Tactical trades that many investors tend to resort to in a choppy market to make a quick buck does not create big wealth; what does is long-term investing that takes advantage of the power of compounding.
That’s market wisdom for you from master investor Henry Ellenbogen , the man who had invested in Facebook and Twitter before they went public and who always advocated growth investing to generate big returns.
Ellenbogen says growth investing requires one to identify great companies that one can hold on to for a long period with lots of patience to stay put when the investment climate turns unfavourable.
“One cannot afford to get wrongly influenced by any market hype or noise and stay true to his/her conviction,” he said.
Choppy markets would always tempt you “to trade through short-term volatility, but one needs to remain true to the bigger goal of making strategic moves, instead of constantly going for tactical trades,” he said.
Ellenbogen says financial markets are made of investors and machines, and investors tend to copy what works. Market prices reflect people’s assessment of current information, as well as historical information.
He, however, says: “Markets are very good at discounting the past, but not at discounting the future. The real world is very dynamic.”
Henry Ellenbogen is the founder of Durable Capital, which he set up in 2019, and serves as its Managing Partner and Chief Investment Officer. Prior to founding his venture, Henry was the Vice President of T. Rowe Price Associates, and T. Rowe Price Group.
In addition, Ellenbogen has also served as a member of the US Equity Steering Committee and the Corporate Governance Committee for US Equity. During his tenure as a portfolio manager, the funds his managed won several awards.
Investment strategy
In times when most investors struggled and lost money, Ellenbogen has always thrived with his disciplined and strategic approach to investing.
The star stockpicker said the key to his success was his ability to identify a select group of smallcap companies that could achieve 20 per cent total annual compounded growth over 10 years. He called these companies ‘compounders’.
Ellenbogen is known for investing in startups before they went public. Some of his big bets included Facebook, Twitter and GrubHub.
“Investing can be viewed as one of the concepts we learn in science: it is about finding the right balance,” he said. “One should come up with his own game plan for investment, and allocate time to strategise for it.”
Ellenbogen said it’s important for investors to differentiate themselves from others in order to attain superior returns.
How to generate superior returns?
One of the things that investors need to do is study a lot on how the human brain works.
“Investing requires you to maintain a mental balance. Great investors can control their emotions. Take public market investing as an example: every morning I come to work, I am flooded with so much news and so many different price points that securities can transact at. You need to be able to detect the subtle signals through the market noises. This is counter to how the human brain is wired. I fundamentally do not believe in efficient markets; the human brain is emotional. Thus, I spend a lot of time trying to understand how the human brain works,” he said in an interview with a financial website.
According to Ellenbogen, investors encounter two types of problems in investing: 1. Complex problems & 2. Complicated problems.
The main difference between the two is that complicated problems are defined, which means it is possible to clearly predict how making a few input changes can help resolve it. But complex problems are undefined like a game of chess, where each move leads to a new set of many potential responses and, thus, they are difficult to resolve.Ellenbogen identifies growth investing as a complex problem, as investors are always dealing with industries and companies that are on the forefront of change.“Investors must understand and deal with a continuous flow of new and often surprising data points in order to become successful in growth investing,” he said. How to tackle complex investment problems? Growth investing is about investing in sectors and companies that are undergoing a lot of change. So one needs to study the underlying forces of change in great detail to make sure each investment is approached with the right framework.In various interviews over the years, Ellenbogen shared some of his investment wisdoms, which can help investors generate solid returns. Let’s look at some […]
source Tactical trades do not make you rich in equity; Ellenbogen tells you what does
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