Establish a Sound Investment Philosophy 65teaches that it is far better for the reputation to fail conventionally
than to succeed unconventionally. ”^5
If it ’ s clear that one of the inherent weaknesses of relative
return investing is that returns tend to run in tandem with general
stock market returns, why do the vast majority of investment profes-
sionals practice relative return investing? The name of the game in
investment management is to, fi rst, keep your job and then, second,
attract additional amounts of capital. To Wall Street, money manag-
ers are only as good as their latest year ’ s results. So why not protect
your job simply by using an approach followed by the vast major-
ity? If 80 percent of active money managers all report declines in
the same year, you can ’ t single one out for being less skillful. It ’ s far
easier to hide among the masses than to stick out your neck and
risk getting it chopped off.
Unlike the relative return approach, an absolute return
approach aims to profi t consistently regardless of market return. It
should be clear then that absolute return investing relies more on
the investor ’ s skill to produce profi ts. Further, and as I mentioned
earlier, an absolute return approach is obviously much more valu-
able during bear market periods. Bull markets can make the most
novice of investors seem brilliant; it ’ s not until the times get tough
that you separate skill from luck. Most important, however, is the
understanding that investment records start becoming meaningful
after a period of years, not just one year. In the short run, a rela-
tive return approach can look extremely good during bear mar-
kets. Because value often is found in the most unloved industries,
a concentrated value - oriented portfolio could easily fi nd itself
vastly underperforming the broad market during a bear market.
Remember that in the short run, the market votes, and often those
votes don ’ t favor temporarily depressed businesses.
Value investors are by default oriented toward an absolute
return approach. Rather than looking at the market as whole, they
focus attention on individual businesses. Rather than invest inCH004.indd 65CH004.indd 65 9/2/09 7:06:53 PM9/2/09 7:06:53 PM