These are thematic ETFs and they don't represent "the market" or a specific benchmark.
App Economy Portfolio has outperformed large caps ETFs (like SCHG) by a lot.
VGT (Vanguard Technology) is one of the best performing ETFs on the market with 13% annual return since inception in 2004 and nearly 20% annual return in the past 10 years. Why? VGT is heavily allocated to semiconductor stocks like NVDA and AMD. Half of VGT is in 3 stocks (MSFT, AAPL, NVDA). Cherry-picking some of the best-performing ETFs after the fact is easy. The challenge is to do so before they deliver such performance.
Technology and Communication represent 40% of the S&P 500. So the entire stock market is tech oriented today.
Low-costs factor-based ETFs can outperform the S&P, but they don't necessarily make for a diversified approach. They are regularly rebalanced, which can diminish their outperformance over several decades. That's not true if you managed you own allocation.
What is your take?
What is your preferred investing approach?
Do you believe it's advantageous to sell winners early?
Do you have a different point of view, more focused on the short-term?
Hi Bertrand, thanks a lot for your very helpful and teaching newsletter. I'm in the finance world for 2 or 3 months, and yet I'm really interested in it. But a question I'm asking right now is how can you say in one hand to select assets with a lot of attention and in the other hand to let them live over decades without really caring. I mean, I understand but still an asset is good at a precise time. So if I select a good asset right now, it might not be in 2 or 3 years and if I don't pay attention well I could lose a lot of money ? Sorry if I'm not clear, I'm French and still learning how to write a proper English.
Thank you for the warm feedback, Lucas! Glad to hear you are getting interested in the finance world. You are correct, an investment today may not be as relevant a few years from now. That's why it's critical to have an investment thesis. If a thesis is broken, then there is no point in holding the investment longer. With this in mind, periodic reviews (for example, quarterly or annually) can help re-assess if anything has changed. Selling losing investments is part of the process. That's why the title of this article is "Let Your Winners Run" and not "Never Sell."
The main benefit of framing an investment with a longer time horizon is to shift our attention to what will move the needle over the long term. It makes us look for different criteria, such as durable growth, sustainable competitive advantages, a large and expanding opportunity, operating leverage and earnings power. It also makes us stay away from many subpar businesses that are in a secular decline.
Buffett uses many analogies for this:
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
He once explained: "I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better."
If you shift your focus to investments that are more likely to stay good over the long-term, you'll improve the quality and durability of the portfolio. As a bonus, you won't have to live your life with a finger hovering over the sell button at all times.
Hi Bertrand, as always very insightful. One qualification, the buy and hold forever philosophy applies to investments in quality companies with a long growth run ahead of them. If you are betting on reversion to the mean in no or low growth companies or investmens in cyclical industries like Energy, which some of us do, this would be bad advice in most of the cases. My portfolio is growth, reversion to the mean / cyclicals, dividends and a small portion for macro bets. Appreciate you can also sell these investments too early, but most of the time you need to exit and reinvest in other opportunities with a better upside eventually. Regards, Denis
Denis, you are absolutely right. Buying with the intention of holding for decades changes the type of investments that enter the portfolio. It shifts the focus to the quality of the business, unit economics, growth duration, addressable market, track record of innovation, and culture and leadership. The benefit of the longer time horizon is not only to leave compounding uninterrupted, but also to invest in companies that can return 100X, as opposed to seeking to make a quick buck investing in an average business undervalued by 30%.
Doesn't have to be an average business. Can be a very good business in a cyclical industry, or a market leader in a stagnant industry. Both value and growth people can be rather dogmatic about their approach to investing. I am saying there is value in both and I can make much higher returns which will be shortlived, but superior nonetheless. Of course ideally I want to buy great businesses at a fair price, which keep compounding for decades. But unfortunately these are outliers and not the norm. As I said I still try to capture them and let them run, but it doesn't mean I have to limit myself to one style of investing.
Denis - I am really interested in your reversion to the mean strategy. I am building a neural net to identify patterns for mean reverting bond pairs. How many standard deviations away from the mean do you usually target in your strategy and what is your timing mechanism.
Hi John, I don't time, at all. If its attractive enough, I buy. If you are looking for timing, major options expiry dates seem to give some indication and direction. But I wouldn't bet my money on it as I don't understand it enough. In terms of standard deviation, guess it all depends on what the deviation is from. Fair value? All time-highs? The mean valuation? Ask five different guys and they will give you five different values for fair value and you would need to make a couple of future assumptions, which are very difficult to predict with any certainty. But what's a lot more important, is the context.
