Investors do a better job perhaps than in any other profession to create unnecessary grief for themselves. Allow me to illustrate.
Assume you are a decent golfer and in the span of one month, everything clicks -- crisp iron shots and the putts just roll in -- and you shoot rounds near par or better. After such a month, would you start thinking about joining the professional ranks? Or would you start making Phil Michelson-style $1000 a hole bets against scratch golfers at your local club? Probably not, or perhaps once and then you come back to reality.
Unfortunately, many investors aren't so humble. Give them a six-year bull market and they start to think they are better than most. Add in a few months of volatility, and the self-doubt kicks in.
So why not take the pressure off and make investing easy? Instead of trying to reach a par 5 in two (which for most golfers decreases the chances for a birdie, yet vastly increases the chance for a bogey or worse), stick with the easier, high-probability lay-up shot that gives you an easy third shot, a birdie but more likely a par.
Today, why risk trying to make 25% at the expense of losing your shirt when you can stick to simple ideas that over time are likely going to give you a market-matching par result, but with a good chance at a little extra?
Take Towne Bank (TOWN), a regional bank in the Southeast that remained profitable during every part of the financial crisis.
Dividends have been increasing regularly. Return on assets exceeds 1%, a dream for most banks today. Return on equity is 9% and this is being done with very modest leverage: $800 million in equity supports $6 billion in assets. And this is all being accomplished by sticking to the simple art of making quality, profitable loans.
But in the end, results are what count. Year to date, Towne Bank is up over 14% vs. basically nothing for the S&P 500 and Dow. Looking back over a 10-year return period, Towne is down 18% while the S&P is up 72%. However, Towne shareholders have seen the stock split twice and that matters because dividends have been offered almost without interruption during the past 10 years.
But starting point matters. Starting today, comparing where Towne is valued vs. the stock market I believe will be a different story. Besides banking, Towne also has an insurance business and real estate management services that provide a nice addition to profits.
I'll conclude with another analogy, this one from Warren Buffett, a more sophisticated investor than 99.9% of the population. Buffett describes his investment philosophy as one where he tries to walk over one-foot hurdles instead of jump over six-foot hurdles. If Buffett is trying to keep things simple, then perhaps the remaining 99.9% should do as well.