“There’s no comfort in the growth zone, but there’s no growth in the comfort zone.”
With investing as in life, growth and comfort don’t often go together. Like the yo-yo dieter moving from one fad to the next, investors often obsess over finding the “best” investment without considering the discipline required to actually hold it. When reality inevitably intrudes, the next best thing is always a mouse click away. Just as most diets fail, an investor caught in this cycle is all but guaranteed to fall short of his or her goal.
In contrast, the most successful investors have figured out that very often, the best investments require the most discipline. Take Amazon (AMZN), recognized today as spectacular investment, having turned an initial $1000 into over $900,000 and counting. Many investment-obsessed investors have been piling into the stock at all time highs, assuming recent history to be a good indicator of the future. A broader look paints a much different picture and opens up some interesting questions.
Amazon Inc (AMZN) price (upper panel) and drawdown history (lower panel). Source: priceactionlab.com
How many of today’s AMZN investors would hold the stock if it declined -15% next year while the S&P 500 gained +15%? Would an investor today still consider AMZN a “good” investment were it to decline 94% over the next 2 years, or if it were to spend the next two decades 20% or more below its all-time high? It may sound incredible, but these are all actual historical figures for AMZN since 1997! The point is, this “good” investment has not often felt that way, and extracting its return often took extraordinary discipline. An extreme example perhaps, but this is a universal phenomenon in investing. Like death and taxes, it cannot be avoided.
Unfortunately, it is not possible to invest only in AMZN’s good years– sound investment decisions represent an investor’s acceptance or rejection of the full range of the investment’s historical outcomes, as well as the discipline necessary to see them through. This is as much art as science, and why good advisors will continue to make themselves relevant while others are replaced by computers.
As Alpha Seeker celebrates its 8-year anniversary this month having produced “good” statistics like outperforming the S&P since inception and in five calendar years including 3 of the last 4, a quick look at its track record reveals many periods when discipline trumped comfort.
Alpha Seeker Fact Sheet as of December 2014
The image above is what the Alpha Seeker fact sheet would have looked like in December of 2014, a year in which the strategy trailed the S&P 500 by roughly 23% in a choppy but positive year for stocks. If an investment is the acceptance of a strategy’s historical profile, then each investment after December 2014 was a statement of willingness to bear the “2014-style” outcome. Now that it has manifested itself again in 2019, each investor is faced with the age-old choice between discipline or comfort. In 2014, the reward to those who stayed disciplined was an outstanding 3-year run that put Alpha Seeker at the top of Morningstar’s ETF Managed Potfolios Database as of June 2017 while it was being managed at Kaizen (see below).
Morningstar ETF Managed Portfolios Landscape Report, Q2 2017
Alpha Seeker may be trailing the S&P this year, but the purpose of Alpha Seeker is to act differently than the stock market. Over the last 8 years, we’ve shown how an exposure like this can help improve portfolios. Just as it opens the possibility of profiting when stocks falter, low correlation introduces the risk of a year like this or like 2014, and every Alpha Seeker investment since was a decision to assume that risk. Now here it is. Discipline or comfort?