I'm going to level with you: It isn't easy being an individual investor when you have to compete against Wall Street. The big boys in New York have a lot of advantages over you. They have more money to throw around. They have access to data you don't. They have teams of researchers to track down information.
But there's one thing that they don't have. And that is how you can compile investment returns that beat the suits on Wall Street. It's a secret that Miller/Howard Investments' Jack Leslie put a fine point on in a recent conversation.
"Time," Leslie told me, "is a huge advantage."
In his quarter-century as a portfolio manager -- now managing dividend and high yield-focused equity funds for Miller/Howard -- John E. "Jack" Leslie III has found that while Wall Street is busy trading on every market wiggle, people with the luxury of a longer-term investing horizon can wait for the best opportunities, have a larger margin of error, and have a better risk and reward trade-off.
Waiting for the right opportunities, and then hanging on to them
According to Leslie, the average Miller/Howard fund has about 40 equities, and the portfolio turnover is roughly 25%. That means each year about 10 stocks will be sold, and 10 new stocks added, which gives each investment an average life of four years.
This is an enormous advantage. Instead of constantly chasing new ideas like a rabid squirrel, you can sit back, wait for the market to throw you something right in your wheelhouse, and capture the best opportunities. As Charlie Munger put it in this year's letter to Berkshire Hathaway shareholders, a key ingredient in Berkshire's success is CEO Warren Buffett's "almost inhuman patience."
Or think about it this way: If you're an investor who thinks in one-year time horizons, then you have to find brand new, great ideas every 12 months. If you invest like Leslie and Miller/Howard, then you don't need new great ideas as often. And let's be honest, are there really that many great investment ideas out there that we can afford to be turning them over all the time?
Timing matters less
Once you find that opportunity, how do you time it perfectly so that right after you buy it the price soars? Traders and other short-termers need to create results now. So timing when to get in and when to get out is critical.
Unfortunately, the stock market is not always logical in the short term, which makes attempting to time the market difficult -- if not impossible. This is because, as Buffett mentor Ben Graham famously wrote, "In the short run, the market is a voting machine, but in the long run, the market is a weighing machine."
This plays right into the hands of the long-term investor. As Leslie noted, "If you have a three, five, 10, or 20-year time horizon, [the price] is going to go up in line with the growth of the income." So even if you buy at the worst time, the longer you own a great company that can consistently grow earnings, the less your starting price matters.
A better risk/reward trade-off
Not only is timing the market difficult, but the trade-off between risk and reward is not as heavily weighted in your favor when you're investing for the short term.
Think about it this way: If you own a stock for a year, an ideal outcome might be for that stock to double (one S&P 500 stock gained almost 160% over the past year). The maximum downside over that year is for the company to go belly-up. That is, you lose 100%. So here we could say that the risk/reward trade-off over a year is 100% upside to 100% downside, or, if you like, 160% upside to 100% downside.
Now what if we think longer term? Over the course of a decade, there are stocks that gain thousands of percentage points -- Apple is up more than 2,000% over the past 10 years. Yet the downside of investing over this time horizon is still fixed at 100%. When we're investing over the longer term, then, we could argue that the risk/reward trade-off is more like 2,000% upside to 100% downside. I'm no math Ph.D, but those numbers sound more attractive to me.
Investing for the long haul
It's not easy to beat Wall Street. The pros there simply have too many resources. But your odds are much better if you don't play their game, and instead use your greatest advantage: a long-term approach to building wealth over time.
Dave Koppenheffer owns shares of Berkshire Hathaway. The Motley Fool recommends Apple and Berkshire Hathaway. The Motley Fool owns shares of Apple and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.