Hussman Weekly Market Comment: Very Nicely Swept!

Hussman Funds - Weekly Market Comment: February 21, 2006 - Very Nicely Swept!:

"The same is true of investing. To the casual observer, investing seems to be about finding the next Microsoft or Google (assuming that Google doesn't suddenly find itself looking like the tech-wrecks of several years ago, which I suspect is a poor assumption). The apparent skill seems to be finding the next great growth story, getting an inside line on future earnings prospects, or timing the next market move.

In truth, to my knowledge, skills like that are both unreliable and unnecessary for investment success. They require success to be far, far too specific. Instead, effective long-term investing requires the 'averages' to work out well - not only the average performance of the stocks in a diversified portfolio, but also the average performance of the portfolio over a series of investment horizons.

The key skill required for good investing, in my view, is the willingness to abandon the specific in favor of the average. That means abandoning the attempt to find one or two 'special' and unique stocks, and instead applying a careful stock-selection discipline in order to create a whole portfolio with certain 'average' characteristics of valuation, market action, financial strength, and so forth. It also means abandoning the attempt to forecast the market's direction over some specific period ahead, and instead aligning the investment position with the 'average' return/risk profile that stocks have experienced when historical market conditions have matched prevailing ones.

So winning depends on a specific skill that might not be immediately obvious. That skill is the willingness to focus on average outcomes, and to ignore specific ones. It's a quality that's commonly called 'patience', and it's rewarding precisely because it is rare."