This Is The Best Thing You Can Do In Investing

April 3, 2018

This Is The Best Thing You Can Do In Investing

If you are familiar with the Philadelphia 76ers, you know what “trust the process” means. For those of you who aren’t familiar, here is a short explanation:



What Is “Trust The Process”

The Philadelphia 76ers are an NBA team. In the NBA, you get players by drafting them from universities through an annual draft. The worse of a team you are, the more chances you have to get a higher draft pick in the draft lottery.

Former Sixers general manager Sam Hinkie decided the team should sacrifice short term wins in order to finally get a chance to win it all. In 2013, they traded their best players to get the best draft picks and rebuild a team. From there, the 76ers went from a mediocre team to a terrible, bad, bad, bad team.

Figure 1: 76ers last 10 seasons with the worst ever NBA record in 2016. Source: Wikipedia.

However, those 4 terrible years allowed the team to draft players like number one draft picks Markelle Fultz (2017), and Ben Simmons (2016), and number 3 picks Jahlil Okafor, and Joel Embiid. Further, they also traded other players to get younger players like Dario Saric from Croatia. What has been the result?

The 76ers are in for the best season since Allen Iverson was in town almost 20 years ago, and we might even see a championship this year or in the next few years.

The point of this “trust the process” story is that what might be the best short-term thing to do isn’t always the best long term thing to do. The same holds true for investing.



Trust The Process When Investing

In this market especially, you can decide whether you want to follow the latest fads and hope for mediocre returns as sooner or later, every bull market ends badly to quote Graham.

When I worked for Bloomberg in London, I used to read The Intelligent Investor on the tube (UK metro) and wrote a few quotes on a piece of paper that I recently found that perfectly fit the “trust the process” investing mindset.

Apart from the one stating that all bull markets end badly, the others are:

Be A Critical Thinker

Similarly to what was done in Philadelphia, sometimes what the majority does isn’t the best way to invest and won’t lead to the best long term returns.

Invest In Businesses

This one is one I keep repeating. Your investing returns will be perfectly correlated with the earnings returns the businesses you invested in deliver. As Philadelphia decided to sacrifice three years of winning (dividends) to find the best players, you might also think about adding only the best businesses to your portfolio.

Sell To Optimists & Buy From Pessimists

The star player of the 76ers, Joel Embiid, was injured during the 2014 draft and it took a long time for the team to enjoy his full abilities. Similarly, buying from a pessimist that focuses on temporary injuries might lead to you finding the best investments for the best price.



The Higher The Price, The Lower The Return

When you draft a player, you get them for a rookie wage. You can get other players, but they would quickly max out your salary cap. So, the lower the price you pay, the better your returns will be.

Always Buy With A Margin Of Safety

Not all players the 76ers have drafted have ended up super stars. Jahlil Okafor being the best example. However, given the low cost, there is always some value to get out of such a bargain trade.

Conclusion

Investing is about creating a life-long process that will lead you to your financial goals with the minimum risk because you can’t risk being without a retirement fund when you are 45 or without enough money to send your kids to the college they wish to attend, etc.

So, when investing, look at what you own, constantly reassess whether it fits your process, and when you find a process that works over the long term, just trust the process.



By Sven Carlin Investing Strategy Investiv Daily Share: