High-profile contrarian value investor Howard Marks has coined a phrase that is well-used by investors. The essence of Marks' view is that you can't do the same thing that others do and expect to outperform the market.
The logic behind this is reasonably simple. First, to beat the market you have to do something different to the market. Second, you have to be right when the market is wrong.
The question for the individual investor is how they can be right when the market is wrong?
Over time, the edges available to the individual investor have largely disappeared. Institutional investors and professional money managers have significant resources at their disposal which are not afforded to the individual investor.
It would be rare, for example, for an individual investor to have an informational edge over professional investors and institutional money managers.
It is also unlikely that an individual investor would have an analytical edge. The high-power computers, access to data, and teams of many analysts with MBAs and PhDs render an analytical advantage near impossible for the individual investor.
The one great advantage the individual investor does have is a behavioural one. The market goes up and down with greed and fear. There is fear of missing out as the market goes up, and fear of losing it all as the market goes down.
And ultimately, people tend to buy when things look good, and sell when things look bad – precisely the wrong time to do either.
While market timing is nigh on impossible, the advantage for the individual investor is simply to stay invested over a long period of time. There is nobody to assess your performance on a yearly, quarterly, or even monthly basis. Investing with a time horizon of decades, and behaving as such, is your biggest advantage over professional investors and money managers.
Charlie Munger says that investing is simple, but not easy. Indeed, it's not easy to stay invested when your portfolio is down 20% and there is no sign of a swing in sentiment. Even in a bull market, it can be hard to hold underperforming stocks. For example, I consider Flight Centre Travel Group Ltd (ASX: FLT) to be a great long-term prospect.
However, from 2014 to 2016, the share price dropped by 45%. It can be hard to hold in these periods, but investors with a long term time horizon have been rewarded. In these circumstances, you can be right when the market is wrong. Since early 2017 the share price of Flight Centre has risen from just under $30.00, to be in or around $50.00 in 2018.
To take advantage of your greatest edge, I encourage individual investors to buy into high quality businesses and hold them for a long time. Businesses such as Ramsay Health Care Limited (ASX: RHC), CSL Limited (ASX: CSL), REA Group Limited (ASX: REA) and SEEK Limited (ASX: SEK) have proven to be great businesses and show little sign of losing relevance. I'd invest in businesses like these ones and hold them for a very long time. As Warren Buffett says, 'Time is the friend of the wonderful business'.
