative basis?

Lynch noted that due to their buying after a period of strong performance and selling  after relative poor performance, investors were doomed to substantially lag behind the fund.

Taylor points out that by doing the reverse – buying during dips and holding over the long term you can outperform even an expert investor. Imagine for example, beating Warren Buffett an Index Fund, or a fund manager by buying on dips Berkshire Hathaway,  the Index or a managed fund. (Beating Peter Lynch is somewhat more difficult given he no longer runs a fund).

Buying on ‘dips’ and holding long term is an excellent approach to relative out-performance for any index investor or an investor who believes they have identified a fund manager with a reliable performance history (e.g. 7-10 years). The tricks to pulling this off are i) identifying a manager or fund that will do well – which is easier to say than do, I know, and ii) deploying capital rationally during dips (e.g. of 5% or more over a certain period). It need not be any more complex.

Would you use this strategy to improve your investment performance?

12 thoughts on “How to beat the experts at investing (including Warren Buffett).

  1. Great point WF30 and that is precisely what we are trying to do with out investing 🙂

    As long as we’re invested in long-term shares and buy them on dips, we should do better than the index.

    Mr DDU

    1. Hey Mr DDU. The strategy works less effectively the more concentrated the portfolio becomes. At least in the US, around 60% of shares fail to do as well as the index over the long run. If a portfolio is concentrated in good quality businesses with decent earnings power bought with a large margin of safety, one is likely to out do the index over a long period of time but that’s perhaps a different strategy. Enjoyed your recent article on saving money – you guys nailed the rent situation!

  2. Reblogged this on The Small Investor and commented:
    Definitely, people who buy and sell mutual funds based on reading their annual returns will lag the market. People buy funds that have done great and sell those that lag – the very definition of buying high and selling low.

  3. Agree completely with your article. The best investors do not panic when the market does. Instead, they view it as an opportunity and deploy their capital to take advantage of the discounts. I do think it takes a long term mindset to be successful with this strategy though.

    Great read this morning. Thanks for putting it together.


    1. Thanks for dropping by and making a comment Bert! Certainly agree it’s a long term strategy – it would fall apart if one invested on a dip only to panic and withdraw should a market decline continue. I would think 10+ years of sticking to it and a good effect would be seen.

  4. I bought on a dip in February of 2016 and would love for another pullback to buy on the dip again. I’m trying to be patient but I have to admit I get antsy at times. But I’m staying discipline.

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