The Globe and Mail, Report on Business, Guest Column April 12 2006
A while back, Ira Gluskin recommended the new Barton Biggs book, Hedgehogging, in his column. I've enjoyed reading Mr. Biggs since his days at Morgan Stanley and I've never been one to doubt Ira, so I dutifully went on-line and ordered a copy.
Early in the book, Mr. Biggs spends considerable time describing the agony he went through with one of his strategies that wasn't working out. He was bearish on the prospects for oil and was selling the commodity short. This part of the book resonated with me because I too have gone to the short side of that same &#@&*$?* commodity. I sold short a selection of large-capitalization energy firms as a way of reducing the oil exposure I have through my mutual fund holdings.
There are learned arguments on both sides of the oil debate, but I feel that this cycle will play out like any other. High prices will create more investment, demand growth will soften and new technologies (including alternative fuels) will gain market share. I also don't think China's growth will be uninterrupted. A few years ago when oil was in the low teens, it was hard to find arguments as to why oil would ever go up. Now, it is equally hard to find reasons why it will go down.
Like Mr. Biggs, shorting is new to me. I've always been told that it is difficult and requires a different psychological makeup. Indeed, there is a chapter in the book entitled “Short Selling Is Not For Sissies.” Also, like Mr. Biggs, my experience has been painful, so far. It has reduced my portfolio returns, but the worst part is having to absorb the body blows inflicted by the daily headlines (“Energy stocks were up again”) and my wife's questioning (“How did oil do today?”).
On the positive side, it has sharpened my focus on the three keys to being a successful investor — discipline, patience and courage. Whether you are investing in stocks, bonds, mutual funds, real estate, art or antiques, you need a healthy dose of all three attributes to win at the game.
Discipline means sticking to your strategy and not losing sight of your long-term objective. To be disciplined, of course, you have to know what your strategy is, as well as what you're good at and not so good at (shorting oil stocks?). For individuals, the best way to be disciplined is to write down your objectives and time frame, and define your long-term asset mix.
Patience is required to let your strategy play out. In the case of an individual's financial plans, we're talking years, not weeks or months. Investing is a marathon, not a sprint. As the calendar is working for you, you'll invariably have times when your investment strategy isn't performing well, or at least not as well as that of others. Patience is certainly required at those times, but it will always be required to some extent because disciplined, long-term investing is dead flat boring a lot of the time.
The third component of being a successful investor is courage. If you're going to be disciplined and patient, you'll also need to be courageous. It takes guts to hang in when your plan hasn't worked for a while (it's been eight months for me on this damn short position).
Perversely, the best time to invest in a security is when it feels the worst and the most courage is required. The truly great opportunities don't come gift wrapped with a bow. They'll be covered with dust and dirt, and undoubtedly they'll have a few warts. Jenny Witterick, who manages international equities at her own firm, Sky Investment Counsel, is one of my favourite money managers. She has a nose for value and a great track record to show for it. Jenny likens buying a stock to cliff diving in Acapulco. To be successful (which in this case means living to see another sunset), the divers must time their leap so they hit the water when a wave is coming in. To do that, however, they have to jump when there are only rocks below. I don't think it takes as much courage to buy a stock, or rebalance your portfolio, but you get the idea.
As for my oil short, I haven't seen anything that makes me change my mind (which takes just as much courage), so I'll stick with it. If it works out and I recoup my losses, or perhaps make some money, my wife will hear about what a patient, disciplined and courageous investor I am. If it doesn't work out, she'll no doubt remind me how stubborn I am.