How to beat the experts at investing (including Warren Buffett).

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Performance of US Shares (S&P500; yellow), Australian Shares (blue), International Shares (orange) and Australian Bonds (brown) since 1970. Source: Vanguard Investments Australia.

As a bit of light reading this week, I perused an investor newsletter by Mike Taylor, CEO & CIO of Pie Funds (Pie Funds is a small New Zealand funds management firm). Mike recalled the story of how Peter Lynch wondered what return investors in the fund which he managed – Fidelity Magellan – were  getting versus the fund’s actual return. During the period 1981-1990, the fund returned a very decent 21.8% p.a. The average individual investor however, actually achieved an annual return of 13.4%.

How can an investment in such a stellar fund perform so poorly on a relative basis?

Lynch noted that due to their buying after a period of strong performance and selling  after relative poor performance, investors were doomed to substantially lag behind the fund.

Taylor points out that by doing the reverse – buying during dips and holding over the long term you can outperform even an expert investor. Imagine for example, beating Warren Buffett an Index Fund, or a fund manager by buying on dips Berkshire Hathaway,  the Index or a managed fund. (Beating Peter Lynch is somewhat more difficult given he no longer runs a fund).

Buying on ‘dips’ and holding long term is an excellent approach to relative out-performance for any index investor or an investor who believes they have identified a fund manager with a reliable performance history (e.g. 7-10 years). The tricks to pulling this off are i) identifying a manager or fund that will do well – which is easier to say than do, I know, and ii) deploying capital rationally during dips (e.g. of 5% or more over a certain period). It need not be any more complex.

Would you use this strategy to improve your investment performance?