Tuesday, May 8, 2012

The Investor's Convictions

Avengers' "hero" teaches
us about investing.

I was one of many who watched the Avengers in its opening weekend.  Despite the many super heroes featured in this blockbuster movie, the creators seem to want us to focus on a particular scene featuring Phil Coulson, a mere mortal who, while working for a somewhat suspicious military outfit, appears to be a genuinely “good guy.”  Coulson, near death after being stabbed by the movie’s villain, Loki, advises his opponent that the decidedly “bad” guy’s plans to rule the earth will never succeed.  According to Coulson, Loki “lacks conviction.”  As you may expect, the movie is rather short on dialogue, and fittingly, the creators refrain from allowing Coulson to explain his comment.  But the agent is likely commenting on the “super villain’s” desire for power, no matter the sacrifice in human lives or moral principles.
Two recent posts (here and here) by this blog’s primary contributor cause me to think about the conviction needed to be an effective investor.  If we believe our objective is simply to “make money,” no matter the methods, we are likely to follow fads and to play the role of the “bigger fool.”  But if we do the homework needed to have an understanding about, and a comfort level with, the factors relevant to investing success, we can develop the conviction needed to avoid making big mistakes.
Yesterday’s post about the wisdom of investing in the common stock of the most successful and well positioned companies in the world, rather than the Treasury Bonds currently trading at what seems to be a significant premium, makes perfect sense.  It is tempting to wonder how this advice can possibly be rejected.  But this conviction is the result of a significant amount of research and experience.  During the past two decades there have been two notorious “can’t miss” investments that, despite the sober analysis of some, were widely believed to have the magical ability to outperform forever:  housing more recently, and internet stocks some time ago.  During each of these asset class’s heyday, an investor anchored by fundamental analysis was tested.  To sit out of the suspected short term bonanza took conviction.  For every sober analysis supporting the “fundamental view,” there existed many more people advising that they were “making easy money” by buying and not asking questions.
To be sure, the use of historical evidence and logic to identify the likely direction of competing asset classes is not an easy task to perform.  And even a strong belief that the the majority of others are choosing the wrong path, whether by investing in Treasury Bonds today, or real estate and internet stocks in the recent past, does not always make the decision to follow one’s convictions easy.  But investors can seek comfort in the anchor provided by considered analysis and clear thought, just like the Avengers’ mortal hero Phil Coulson found comfort that the convictions of the “good guys” on his side would lead to a happy ending.  And of course Phil was correct.  The Avengers prevailed.  And Loki met justice.  Hopefully we “good guy” investors will prevail, too.