Friday, March 9, 2012

Four Traits of Successful Investors from Ned Davis

I went to a breakfast meeting yesterday to hear Ned Davis speak.

Ned has been involved in the business for more than 40 years, and I don't think it would be a stretch to say that he has become one of most widely followed commentators in the institutional money management business.

He is the founder of Ned Davis Research (now called NDR), which provides a huge database of statistical information on the markets and the economy. Most of their work focuses on the U.S. markets and economy, although they are now expanding their research efforts to follow the European markets.

Nearly every major institutional investor subscribes to their work, and NDR's daily commentary is both interesting and insightful.

What I like about NDR's work is that it recognizes that successful investing is mostly about playing the odds.

NDR rarely makes definitive market calls; instead, they suggest that a given set of circumstances in past has typically lead to a certain market or economic outcomes.

In addition, NDR never just uses one data point to help them understand what's going on in the markets.  Instead, they look at a wide variety of indicators, and try to draw some conclusions on the trends.

Ned started his remarks with an overview of what he considers the four basic traits of successful investors:
  1. They look at objective indicators.  Good investors try to separate their emotions from their investing decisions, and focus on what the data is telling them rather than simply reacting;
  2. Successful investors are disciplined.  They let the data tell them what to do, and are not influenced by other external factors;
  3. Flexibility is a key for successful investing.  Ned said that the best investors are open-minded to new ideas, or revisiting previous thoughts;
  4. The best investors are risk adverse.  This trait is not always obvious to many investors, but in Ned's (and my) opinion considering what could go wrong is a crucial part of successful investing.
Other thoughts from Ned yesterday:

Ned indicated yesterday that while the data would suggest that while we might see a market pullback in the next few weeks, we are in the midst of a bull market that started three years ago, in March 2009.

Consistent with the NDR approach, Ned will not say how far the market could move from current levels - he will let the data tell him when it is either time to add to stocks or reduce positions. 

One factor that keeps him relatively bullish, however, is the widespread pessimism that the general public seems to hold regarding the stock market. 

Outflows from equity mutual funds - especially those that invest in US stocks - have continued even while the markets move higher.  Bull markets end when optimism is running high, and we are a long way from this condition.

Finally, in response to a question from the audience, Ned is reluctant is say that the bond market is in a "bubble" even though interest rates are at 60-year lows.  The desire for income from an aging population will continue, and with Fed policy keeping short-term interest rates at 0% will keep a bid in the bond markets.