A little around the edges
Not being diﬀerent is a barrier to success in our industry. If you’re part of the herd, it’s diﬃcult to do better than the herd. Though being diﬀerent for the sake of it isn’t going to get you anywhere either. The sweet spot is when you find reasons to view a business diﬀerently than the crowd – what we refer to as proprietary insights, where we have an idea on why we think a business will grow over the long term. There’s no sure path to finding a unique view on a business, though we’d suggest that having at least one of the advantages or “edges” below will help get you there.
There’s the informational advantage which simply means knowing more than the next guy about a particular business. Nice when it happens, but rarer these days for the average investor given the amount of information accessible to anyone with an internet connection.
Data hungry investors will often look for an analytical advantage, which is when you have a unique view on information readily available to all but view it diﬀerently. Like the informational advantage, without a keen eye these opportunities are few and far between.
We believe an often overlooked advantage today is time. As in, having the time to do the necessary research to find a proprietary insight and the opportunity to see it play out. This requires patience and self-discipline because you typically have to take a longer term view on a business than the crowd. Time is more and more important these days as the market increasingly focuses on the short term.
It’s one thing to know what the edges are. It’s another to figure out the necessary ingredients to achieve them. There are many contributors to success. Below are three building blocks that we believe contribute to the foundation: the right structure, the right people and the right partners.
Cymbria’s Investment team is structured in such a way that it allows the portfolio managers months (or longer!) to look at a business. This is necessary when you’re building a portfolio that doesn’t look like an index. And Cymbria doesn’t. In fact, our Investment team doesn’t see much merit in comparing Cymbria to an index simply because they aren’t trying to mimic it or, if we’re honest, beat it. Their goal is to have investment results that will get our investors to their Point B (which is diﬀerent for everyone but can include retirement, post-secondary education for their kids or a house). That’s how we measure success.
Finally, we believe Cymbria has the right incentives in place. Our Investment team isn’t compensated on short- term numbers which reinforces what we said at the outset. With no pressure to hit short-term targets, our managers can really invest their time in an idea and wait years for the thesis to play out if that’s what it takes.
In general, we humans aren’t the best at delaying gratification. Lustpinzip is the name of the game for many of us. When we want something, we’re hardwired to want it now. In part to satisfy basic needs and also because many of us don’t trust the reward will be delivered at a later date.
This very notion has been proven in numerous behavioural studies, perhaps the most well-known is the marshmallow experiment. Stanford University conducted a study on children in the late 1960s that tested their ability to delay gratification. Children were given one marshmallow which they could eat right away or two if they waited 15 minutes. Only one out of three could wait for the two marshmallows. Researchers reported that a follow-up study revealed that the children who waited the 15 minutes were more successful in life, proving that our ability to delay gratification is hard-wired at a very early age.i
These innate tendencies are why it takes a diﬀerent type of human to be a portfolio manager. A successful portfolio manager can forgo consumption today to consume more later. This unique trait means they don’t get sucked into the hype around certain companies, sectors or regions and can resist the urge to make bets that may or may not bear fruit in favour of well-researched ideas that often do.
Now, there will be managers elsewhere who possess this trait but the structure of their firm is such that they need to act immediately because hitting short-term numbers keeps their careers intact. Either way, the reality is that there are a lot of managers out there that either don’t have the ability to wait or can’t risk their careers and this presents opportunities for Cymbria. With the right structure and right people in place, our managers have both the ability to delay gratification and aren’t pressured to deliver short-term results at the expense of potentially better long-term investments.
We’re only as good as our investment partners (you). And it’s because of this that we’ve always made a concerted eﬀort to make sure we partner with like-minded people. What do these partners look like? They’re wired a little diﬀerently. They take a longer term view and understand the importance of resisting the urge to sell when markets get rocky while also ignoring the impulse to chase the next big thing.
On paper, being a good partner probably sounds easy. But it isn’t. If it were, the average investor wouldn’t lag the performance of all major asset classes year after year.ii There are numerous factors behind this including something called decision fatigue. The more decisions we’re forced to make in a day, the more taxed our brains are. Eventually it starts looking for shortcuts (just like we may opt for the elevator over the stairs after a long day!) A common shortcut is reckless behaviour, so otherwise rational people start making impulsive decisions.iii This type of behaviour doesn’t serve the average investor well. It leads to all the pitfalls mentioned above: performance chasing, panicked selling and short-term thinking to name a few. Without the right partners, we don’t stand a chance.
Cymbria isn’t for everyone. It doesn’t look like an index. Our managers don’t chase what’s hot or worry about short-term performance. And we certainly don’t try to be all things to all people which means we partner with a select group of like-minded individuals who truly understand us. It’s our belief that it’s these very reasons that give Cymbria an edge and will continue to help contribute to its success over the long term.
i W. Mischel, E.B. Ebbesen and A.R. Zeiss, “Cognitive and attentional mechanisms in delay gratification,” Journal of Personality and Social Psychology, v.21(2) February 1972: 204-18.
ii Quantitative Analysis of Investor Behavior, 2015,” DALBAR, Inc.
iii John Tierney, “Do You Suﬀer From Decision Fatigue?”, The New York Times Magazine, August 17, 2011, http://www.nytimes.com/2011/08/21/magazine/do-you-suﬀer-from-decision-fatigue.html.