Difficulty in Sticking With a Plan

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

Six years ago, I read Joel Greenblatt’s “The Little Book That Beats the Market“.  I read it, and was very skeptical of the claims made that following the author’s methodology would result in 30+% returns.  Quickly working these returns out over a 15 year period, an annual $10,000 investment with the prescribed juggling of stocks compounded would result in over $1 million in your portfolio in 13 years.  I don’t know about you, but this seemed sort of unrealistic to me, so I never really followed it.  I was cleaning off my bookshelf the other day and came across this book again.

I got curious, and thought I’d look up and see what the returns were if I would have utilized the book over the past six years.  It’s interesting to note that most people are not able to stay with the strategy outlined in the book for the long-term, or at least they stop writing about it after about 8 or 9 weeks.  Additionally, anyone who tried wasn’t able to repeat the returns in the published book.  Both of these facts don’t really make me feel too bad about not following this book to fortune.  Additionally, returns were not at all favourable by anyone who followed this strategy and fluctuated greatly.

For those who haven’t taken the 2 hours to read this “Little Book”, the basis of the investment strategy is to follow the formula (EBIT / (Net Working Capital + Net Assets)) to screen the stocks, and to pick 5 to 7 stocks every quarter until you hold 20 to 30 stocks.  You are supposed to annually flip the stocks to maintain a 20-30 company portfolio.

The portfolio’s selection depends on capital gains and faith in the formula, neither of which I have a lot of faith in.  I prefer more tangible returns (such as dividends) and at least if I choose a poor investment, there is a reason for it other than a math formula going wrong.

One quality that this method and the method that many people interested in early retirement have (at least the ones who don’t attempt to time the market) is the fact that some years will provide very negative returns, and the best thing to do (probably) is to keep with your plan – to continue to buy stocks in the down market, a difficult thing to talk yourself into.

As a test, I think I will “paper” trade by this method over the next few years, it will only take about 10 minutes every 3 months, and may be interesting to know the results over a three-year period of time.  I don’t have a lot of faith in this type of investing, but it may be interesting to have my own results.

Would you invest in a down market?  Have you in the past?  If you have an investment plan in place, what would make you change your plan?

5 thoughts on “Difficulty in Sticking With a Plan”

  1. still waiting for Europe to crash … could be the best thing to happen for my retirement in the next 20 years

  2. The only time to invest is in a down market! The most solid Graham principle is to buy when others are selling.

    I’m a dividend investor that holds common shares for the long term. I look for dividend growth, and the strategy is working very well for me.

    It’s a solid strategy and I wouldn’t change it for the world. A few of my yield on costs are reaching 8% and still growing. What other type of investment gives you potential double digit growth year after year without having to stay glued to a monitor trying to predict when to sell?

  3. I dollar cost average through ups and downs. During the last 2 crashes I kept buying all the way down. Was it hard? Very. But my portfolio has completely recovered. And I am going to keep buying. Slow and steady wins the race.

  4. @ Greg – Are you betting on the downside, or going to buy for the “bounce”?

    @ Steve – I agree – it’s always difficult to know when the bottom has hit, but if you have a targeted yield it definitely helps.

    @ Tara – It is hard doing that, it seems like throwing good money after bad, but it seems like the buys at the bottom work out the best.

  5. For an example of someone buying stocks in a down industry (not so much market), I think about Michael Burry loading up on airline and hotel stocks right after 9/11. Or Derek Foster getting in on tobacco stocks when they got hit by the lawsuits and making his nut that way.

    In June-July, 2008 when crude oil hit $145, I sold all of my stocks. I bought oil stocks like a crazy woman when oil hit $30-$35 in Nov/08 on through to Mar/09. Market irrationality is a wonderful gift if you have some cash. I wish I had had more.

    The interesting thing is that you start reading the news in an entirely different way – like how is this “bad thing” a stock opportunity? Back in Sep-Oct 2011, I traveled a lot in the US (lived in Houston) because it was so cheap. What if I had been looking for stock opportunities like Burry was instead of just trying to save a few bucks on flights and hotels (being of a frugal mindset rather than a money making mindset)?

    Re. Greenblatt’s book – I never tried the method, but did flip through that book at one time and wasn’t too impressed.

    Here’s a guy that paper traded the formula for about 2 minutes:

    Like Steve, I like dividends – at least they pay you to wait.

Comments are closed.