Successful fund manager Chris Mack shares with us some of the things that has led to his fund outperforming the competition. While we may profit from such tips, they play a different game.

Being a successful fund manager is a pretty challenging affair, as managing a huge amount of money and managing to beat what their investors could have made by just buying and holding a basket of stocks in an index is a lot harder than it sounds.

Perhaps this task should not be as hard as it is, but when we consider that only about 1 in 5 funds do this, even though this may only involve beating the market by a little, funds do struggle a lot with this overall to be sure.

The main challenge in successfully managing a fund, and doing so does indeed involve beating the market on a net basis after fees are deducted, is to be able to anticipate changes far down the road, instead of just the near term as more agile investors shoot for, or even the next few bars on a chart as the nimblest ones can focus on.

As individual investors, when we are looking to get advice from fund managers, we do need to account for the big handicap that they are under, and not just be willing to necessarily trade their way and take on this handicap voluntarily, trading as if we were under it.

This does not mean that there isn’t anything we can learn from these professionals, and after all they are indeed professionals, with most investors being far less experienced and educated. We need to realize though that the curriculum for being a successful investor and that of managing a successful fund are quite different.

A Fund Manager Shares a Little Advice with Us

Chris Mack of the Harding Loevner Global Equity Fund has recently shared some of his insights with us, with the presumption that individual investors may profit from this advice. Like many in the business, he preaches a fairly long-term approach to stock holdings, telling us that “we think our edge comes from having a longer-term orientation. We have a holding period of four or five years, if not longer.”

Actively managed funds don’t just buy and hold that often like a lot of investors do, and some may think that four or five years is a rather short period of time compared to how long they may plan to hold their stocks, and when someone tells us that this involves taking a longer approach than their peers generally, that may actually surprise us a little.

We enter a position when it looks promising, and exit when this promise has either failed to manifest or has played itself out. While we should never set any arbitrary time frame for these holdings, 4 or 5 years or otherwise. Even though such a timeframe may end up being the average, there are various degrees of patience that will be involved, higher or lower thresholds that are set to determine when it’s time to go.

Just because Mack and his fund ends up with these results does not necessarily mean that this is how long we should be looking to hold our own stocks, especially since his fund or any fund must by nature be more patient. It takes real time and quite a bit of slippage generally to enter and exit their positions, and therefore funds require a higher degree of tolerance before they pull the plug or their trading costs will be too high.

This also requires their outlook to be longer-range, in this case one of 4-5 years, where we don’t even need to use such things if we don’t want to. We can just trade on the current bar if we want, involving no expectations at all other than just exiting when the current trend ends. That’s how traders earn their living actually, and while few investors use a trading approach to their investing, this does not mean that this isn’t a viable method for them as well.

The problem they have with doing so though is that trading this way does require a fair bit of skill, although nowhere near what many people think. What we’re looking to do here is ride various waves, and the trick is to know when the current wave ends and a new one begins, and be right about this more than we’re wrong.

Funds cannot even dream of such things though, or for that matter, getting right back in a trade when it looked like it was time to go but this ended up being a mistake. Their moves have to be well planned out and also involve a fair amount of commitment, perhaps not as much as someone like Warren Buffett would make, but a fair bit of it nonetheless.

Patience is Indeed a Valuable Attribute

Having an appropriate amount of patience is needed though however we trade, because there’s always reasons to exit if we wish to look, as well as having a base plan with an exit strategy, all things utilized by Mack and other fund managers. Some do this better than others of course, and Mack’s fund is at least ahead of the curve, beating competing funds consistently.

Mack also shares some of the things that he looks for in deciding on investing in a company, such as looking at earnings growth. That does make sense because a history of earnings growth does portend well. We do need to have our finger on the trigger though should this growth decline.

There are a lot of reasons to invest in a stock, with this being just one of them, but whatever our rationale may be, it is important to watch these conditions closely to ensure that they don’t become violated such that we would no longer enter the trade. If we shouldn’t enter, we shouldn’t hold either, as a general rule.

If a company had some good earnings growth for a time but that has gone away, and we invested in it based upon this prospect, we need to ask ourselves why we’re still in the trade, and this is no time for rationalizations. Funds do require that they give these trades more room, but there is always the possibility that the deal may turn sour, and if we do not act, we just end up violating our trading principles and often common sense as well.

Mack also shares his preference of non-cyclical stocks, although cycles are long enough generally that we can easily get out of the more cyclical ones during unfriendly cycles, and even funds can do this. This does suggest a more defensive posture as well as perhaps a reluctance to trade that may exceed what even funds can pull off and benefit from.

We’re also advised to be more patient with things like negative earnings reports, which in some cases can be pretty good advice given that the shock of this tends to happen right away. The fact that a stock has taken a shock doesn’t mean that it’s time to go, and this should never be about how much we’re up or down, and always about where we’re going from here.

On the other hand, when you see your stock declining in a way that should have you second guess why you are in this, that’s a different matter, and hoping that it will come back doesn’t count. Hope has no place in investing, and when you’re down to this, it is surely time to get out.

Being patient enough, however much that involves, and not being easily put out by short-term fluctuations in price, those within our threshold, are two good pieces of advice for us. It is not that funds don’t evaluate their positions on an ongoing basis, as they certainly do, and it’s not that they give then unlimited room like a pure buy and hold investor would, as there are real limits to this as well.

That may be the best takeaway from this that individual investors can benefit from, to be patient but still have an exit plan, a threshold where our patience is no longer warranted.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: ken@marketreview.com

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