Fund executive Jon Fossel notes that the strategy worked precisely because it was simple and logical, even if investors find it a lot harder to buy laggards than leaders.
Jon Fossel didn’t need any new study to know that investors are better off buying laggards than leaders.
The former chairman of OppenheimerFunds lived the strategy for the 20 years he was running the fund company.
Buying losers isn’t easy, he says, but it is profitable and more intuitive than it seems at first blush.
To see why, we should first revisit the recent research that had me tracking down Fossel, who left Oppenheimer in 2006 after 19 years. I wrote about it in this space several weeks ago, when Rob Arnott and colleagues at Research Affiliates released a study suggesting that “factor investing” doesn’t really work because most people buy into strategies when they have done well and are “trading rich.”
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Investors would be better off buying the factors that have lagged and, therefore, are trading relatively cheaply, Arnott said.
The Research Affiliates paper put it this way: “The winning approach to factor investing is buying the losers: Past negative performance appears to be predictive of positive future returns.”
Fossel proved the point long ago.
Now 75, Fossel — who also served as chairman of the Investment Company Institute — the fund industry’s trade group — is a rancher who still serves on the board of some Oppenheimer funds, but when he was running the fund company he had the oddest investment strategy anyone ever heard of.
When the New Year came around, he rolled 100 percent of his 401(k) into the worst-performing Oppenheimer equity fund from the previous year. He did it blindly — “actually had my secretary do it for me,” he recalls — and did it for the 19 years he was at the firm, ending in 2006.
“I did a little bit better than double the return of the Standard & Poor’s 500 in that time,” he said. He also tested the strategy using the funds of a competitor, Putnam, which had an equally diverse stable of funds, and the results “were similarly spectacular, though not quite as good as what we got from my fund company.”
Fossel notes that the strategy worked precisely because it was simple and logical, even if investors find it a lot harder to buy laggards than leaders. He suggested that investors would benefit from taking the “uncomplicated approach, but that’s not what anyone is doing. They want to be sophisticated, and that means complicated, when investing should be simple.”
Fossel notes that the discipline of his program forced him to buy low and sell high.
“I was buying good funds to start with, but they had just been through a rough period, and you knew that three or six months later — or maybe longer — it was bound to come back,” he explained, noting that in the 19 years he used the strategy, only once did he have a down year. He stopped using the strategy when he left the top job at Oppenheimer, though he exchanged it for “a simple, low-cost investment strategy and asset-allocation put together by my son, who had gotten into the business.”
“Twelve months wasn’t the perfect time frame, ” he added, “and I am sure there was a way I could have gotten more sophisticated — I could have done more funds too — but the point was that I was buying equities and the point is buy low, let the market do its job and sell high.”
Fossel suggested that in a financial world of increasing complexity, investors should try to keep things simple, and they shouldn’t abandon traditional strategies.
He cited dollar-cost averaging — investing at regular intervals so that more shares are purchased when the price is down and fewer when it’s up — and portfolio rebalancing, where an investor puts their portfolio back to planned levels by culling some winners and putting more into laggards.
Moreover, the autopilot options — where investors take control by establishing their rules and living by them — allow the investment ideas to work and pay off over time.
“Individual investors are their own worst enemies,” Fossel said, “and the proof is in the studies that show that, over time, they get about half of the return of the market, and they get returns that aren’t as good as the funds they own, because they bought and sold those funds at the wrong time.”
Similarly, Arnott noted that all of the studies on factor investing — because they don’t look at whether the strategy is trading cheaply — wind up performing worse in real life than they do on paper.
Decades of watching the fund industry has Fossel convinced that there is no perfect strategy, and that investors who spend a lot of time searching for something just a little bit better out are often missing out on what’s important in life, while also missing out on returns because they are meddling on the fly with their investment thesis.
“Do I think a lot of people could do what I did? No,” he said, “but could they find a simple strategy that diversifies their portfolio properly, that keeps costs down, that allows them to buy low and sell high and stick with it for years and years, yes, people can do that. … In fact it’s what they should be doing, and looking for in their investment lives.”