Ahead of the Herd

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The secret of change is to focus all of your energy, not on fighting the old, but on building the new.

—Socrates

When I got out of college in 1994, I quickly learned that following the established rules of Wall Street and the academic community can be hazardous to your investment performance. When I started my career as a professional investor, the stock market had started to roar higher, and investors saw back-to-back years of banner growth. The world was enamored with the internet and all things dot-com.

My finance training indoctrinated me with the common wisdom taught in business school and the Chartered Financial Analyst (CFA) curriculum. That wisdom asserted that you should focus your attention on trying to value companies and invest in stocks that had excellent valuation based on detailed fundamental analysis. This way of thinking is still the predominant method used on Wall Street today.

At first, this method worked very well in the market for me. But then something strange happened—something that was never taught in business school or the CFA curriculum. My stocks, which had great fundamentals, started heading down hard, while poor quality stocks with no earnings skyrocketed. This continued for a couple of years. My firm started losing assets as people began to move their money to mutual funds that were investing in everything dot-com. Investors were hypnotized by greed and throwing out the fundamentals. Many of the best, strictly fundamental managers saw their portfolios get slashed in value. In fact, Warren Buffett, one of the most famous value investors, saw his portfolio in Berkshire Hathaway crash in value, going down over 50 percent during this period of time. It was brutal.

Then, everything reversed. In the year 2000, all of the poor-quality dot-com stocks crashed while stocks with good fundamentals moved much higher. If you were a buy-and-hold index investor who followed the conventional wisdom, you would have suffered losses for well over a decade because most of your stocks would be invested in the companies that crashed!

I estimate that 80 percent of investors are following the established rules that were invented and promoted by Wall Street. I believe that investors will do much better if they step away from products sold to the masses. Mass-marketed products tend to water down your ability to generate solid, risk-adjusted returns. I also believe that investors should take a different approach than the buy-and-hold convention.

Instead, I supportnot conforming to the established rules that have been preached by the financial services industry, but to think independently based on a formula that I will introduce. I’m talking about changing your habits and not following the herd.

This is Not Your Parents’ Economy

As I write this, in 2021, we are in a completely different econom