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  • Neville Glaser

THE PROBLEM WITH GURUS

The problem with investment “gurus” is that you never can be sure whether their methods will be equally successful in all economic environments.

Everything works in cycles and strategies that outperform today will underperform tomorrow. The same can be said for the gurus. They might be super stars through an entire cycle of the economy, which can last 7-10 years, but then crash and burn when the cycle changes.

Take one of the legends of the investment markets, Bill Miller of the Legg Mason Value Trust. Under his management, the Legg Mason Value Trust outperformed the Standard & Poor’s 500-stock index for 15 consecutive years, from 1991 to 2005 - one of the longest winning streaks in investment fund history.

He was treated like a god, regularly appearing in interviews. But his Value Trust’s performance collapsed in the volatile years of the 2008 financial crisis.

The Value strategy that had worked so well – buying assets that others are selling, buying companies in distress and waiting for their recovery – no longer worked because of the nature of the financial crisis.

Miller had made money in virtually every crisis since 1987. “But what’s different this time, over my 30 years of investing,” he said, “is that contrarian value-based investing just isn’t working anymore.”

Shares that fell below their long term values stayed down.

As prices fell in 2008, Miller doubled down on the likes of AIG, Freddie Mac, and Bear Stearns, with disastrous results. From January 2008 to December 2011 his fund’s assets fell from $20.1 billion to $2.8 billion while experiencing one of the worst stretches of investment performances in modern times.

The value investor gets into value destruction that is temporary, but has no answer to systemic failures that tend to go on forever.

Bill Miller is just one example where chasing magical returns just did not work for investors. Underperformance that follows outperformance is the rule rather than the exception.

Yet many say that you need only look at Warren Buffett, and any notion that gurus all get their comeuppance is soundly refuted. But I think Buffett proves the point that it is very difficult to stay ahead of other investors indefinitely, because he is the rare exception.

Warren Buffett has delivered an average annual return of 20% pa since his company Berkshire Hathaway was founded in 1965. That is a unique performance.

When we encounter an amazing investor like Warren Buffett, with a proven ability to beat the market returns over 50 years, we treat him like a God. Yet, isn’t beating the market returns what an investment expert is paid to do?

When an engineer builds a bridge that stands for 50 years, do we make a fuss over him? Do magazines rush over for an interview? No, because engineering is a profession defined by success. Investment is defined by failure. It is simply very hard to be good at it.

It is also worth noting that Buffett’s investment company no longer delivers stellar returns, having fallen behind in the past decade.

What is the investor supposed to do?

Firstly, ignore the gurus, they represent past performance – and possibly a degree of luck - that might not be repeated in the future.

Secondly, acquire fundamental knowledge that will allow you to develop a sensible strategy.

Thirdly, find a strategy that suits your temperament. If you are young, quite aggressive and accept volatility that comes with a high risk strategy, study a Growth strategy for shares.

If you are the type that feels most comfortable buying good assets cheaply, and you are prepared to wait for others to recognize the value, then follow a Value strategy. If you trust only annual cash returns as the most reliable form of return, then study an Income strategy that relies on high dividend paying shares.

Find out how Growth, Value and Income work together because most equities deliver a combination of the three types of return.

Take advice from experts. The fact is that most of your returns come from macro economic factors, such as the state of the economy and the state of sectors within the economy, which directs you to which shares to invest in, or whether you should be investing at all.

Respect clever people, but ignore gurus.

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