You and I have a superpower
Using our 'temporal edge' to win in the stock market
We can challenge institutional investors.
And actually I’m not crazy when I say that we small retail investors can triumph over them.
Many times our brain whispers how impossible it is to ‘beat’ them.
Wrong. We simply play different roles.
We can suffer. They can’t
Today’s episode is about a superpower you and I share: temporal edge. Stay with me!
If you’re new, don’t miss out some of my recent updates:
What’s this power all about? Let’s find out.
The analogy of the queue
Last month, I visited a small city in Italy (Cremona, btw) and my girlfriend and I were standing in a long queue to visit a historical palace.
The wait was a lot longer than expected - we would probably need to wait hours. ‘What do we do? Shall we stay or go?’.
We decided to stay. We had come all the way to the city to visit that specific place. How could we surrender.
Meanwhile, the most impatient people started to leave. As minutes passed by, more and more people ahead of us in the queue gave up and left.
Long story short… with enormous patience, we remained there and managed to enjoy our prize. And without the company of a large crew, it felt even more special.
What does the metaphor stand for?
Simple: we retail investors can suffer for longer. We are accountable to nobody besides ourselves and provided we don’t seek short-term gratifications, we can survive much longer.
In contrast, institutional investors often feel pressured to show results each year, if not each quarter. Driven by the need to capture momentum, they rarely have the luxury to wait patiently, especially if they care about their job.
If they can’t get immediate results from a specific tier (our museum), they’ll leave.
This is what I call ‘temporal edge’.
It’s one of the superpowers that makes equity investing profitable for us.
The Discounting Machine
But wait, we all know the stock market works as a discounting machine.
Investors on Wall Street act based on the future. What’s happening now is already priced in, right?
Yes, financial markets in general always incorporate what they expect for the foreseable future in today’s valuations.
Sam Stovall’s S&P’s Guide to Sector Rotation is a commonly accepted proof of that. Valuations (orange line) always tend to anticipate economic cycles (blue line).
But there’s more.
For those who trust the Market Efficiency Theory, or Efficient Market Hypothesis (EMH), all private and public information is already priced in current share prices. There is absolutely no room for arbitrage.
These theories say the truth. The stock market is indeed forward-looking. But if this holds up, what kind of superpower are you talking about?
Extending your horizon
In my opinion, the real question for a retail investor shoud be:
How far off in the future is the stock market?
To answer this very complicated matter, I’ll quote a few illustrious names in the investing world.
Stock market cycles have typically anticipated economic cycles by 6-12 months on average. -Fidelity Investment Research
Markets are neither shortsighted nor farsighted. They price in the probability over a horizon of 3 to 30 months, ignoring much of the very short-term noise and all long-term conjecture. -Ken Fisher, Fisher Investments Worldwide
In the short-term, the market is a voting machine. In the long-term, it is a weighting machine. -Ben. Graham & Warren Buffett
These are just a few examples of what I sense being the consensus in general. The stock market discounts anywhere between 3 to 30 months in the future. Not more.
And that’s what the edge is all about.
Personally, this spirit has carries a lot of practical implications when it comes to managing my portfolio. Some of them are the following:
Catching falling knives: embracing a multi-year mentality does definitely help me start positions in great companies with bearish sentiment that are falling in price temporarily;
Letting my winners run: I learnt to detach from short-term upside movements. Some of my stocks I own went up 30%-50% faster than I expected, but I didn’t fall in the fast selling trap;
No men’s land territory: some of my stocks literally stayed flat for many months. With my longer time frame in mind, I avoided impatience.
Extending our horizon beyond this time frame. How about 3, 5, 7 years? Can you hold on that long?
If the answer is yes, you will probably do very well.
Investing in multi-year Business Plans
My investment philosophy is simple, but not easy: I invest in the best business plans I can find.
As you know, the business plan includes all the strategic initiatives and financial targets of a company for the next few years.
Normally, the minimum time frame of a business plan is 3 years.
Strangely enough, this is more or less the moment where Mr. Market’s view starts fading, and institutional investors stop discounting.
Coincidence?
As Warren Buffett once said:
View yourself as a business analyst, not a security analyst.
Warren Buffett
Olympics memes come to my help to let me stress once again what I mean.
Above you see Mr. Market trying to operate based on inflationary waves, interest rates curves, S&P quarterly earnings, and GDP projections.
Below there’s me, ignoring short-term macroeconomics to focus on the highest quality companies, long-term earnings stories and secular business cycles.
At this point, I understand skepticism.
Francesco, looking years and years ahead is quite impossible. How can you predict what a company is going to look like so far off? What if the business plan does not hold up? What if those targets just simply never get reached?
Well, this is my job. Finding the best equity opportunities without being exposed to excessive risk. This is Business Investing.
Difficult is not impossible!
Some companies indeed do:
Catch secular technological waves
Exhibit superior quality over the others
Execute excellent business plans over decades
For sure, they’re not many.
They’re very few and that’s why I manage a concentrated quality portfolio with the goal of 15% return per year (and an actual 25.11%, as I’m writing).
Is this you?
👇🏼
You would like do allocate a portion of your main investments to individual companies, but lack a proven method
You would love to become a 100% confident equity investor
You’re struggling to achieve satisfying returns
You don’t know how to properly value the companies you love
You don’t have enough time to manage all that
You are in the right place.
⭐ My Mentorship Program starts in 2025! ⭐
If I’m announcing it quietly, it’s because I want the most motivated people to see it first. I can handle very few slots.
And if you’ve read this far, you’re in this top 5%.
➡️ Drop me a message and we’ll chat about your specific situation to understand if and how I can help.
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Thank you again for your valuable time.
Happy Investing,
Francesco - Business Invest