Sunday, December 4, 2011

It's Not Rocket Science: Part VIII

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

In this final section of the book, Bradley discusses how investors can find success in the markets. First up, here's what not to do. Don't chase short-term returns, and don't think you can reliably forecast the future.

When considering a money manager, therefore, it's important to look past his last three years of returns. Find out where his alpha comes from. Is it from macroeconomic bets? These can deliver the best returns, because short-term economic events appear to drive the market's direction. But in Bradley's experience, predicting such events are a crap shoot. The most effective managers over the long term are successful because they correctly gauge the risk/return characteristics of individual securities.

Finally, investors should be prepared for down drafts. Nobody knows when the next Black Monday is going to be, but it will happen. Investors should be prepared to buy when it looks like the world is coming to and end, and sell when things look rosy.

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