Why exactly is the price deviating from the mean? Is it because of temporary issues with a high chance of overcoming these issues? Is it because the prices for the key product in that industry are down? Is it because the company cut the dividend? Is it because they are investing a lot of CAPEX and it is not certain whether that investment will pay off? Is it because they made an acquisition which is questionable and/or they took on a lot of debt to finance it? So not sure how meaningful a standard deviation would be without context.
This article is called "Let Your Winners Run." And you are suggesting I sell most of my biggest winners. Do you see the irony? Let's agree to disagree.
Can you send a note to Meb Faber to let him know that his post has a dead link for The Capitalism Distribution – The Realities of Individual Common Stock Returns by Eric Crittenden and Cole Wilcox, BlackStar Funds.
Thank you for a very interesting article. One reason for the impatience of investors might be the unknowability of whether a "short-term" (few-year) loser is a "long-term" (20+-year) winner. I fear that without quite nuanced understanding of the stock's underlying business, its future potential and the quality of execution toward realizing that potential, which seem to require re-examination of the business quarter-after-quarter, zillion possible implementations of cut-your-losers strategy available to retail investors might also lead to cutting their winners. So, any battle-tested recipes that don't require Warren-Buffet-level inspection of businesses and their future potential would help retail investors choose that right one cut-your-losers-without-cutting-your-future-winners strategy. Holding winners by simple monitoring of the total return achieved by each stock in one's portfolio is much more straightforward for retail investors. However, those stocks that have no hickups year-on-year are hard to find, as the article very well illustrates, so if positions are opened just before a hickup that will last a few years, a future winner may well be cut as a loser without more details in how to avoid these mistakes in cutting-your-losers strategy. Perhaps the answer is: you can't avoid these mistakes, so either bring your understanding of businesses, their future potential and execution closer to Buffet's level to make such mistakes fewer, or just invest in indexes and perhaps current wide moat companies at the top of these indexes.
This is a brilliant article
Thank you, Joyanta! 🙏
Do ETFs like VGT or SCHG outperform your portfolio? (:
These are thematic ETFs and they don't represent "the market" or a specific benchmark.
App Economy Portfolio has outperformed large caps ETFs (like SCHG) by a lot.
VGT (Vanguard Technology) is one of the best performing ETFs on the market with 13% annual return since inception in 2004 and nearly 20% annual return in the past 10 years. Why? VGT is heavily allocated to semiconductor stocks like NVDA and AMD. Half of VGT is in 3 stocks (MSFT, AAPL, NVDA). Cherry-picking some of the best-performing ETFs after the fact is easy. The challenge is to do so before they deliver such performance.
I agree that VGT is good after the fact... But... Your portfolio is tech oriented and "does the same" )
Technology and Communication represent 40% of the S&P 500. So the entire stock market is tech oriented today.
Low-costs factor-based ETFs can outperform the S&P, but they don't necessarily make for a diversified approach. They are regularly rebalanced, which can diminish their outperformance over several decades. That's not true if you managed you own allocation.
What is your take?
What is your preferred investing approach?
Do you believe it's advantageous to sell winners early?
Do you have a different point of view, more focused on the short-term?
Hi Bertrand, thanks a lot for your very helpful and teaching newsletter. I'm in the finance world for 2 or 3 months, and yet I'm really interested in it. But a question I'm asking right now is how can you say in one hand to select assets with a lot of attention and in the other hand to let them live over decades without really caring. I mean, I understand but still an asset is good at a precise time. So if I select a good asset right now, it might not be in 2 or 3 years and if I don't pay attention well I could lose a lot of money ? Sorry if I'm not clear, I'm French and still learning how to write a proper English.
Thank you for the warm feedback, Lucas! Glad to hear you are getting interested in the finance world. You are correct, an investment today may not be as relevant a few years from now. That's why it's critical to have an investment thesis. If a thesis is broken, then there is no point in holding the investment longer. With this in mind, periodic reviews (for example, quarterly or annually) can help re-assess if anything has changed. Selling losing investments is part of the process. That's why the title of this article is "Let Your Winners Run" and not "Never Sell."
The main benefit of framing an investment with a longer time horizon is to shift our attention to what will move the needle over the long term. It makes us look for different criteria, such as durable growth, sustainable competitive advantages, a large and expanding opportunity, operating leverage and earnings power. It also makes us stay away from many subpar businesses that are in a secular decline.
Buffett uses many analogies for this:
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
He once explained: "I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better."
