In 1981, Pension & Investment Age magazine published their regular report ranking investment performance for pension plans. Alone at the top was a tiny bank based out of Chillicothe, Missouri.
Citizens Bank & Trust led the list of every bank- and insurance-managed pension fund for the 3-year performance mark. More importantly, it led the same list for the 10-year mark. How does a tiny bank in farm country Missouri beat out the biggest banks and insurance companies in the country for a decade?
The answer is Edgerton Welch. Welch was the 72-year-old chief investment officer for the bank who had never heard of Ben Graham or modern portfolio theory. He admitted to not being smart enough to play the stock market. He even said he had no idea if it would go up or down. Instead, he had a copy of Value Line and a simple set of rules to guide him.
Welch bought all the stocks that had Value Line’s highest ranking relative to other stocks, in industries ranked highly by Value Line, and also highly rated by Merrill Lynch and E.F. Hutton, the two brokerage firms he used. He held onto each stock until its Value Line ranking dropped. At which point he sold. Three rules tied to buying, one for selling. That’s it.
Some may point to the simplicity of Welch’s strategy as the reason for its success. They’re partially right.
The stock market is ridiculously complex. Investors often try to combat that complexity with more complexity. Except, they often fail to account for the fact that markets are made up of people who respond to events in unexpected ways.
So they create a complex strategy when it should be simplified. Simple strategies tend to do better than complex strategies because complexity introduces unanticipated errors and risks to a portfolio. That’s when complex strategies go horribly wrong.
Yet, a simple strategy is nothing without the discipline to stick with it year after year for decades. Consistency is key.
Dean Williams retold Welch’s story in a great speech and came to a similar conclusion:
Look at the best performing funds for the past ten years or more. Templeton, Twentieth Century Growth, Oppenheimer Special, and others. What did they have in common? It sure wasn’t their investment philosophies. It was that whatever their investment plans were, they had the discipline and good sense to carry them out consistently.
To be consistent you have to be comfortable with your portfolio looking wrong from time to time. Because it’s guaranteed to never own enough of what’s making money now and always own too much of whatever is underperforming or losing money.
Many investors have difficulty with that reality. So they derail their strategy because it underperforms or loses money before it has a chance to prove out.
If you give your strategy time the power of consistency comes through. You keep your emotions in check. You silence the noise from the talking heads predicting what’s “best” for your portfolio. You suppress the urge to do something — anything — every time the market acts wilder than normal. You separate what’s happening here and now from what’s best for the long run. Put simply, you avoid doing the things that get so many investors into trouble. And somehow, the strategy produces solid results over time.
The slow drumbeat of doing the same thing over and over and over again keeps you on track. Consistency is the secret to your strategy’s success.
Trying Too Hard
- Working Hypothesis – The Better Letter
- Learning to Be a Good Investor is Hard – Behavioural Investment
- Incentives: The Most Powerful Force In The World – M. Housel
- Move Slow, Win Big with Thomas Russo (podcast) – Richer, Wiser, Happier
- What We’ve Learned From Users – P. Graham
- The Family that Built a Ballpark Nachos Monopoly – The Hustle
- We Spoke With the Last Person Standing in the Floppy Disk Business – Eye on Design
- Misperceiving Life Expectancy in the Deep Past – Sapiens
- In the Mind of a Whale – Hakai Magazine