Underperformance…Is It A Necessary Evil?

You will underperform. That’s right I said it!

We will all underperform at multiple points while investing in the stock market. I hate to break it to you, but it’s an inevitable fact of life that we will underperform the market from time to time — and it’s perfectly OK!

It’s a “Catch-22” in some sense — to outperform and compound capital at high rates over time, underperformance is a necessity.

If you want to beat the average index, you have to deviate from the index — it’s a simple concept, but far from easy to execute. It can be stressful and a hindrance when we deviate from the index during the short term. However, we gain a significant advantage long-term from this deviation. There are numerous investors who produced investment returns that are multiples over that of various indices. The only way they can accomplish this is by owning a portfolio that looks nothing like the index.

We believe in concentrating our best ideas into a focused portfolio. We want to own the cheapest, highest quality stocks with the best future. I have no idea whether these investments will rise today or tomorrow (BTW, no one does). However, I’m very confident that this strategy will work incredibly well over time.

The psychological pressure to succeed long-term in investing can be tough for most individuals.

Investors must stick to a long-term, rational system. We should consider ourselves lucky. By its very nature, the stock market shifts capital to the patient investor from those who are impatient and active.

WE WILL UNDERPERFORM. And you should welcome those periods from time to time. EVERY great investor will have periods of underperformance. Unfortunately, these periods can be longer than anticipated before the investor is proven correct for their patience. The problem is we only hear about the underperformance from the media because it causes more of an emotional feeling of loss for individuals. This tactic follows the closely held mantra in the media, ‘if it bleeds, it leads. ‘

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Moon Kil Woong 4 years ago Contributor's comment

Underperformance to increase safety and decrease risk is fine unless your job depends on it. Unfortunately, the aims of money managers and the interests of many investors do not agree.