If you shift your focus to investments that are more likely to stay good over the long-term, you'll improve the quality and durability of the portfolio. As a bonus, you won't have to live your life with a finger hovering over the sell button at all times.
Thank you a lot for the answer. This is very clear.
Hi Bertrand, as always very insightful. One qualification, the buy and hold forever philosophy applies to investments in quality companies with a long growth run ahead of them. If you are betting on reversion to the mean in no or low growth companies or investmens in cyclical industries like Energy, which some of us do, this would be bad advice in most of the cases. My portfolio is growth, reversion to the mean / cyclicals, dividends and a small portion for macro bets. Appreciate you can also sell these investments too early, but most of the time you need to exit and reinvest in other opportunities with a better upside eventually. Regards, Denis
Denis, you are absolutely right. Buying with the intention of holding for decades changes the type of investments that enter the portfolio. It shifts the focus to the quality of the business, unit economics, growth duration, addressable market, track record of innovation, and culture and leadership. The benefit of the longer time horizon is not only to leave compounding uninterrupted, but also to invest in companies that can return 100X, as opposed to seeking to make a quick buck investing in an average business undervalued by 30%.
Doesn't have to be an average business. Can be a very good business in a cyclical industry, or a market leader in a stagnant industry. Both value and growth people can be rather dogmatic about their approach to investing. I am saying there is value in both and I can make much higher returns which will be shortlived, but superior nonetheless. Of course ideally I want to buy great businesses at a fair price, which keep compounding for decades. But unfortunately these are outliers and not the norm. As I said I still try to capture them and let them run, but it doesn't mean I have to limit myself to one style of investing.
Denis - I am really interested in your reversion to the mean strategy. I am building a neural net to identify patterns for mean reverting bond pairs. How many standard deviations away from the mean do you usually target in your strategy and what is your timing mechanism.
Hi John, I don't time, at all. If its attractive enough, I buy. If you are looking for timing, major options expiry dates seem to give some indication and direction. But I wouldn't bet my money on it as I don't understand it enough. In terms of standard deviation, guess it all depends on what the deviation is from. Fair value? All time-highs? The mean valuation? Ask five different guys and they will give you five different values for fair value and you would need to make a couple of future assumptions, which are very difficult to predict with any certainty. But what's a lot more important, is the context.
Why exactly is the price deviating from the mean? Is it because of temporary issues with a high chance of overcoming these issues? Is it because the prices for the key product in that industry are down? Is it because the company cut the dividend? Is it because they are investing a lot of CAPEX and it is not certain whether that investment will pay off? Is it because they made an acquisition which is questionable and/or they took on a lot of debt to finance it? So not sure how meaningful a standard deviation would be without context.
I would remove the following from your portfolio:
TTD - Strong position in ad tech but limited competitive moat and cash flows.
MDB - Growing database software provider but faces entrenched competition.
MTCH - Leading dating app player but limited switching costs.
HUBS - Benefits from cloud growth but niche HR software market.
I have an idea or two as replacement(s).
This article is called "Let Your Winners Run." And you are suggesting I sell most of my biggest winners. Do you see the irony? Let's agree to disagree.
Can you send a note to Meb Faber to let him know that his post has a dead link for The Capitalism Distribution – The Realities of Individual Common Stock Returns by Eric Crittenden and Cole Wilcox, BlackStar Funds.
See link below to see what happens
https://ibb.co/7GWhbgw
A note from you has a higher probability of Meb reading than me.
Thank you for a very interesting article. One reason for the impatience of investors might be the unknowability of whether a "short-term" (few-year) loser is a "long-term" (20+-year) winner. I fear that without quite nuanced understanding of the stock's underlying business, its future potential and the quality of execution toward realizing that potential, which seem to require re-examination of the business quarter-after-quarter, zillion possible implementations of cut-your-losers strategy available to retail investors might also lead to cutting their winners. So, any battle-tested recipes that don't require Warren-Buffet-level inspection of businesses and their future potential would help retail investors choose that right one cut-your-losers-without-cutting-your-future-winners strategy. Holding winners by simple monitoring of the total return achieved by each stock in one's portfolio is much more straightforward for retail investors. However, those stocks that have no hickups year-on-year are hard to find, as the article very well illustrates, so if positions are opened just before a hickup that will last a few years, a future winner may well be cut as a loser without more details in how to avoid these mistakes in cutting-your-losers strategy. Perhaps the answer is: you can't avoid these mistakes, so either bring your understanding of businesses, their future potential and execution closer to Buffet's level to make such mistakes fewer, or just invest in indexes and perhaps current wide moat companies at the top of these indexes.