Slow Investors Can Win

One of Robert T. Kiyosaki‘s books is called Rich Dad’s Who Took My Money?: Why Slow Investors Lose and Fast Money Wins!

Fast investors may have a tendency to react quickly to new circumstances, opportunities or new information. This can lead to a reactive personality, which I don‘t believe to be an advantage. From my point of view, an investor should be proactive. This requires the use of sound investment principles that can be applied with a regular pattern (for example once a year or once a quarter, preferably at fixed dates).

The concept of “pro-activity” was created by writer and psychiatrist Victor Frankl, author of Man’s Search for Meaning, where he recounted his experiences in a Nazi concentration camp. Pro-activity is the ability to take decisions that lead to the achievement of our goals. Reactivity is not an ability but a behavior that in some instances may be opportunistic (“to seize the opportunity“) and in others it may induce a flight response (to avoid a new threat or danger). This means that a fast investor may be in a fight-or-flight mode.

Some years ago I designed nine selection criteria for non financial shares listed on the Spanish stock exchange. Portfolios made from these criteria started on March 31, 2006 and were updated once a quarter through September 30, 2013. I published my findings in a book called Invertir Low Cost (Low Cost Investing), which was out in Spain in 2014. The title refers to the fact that most portfolios are made up of only five shares, so they are appropriate for investors who can‘t or don‘t want to invest too much in stocks. Since September 30, 2013 I have updated the portfolios daily in this blog. In those two years since the publication of my book, seven of the nine portfolios have outperformed the IBEX-35, the main benchmark index for the Spanish stock market.

The following table shows the performance (dividends included) of the nine portfolios and the benchmarks in calendar years from 2006 to 2014. All portfolios are made up of non financial companies.

 

Not to dwell too much, I will focus on my favorite portfolio, the one called Counterpoint. It is based on P/E ratios and solvency. Earnings per share are updated twice per year. Solvency is defined from the ratio of net financial debt to operating profit. The Counterpoint portfolio consists of the five companies from the IBEX-35 with the lowest P/E ratio at the end of each quarter, provided they are not ranked among the top five nor among the last ten in the solvency ranking of non financial companies in the IBEX-35.

The Counterpoint portfolio had an excellent risk-return tradeoff. In the 9-year period between March 31, 2006 and March 31, 2015, the IBEX-35 posted losses in 17 of the 36 quarters while the Counterpoint only had 10 negative quarters. Its average return in this period was 17.47% per year while the benchmark (IBEX non financial) gained 5.93% annually and the IBEX-35 gained even less.

This shows that a slow investor who:

  • updates its portfolio only once a quarter at fixed dates
  • does not react immediately to the publication of financial statements
  • does not take advantage of market opportunities, aside from once in a quarter
  • does not set up stop loss limits nor target prices,

is able to beat the market with a lower risk. He just has to be disciplined four times a year.

This article was first published in rectitudemarket.com