John Huber is one of the top-performing fund managers of the decade. His Saber Investment fund has achieved a gross annualised return of 20.66% since 2014. That puts his fund well ahead of the S&P 500 which has annualised at 10.89%.
I spent my weekend studying some of Huber’s letters to shareholders and blog posts. Here are three investing lessons from his writings.
Time is a valuable edge
Fund managers often get asked the question, “what is your edge”? The two main responses that institutional investors look for are some sort of “information” or “analytical” edge.
However, Huber believes that in an era of easily-accessible information, both these edges do not exist anymore. Huber explains:
“I’ve observed over the years that whatever information an investor believes to be unique is almost always understood by many other market participants, and thus is not valuable.
The mispricing is not in the stock itself, but in the investor’s own perception of the value of information: it’s worth far less than they believe it is. Information is now a commodity, and like the unit price of computing power that provides it, the value has steadily fallen as the supply and access to it has skyrocketed.”
But the absence of an “informational” or “analytical” edge does not mean stock pickers cannot outperform the market. Huber believes that the “time horizon” edge is still alive and kicking.
The “time horizon” edge is formed because today’s market participants are more interested in short-term gains over the long-term. Huber notes that many investment firms today make investing decisions based entirely on short-term stock price movements. These decisions have nothing to do with long-term value.
This creates a huge pricing mismatch between a stock’s long-term value and the current stock price. In turn, it creates a massive opportunity for long-term investors to outperform the market.
But the “time horizon” edge does come with its price. Huber explains:
“The price of gaining this edge is the volatility that could occur in the near term. You have to be willing to accept the possibility that your stock will go down before it goes up. Very few investors are willing to pay that price, which is why even large-cap stocks can become disconnected from their long term fair values.”
Don’t be afraid to say, “I don’t know”
Huber wrote a great article on one of Warren Buffett’s underrated investment attributes: His ability to recognize when a situation is outside of his well-defined circle of competence.
Buffett has been able to do extremely well in the stock market simply by focusing on more-certain bets and resisting everything else.
The ability to say “no” has enabled Buffett to have very few major mistakes on his record.
More impressively, Buffett is also humble enough to admit when he is wrong. For example, his ability to realise his mistakes led him to make smart investment exits in IBM, Tesco, and Freddie Mac. Huber wrote:
“I think the vast majority of investment mistakes can be traced back to the inability to be honest about your own knowledge or level of understanding about a subject matter.
It’s hard for smart people who have spent their lives being right far more often than they are wrong to admit to themselves that something is too challenging.
It is even harder to admit that their original assessment was completely wrong. So I think intellectual honesty can be a source of a powerful edge for those who can harness it to their advantage.”
Individual thought is essential
Huber also explains that one of the biggest risks in investing is allowing others to indirectly make your investment decisions.
Too often investors rely on outside advisors to make an investment decision. But the advice may be based on different economic interests, investment horizons, or goals.
Investors also tend to copy high-profile investors. However, high-profile investors can also occasionally make mistakes.
Theranos, one of the most high profile fraud cases of the decade, managed to secure billions in funding before it was eventually found out. Its early investors were some of the most respected business people of our time. They included the likes of Carlos Slim, Robert Kraft, Larry Ellison, Rupert Murdoch, and the Walton family. Huber notes:
“My observation is that independent thought is extremely rare, which makes it very valuable.
On the other hand, outsourced thinking appears to be pervasive in the investment community, and because of how we’re wired, this dynamic is unlikely to change. Regardless of how convincing the facts are, we are just more comfortable if we can mold our opinion around the opinion of others.
Understanding this reality and being aware of our own human tendencies is probably a necessary condition to investment success in the long run.”