Why Consistency?

At lunch with my partner last week, we discussed why we have a long-term approach, in a market of frequent trading. We hold portfolios for months, rather than trade monthly, let alone weekly or daily. And our analysis takes into account several years of performance, in order to find consistently superior performers to buy and hold.

This market demonstrates why. Volatility is very high over short periods of time. Given the various forces and factors influencing investors- Fed rate hikes, oil and natural gas supply, Mideast oil supply worries, and, now, North Korean aggression- market prices in various equity sectors gyrate swiftly.

In my proprietary research, I found that many 3-year phenomenons are not 4 year successes. While the average returns for the market is remarkably stable over various timeframes, the standard deviations of those returns are markedly higher for relatively short time periods- less than 4 years.

In fact, some returns which are not even beyond one standard deviation from the market average return at 2 years will be well beyond that measure at 4 years. This means it is a much less rare event over a short timeframe, and a much more rare event over the longer timeframe.

Thus, the loss rate would be high for equity selections, based upon extraordinary 2-year returns. Seasoning the selections for 2, or even 1, more year, knocks out quite a few of them.

What it boils down to, from my research, is that the best way to select for consistently superior performing companies in the near future, is to find which ones have already been doing it in the past. From various prior posts on this blog, it should be evident that I do not hold out much hope for the broad mass of average employees, managers, CEOs and companies to change their behaviors and suddenly become above-average. It is much less risky to find companies which already display consistently superior performance, and simply expect a little more of it over the coming months.