What is required for active management to create the potential for long-term outperformance?
Everyone would love to have outstanding performance. The real question is whether you are willing to be different.
You cannot be the same as everyone else and expect to outperform. That may seem obvious, but it is an imperative point to repeat - you have to assemble a portfolio that is different from those held by most investors. If your portfolio looks like everyone else’s you may do well, or you may do poorly, but you cannot do better.
Being different is essential because if you want outstanding long-term performance you must escape from the crowd. There are many ways to try, such as:
being active in inefficient markets;
buying things that others haven’t found, don’t like or consider too risky to touch;
avoiding market darlings that the crowd thinks can’t lose.
And, concentrating on a small number of things that you think will deliver exceptional performance because a huge bonus of a concentrated portfolio is that you can buy a lot of what you like.
The mantra for the retail asset management business is that it is better to fail conventionally than to do something different from the herd and succeed unconventionally.
Yet, in terms of conventional asset allocation, one of NS Capital’s key principles for active management is, mindless diversification is not a substitute for intelligent thought.
NS Capital always looks for money managers that have the intellectual skill and emotional gift to stray from the crowd. When it comes to investing, you must give yourself the chance to fail from time to time. Failure isn’t anyone’s goal but rather an inescapable potential consequence of trying to do well. To succeed at any activity involving the pursuit of gain, you must be willing and able to withstand the discomfort that comes with the possibility of loss. The key is to invest judiciously, to have more successes than failures and to make more on your successes than you lose on your failures.
A winning strategy cannot lie in rigid tactics, public formulas or loss-eliminating rules. Nor can it rely on complete risk avoidance. Managing risk is not the same as eliminating risk. To eliminate risk is to limit returns. Superior investment results can only stem from skills that help identify when risk-taking will lead to gain and when it will end in loss. When it comes to active portfolio management there is no alternative.
For us, the key is not to be risk averse; it is to be risk aware.