MarketSaga

Saga of Financial Markets

Fri12152017

Last updateSat, 29 Jul 2017 12am

Back You are here: Home Market Market Update Saga Investment Lessons From Successful Investor

Investment Lessons From Successful Investor

Charles Allmon, one of the most successful investment newsletter - Growth Stock Outlook, editors of the 1960s, 1970s and 1980s, died at age of 94.  He discontinued his newsletter in 2008.

Allmon was a close follower of Benjamin Graham, the father of fundamental analysis, who advocated buying only stocks that trade for significantly less than their net worth and holding them for however long it takes for the rest of the equity market to appreciate their true value.

In the late 1980s, when the number of stocks satisfying the criteria of value shrunk to near zero, unlike many of his fellow value advisers, who became "closet" growth stock advisers, Allmon hold on to his principles to cater to an investment public increasingly bent on turning a quick profit.  As a result, he built up a cash position that, with few exceptions, remained at or greater than 75% until he discontinued his letter in 2008.

Although that large cash position didn't make Allmon very popular in the go-go 1990s, the stellar performance of the few stocks that he continued to recommend, along with the power of compounding, kept him near the top of the Hulbert Financial Digest's performance ratings.  When he discontinued his letter in 2008, he was tied for second place among HFD-monitored services for risk-adjusted performance over the 28-year period.

The three lessons that can be drawn from Allmon are:

  1. Slow and steady really can win. Though Allmon’s conservative approach was well-behind a buy-and-hold strategy at the bull market peaks of March 2000 and October 2007, the bear markets that followed each of those tops pulled the broad market averages back down below the return of Allmon’s portfolio.
  2. You don’t need to incur huge amounts of risk to produce stellar long-term returns. This, of course, runs counter to the conventional wisdom, but Allmon’s record shows that it isn’t always true. The HFD calculates that the annualized return of Allmon’s portfolio was 1.7 percentage points less than the broad market averages, and 55% less volatile (or risky). Are 1.7 percentage points of annual performance a fair price to pay to cut risk by more than half? The judgment of modern portfolio theory is “yes,” as judged by his risk-adjusted return being well ahead of the market.
  3. The third lesson of Allmon’s investment career has to do with the power of compounding. Though Allmon’s returns in any given year were never at the top of the rankings, at the same time he never lost money in any calendar year. As a result, his very conservative strategy continued to propel his portfolio’s worth ever higher, even while the market gyrated wildly above and below.

Reference:

MarketWatch, Mark Hulbert, 2015-10-27, "This Famous Investor Showed that Show and Steady Really Does Win"