Wednesday, August 11, 2010

Outperformance comes many ways

There are many ways to outperform the general market, some adding incremental value here and there, such as finding undervalued individual companies, or staying away from seemingly overvalued sectors (bearing in mind of course, that over [under] valuations can stay that way for very long periods of time).

However, the one of the seemingly most riskiest ways is to find an unacknowledged secular tailwind, and ride it to outperformance. These are always present, but difficult to figure out how much return they'll produce, and how long the ride will go on for, or even when it will begin.

In some cases, like the tech sector beginning in the late 1980's, should have been very visible to figure out, and ride it for a very long period of time. Some, like the hard commodities boom, beginning in the very late 1990s, were a bit tougher to figure out, given the nearly two decades of very weak performance in that sector. Even if you figured it was on the cusp of a long term revival, it would have taken considerable courage to move against the thinking that had solidified over two decades: namely, that this was a poor investment area.

Today, soft commodities (eg foodstuffs, generally) and emerging markets (both personal holdings; GRU, RJA, DEM), seem like excellent bets to overweight a portfolio in, something I have been writing about for three years or more now. Will these bets produce the outperformance I think is available there?

When thinking about these types of potentially big portfolio moves, it might hearten you to think about what one of the deep management thinkers of the last century, Dr. W. Edwards Deming had to say about the unknowability of things .... which can reverberate in investment thinking ....

"The most important things cannot be measured."

"The most important things are unknown or unknowable."

Given that Dr. Deming was a statistician who preached quality improvement through process management and statistical output measurement to the ready post-war Japanese, the first comment might seem surprising, but he is simply acknowledging a fundamental truth. The quality of management, their philosophy, for example, simply can't be directly measured. These are, however, long-term drivers of corporate success.

The second comment simply builds on the first, and speaks to the relative unpredictability of the future, trends that may be building below the surface, or simply events that are virtually not predictable.

If you can keep these thoughts in mind, long enough to take advantage of the trend you have researched, thought about, and are willing to take a flyer on, then you too might enjoy outperformance in this way.

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JW The Confused Capitalist

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