The recently completed Summer Olympics in Rio showcased countless competitions which kept many of us enthralled. Structuring an investment portfolio to achieve one’s financial goals may not be quite as thrilling but that’s because investing is more like a marathon than a sprint. Success is measured by stamina rather than speed. Eliud Kipchoge, this year’s marathon winner, would leave Usain Bolt in the dust over 42 kilometres.
The Olympic event best compared to investing might be the decathlon. In the decathlon, the gold medal winner does not have to win every category outright. Rather, the athlete needs only to win a few of the events and perform reasonably well in the others. Ashton Eaton, this year’s decathlon gold medal winner, won just two of the ten events outright, placed as low as 18th in two others but was top ten in the rest. An overall, well-balanced performance will lead to a place on the podium.
Further, the Olympic decathlon is always held outdoors, meaning the competitors need to adapt and be prepared for circumstances beyond their control. If the weather is wet or windy, all the athletes’ performances may suffer. Similarly, investment portfolios are susceptible to outside conditions: when markets are volatile, performance will be impacted accordingly.
So how does the investor ensure a portfolio has the stamina of a marathoner while allowing the individual components to do well enough to result in a decathlon-like, overall podium result?
A well-balanced performance will lead to a place on the podium
We think the best way is to focus on and invest in wealth creators – those businesses that deliver a product or service that has a greater value than the cost to produce it, and have the ability to reinvest their profits and grow their productive capacity. We believe that wealth is derived from the productive infrastructure that underlies such a business – the facilities, equipment and personnel that deliver the product or service. It is not derived from trading stocks or juggling asset classes.
The markets frequently put a price on shares of a business that does not reflect their true value, but over time as the success or failure of a business becomes more obvious, the market eventually gets it right. If a portfolio consists of shares of businesses that are profitable and growing, we know that the portfolio is becoming more and more valuable. What we don’t know is when the market will accept that and price it accordingly.
When bought at the right price, successful businesses, those with a long time-line, predictable results, adaptable to market conditions and which have a sustainable competitive advantage, should lead performance and consequently the portfolio, to the podium.