‘You’ve Gotta Have Faith….’ (with apologies to George Michael).

At the cinema over Christmas with my children, a trailer for the new Disney Movie “Dumbo” came on screen. Seeing yet another one of these live action remakes of beloved classic cartoons, it led me to ask the obvious question…would Dumbo have been a good investor?

If you don’t know the story, Dumbo is an orphaned elephant with embarrassingly large ears. He is made to work at a circus, where Timothy, a clever mouse, tells him that he could be a star if he used his huge ears to fly. Dumbo isn’t convinced, so the mouse gives him a ‘magic feather’, which allows him to fly. Dumbo later learns (mid-flight, for dramatic effect) that the feather isn’t magic. He could always fly. He just needed to believe.

Belief systems appear in almost all societies in some form, though the details vary dramatically. In their purest sense, they help a society cultivate a system of ethics, a story about the world, how life and death work, a supportive community to join. Interestingly, extensive studies have shown that the benefits of a belief system or religion don’t actually seem to depend on the exact theology. The details of the story aren’t critical, just belief in the story So, what if a critical ingredient to being a successful investor isn’t exactly which strategy you follow but instead that you have faith in that strategy no matter what?

By faith I mean the ability to take the leap into risking your money without guarantees, and to continue to adhere to the strategy, even in the face of disappointing results. Markets must crash, as we’ve seen only in the last few weeks. Strategies must underperform. Chasing performance actually produces lower returns and Warren Buffett underperformed the markets by 67% at one point! The truth is that a clairvoyant Investment Manager, who knew exactly what stocks would perform best, would get fired, because the client experience would be so terrifying. Most of us will invest for about 50 years, from around age 30 to 80.  Over that period the primary driver of growth will be from a reasonably diversified, risk-appropriate portfolio with low cost and efficient tax treatment. Once those boxes are checked, the exact strategy you choose isn’t hugely important. Methodologies like Market-cap, SRI/ESG, Smart Beta, Global CAPE all sound good for the uninitiated but the truth is they’ll all have periods where they look best, and periods where they under-perform.

Except if you don’t stick with it. Except if you flop in and out of strategies with each glittering fad and temporary disappointment, especially if it includes moving in and out of cash. Over a decade where the market went up about 7% per annum on average, the average investor underperformed by 1.6% before costs through activity alone. The most active 20% of investors underperformed by 6.5%! Break most investing mistakes down and you get a simple story: the single biggest factor in successful investing is simply total time invested. Anything we can do which increases the time an investor holds a reasonable portfolio, is a win. Therefore, when it comes to investing it is better to have any reasonable faith, than none at all.


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