The Loneliness of the Long-Distance Investor
Winning over a year is different to winning over a lifetime — how?
I reckon I could lead the London Marathon.
The elite race, that is, not the hoi polloi bit where the runners dress up as muppets. I’d then dine out for years on how I left Mo Farah trailing in my wake.
Granted, having led the race for the first 40 yards, I’d then have to pull out, wheezing heavily. But what a 40 yards!
‘It’s a marathon, not a sprint’ is a well-worn saying within the industry, and rightly so: it fits perfectly with investing. The best fund managers — the ones you want to back — know it’s a long race and plan accordingly.
The also-rans, in contrast, don’t know what race they’re running. They aren’t sure over what period their process should work and, when pressed, blurt out the standard ‘three years’ boilerplate. Middle distance at most.
This should worry you. It probably means they’re unthinkingly trying to keep up with the pack, no matter what the pack is doing.
They remind me of the long-distance race on sports day at my primary school (‘long’ being a couple of laps of the field). Everyone would tear off at maximum speed, only to be exhausted to the point of collapse within half a lap. It then became about which kid could grimly slog on at quarter speed.
If any bright spark had set off at a jog from the start, resisting the early FOMO as the pack accelerated away, they’d have sauntered past the spent herd by lap one and cantered home to any easy win. But none ever did.
Ignore the herd
Thankfully in the (slightly) more grown-up world of fund management, there are a few managers prepared to run their own race, regardless of what the herd is doing.
That doesn’t have to be a steady jog, by the way. Maybe they let the pack stampede off in rising markets, but catch up and pass them when they’re falling. Or stay in touch with the pack when their style isn’t working, but steam off when it is.
It doesn’t really matter. As long as they are running to their own strengths, are doing something that repeatedly works, and have the grit to stick to their race plan, then they’re a better prospect than the clueless runners trying to bag the fastest time for all of the marathon’s 461 hundred-yard sections. Coronaries beckon.
But, you may ask, if the results are so much better, why don’t more managers run the long race?
Because being a long-distance manager is hard: isolating yourself from the herd is lonely. Humans are hardwired to hate it. But if the herd is charging towards disaster, then it’s the right thing to do.
It’s also riskier for their careers. When their higher-ups, or their holders, aren’t so patient, long-distance managers are often sacked before the race turns in their favour. Equally, with the herd so far ahead, ending the pain by quitting becomes an increasingly tempting option.
The dilemma
We fund buyers face a similar dilemma. Standing by a great long-term performer as it endures short-term pain is tricky, but such periods are a feature of a great fund, not a flaw. You can’t be outstandingly good without being outstandingly different. The quid pro quo is that, for short periods of time, you can appear outstandingly bad.
But if you want to outperform over the long term, they’re the only type of manager to hold. Which is why they’re the only type of manager I hold.
Thankfully, one advantage I (and my own fund holders) have over single-equity strategies is that I can back runners of different styles.
If I do that well, then as one of my runners is slowing, another is accelerating. While they’re unlikely to win big in the short term, my funds can continue to fare OK over more market conditions (unless the pack is in one of its manic 10-year-old-at-a-sports-day phases).
My race
As a fund of funds manager, I’m conscious that I, too, need to explain to my holders what race I’m running.
For me, this is at least a 20-year endeavour, and I expect my funds to be outright winners over that timeframe — no excuses. But I know some will say that’s a cop-out: How can you usefully judge me if you have to wait two decades for the finish line?
That’s a fair question, so I break it down like this. Over a year or less, luck has an uncomfortably big say, but I’d hope to at least stay in touch with the pack.
Over three to seven years, I hope to be ahead of the pack. (For both of these shorter runs, I caution that I may look slow if the pack is at peak speculative fervour, as it was in 1999 or the summer of 2020).
Over 10 years? Now it’s getting interesting. If the funds aren’t around the top decile of their peer groups, I’ll be disappointed. But over 20– now that’s the marathon, not the sprint. That’s when I expect to be first through the tape.
See you at the finish line.
This first appeared in Citywire in July 2022. This is personal opinion only and does not constitute investment advice.
