Investment process
Surviving contact with the enemy
There are two points to make here. The first is the importance of thinking strategically. The second is the difficulty of sticking to the plan.
Helmuth von Moltke, the 19th century Chief of the Prussian General Staff, is often paraphrased as saying: ‘no plan survives contact with the enemy’. Or as boxer Mike Tyson is supposed to have said: “Everybody has a plan ’til they get punched in the mouth.”
In this post I will look at the ideas of investment philosophy, strategy and planning.
investment philosophy is very broad-brush. My investment philosophy is basically an all-stock program to take advantage of the outperformance of stocks over the long haul.
What is an investment strategy?
In investing, a strategy is some basic policies on how we deploy our investment dollars in pursuit of our investment philosophy.
The best way to understand what an investment strategy is is to look at two. The maynardkeynes.org website outlines Keynes approach: “The investment strategy Keynes finally adopted is, in many respects, remarkably similar to Warren Buffett’s. Buffett has acknowledged Keynes’s influence on his thinking. In 1991 he said Keynes was a man, “whose brilliance as a practicing investor matched his brilliance in thought.”
Buffett went on to quote a letter from Keynes to a business associate, F. C. Scott, dated August 15, 1934 showing how Keynes, in addition to favoring long term investments, had grown to favor limiting these investments to a small number of enterprises:
Keynes wrote: “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence… One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.” (Emphasis Added)
And how does Buffett describe his strategy? He explains: “Our equity-investing strategy remains little changed from what it was…when we said in the 1977 annual report: ‘We select our marketable equity securities in much the way we would evaluate a business for acquisition it its entirety. We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and, (d) available at a very attractive price.’ We have seen cause to make only one change in this creed: Because of both market conditions and our size, we now substitute ‘an attractive price’ for ‘a very attractive price’.” (Buffett, 1998, p.85) (Emphasis added)
An investment plan might be thought of as the way we implement our strategy. It might be thought of as including tactics. This is the level at which our investment strategy grapples with the vagaries of the stock market. This is where we confront Mr. Market, market volatility and ourselves. These are the enemy. And we can be our own worst enemy.
For Warren Buffett the plan would include things like his favorite holding period being forever but being ready to water the flowers and cut the weeds.
My plan largely follows Warren Buffett’s approach. I don’t try to time the market. I basically stay invested through thick and thin. I have one exception to this related to true stock market bubbles which I’ll explain below.
A plan meets the enemy
What von Moltke is telling us is that the enemy can act in unpredictable ways and that we need to be flexible. Agreed. As for getting punched in the mouth, that does happen to investors. We understand that. But the big question is when do we stick to our plan and when do we want to be flexible?
Some personal experiences
I’ll mention two and put them in reverse date order.
I retired in 2005 with all our retirement savings in an all-stock program. In calendar 2008 our retirement savings were down 37% on paper thanks to the Great Financial Crisis. That was actually the same drawdown as the S&P 500. For a recent retiree that would be close to a worst-case scenario. If you start with $100 and lose 37% you have $63. Just to get back to $100 you have to generate a return on your $63 of 58%! And, you are out of the workforce. That was a pretty good punch in the mouth.
The 58% calculation is an example of what is called volatility drag. The big drawdown shortly after retirement is know as ‘sequence of returns’ risk. The idea here is that a big setback shortly after retirement can be particularly, even irreparably, damaging.
I stuck to my plan. Several good things happened in the early spring of 2009. An insurance company in which we held shares went private at a significant premium to the then seriously depressed price. I was able to deploy the proceeds in part into the shares of Canada’s largest bank at a fraction of its fair value. I was able to buy shares in a Canadian tee shirt manufacturer I had be eying for five years but was always too expensive. I was also able to buy stock in a mining company whose shares were trading at a fraction of the company’s cash on hand per share and the mines that produced all this cash were thrown in for free. Within 18 months our investments were well over the price pre-crash. Sticking to my plan had been a good idea.
Bursting stock bubbles
The second experience has to do with stock bubbles. In my investing experience I have seen only two true North American stock market bubbles and lots of frothy bull markets and bear markets. The first bubble popped in the early 1970s. It was driven by the so-called Nifty Fifty stocks and the conglomerate boom of the 1960s.
The conglomerate boom is an interesting case study for bubbles. This was where “equity leveraging, that is selling stock at inflated valuations, can generate earnings growth.” (Soros, The Crash of 2008 and What it Means, 2008,2009) pp59-61 The earning growth is actually a mirage and function of accounting rules. It all depends on leverage and, as prices go up, more cheap equity becomes available for issuers and more debt becomes available. It operates like a whirligig.
The next bubble I experienced was the Dot Com bubble of the late 1990s. My plan has always been to side step true stock bubbles if I can. The reason for this is that the drawdown in a true stock bubble is so severe that it can do serious, if not permanent, long-term damage to one’s finances. With this in mind, in 2008 I sold almost all our stocks (over 90%) and put the proceeds in two-year government bonds yielding just over 4%. The Dot Com bubble burst in 2000 and I waited until late 2002 to get back into the market.
Why not do the same in 2008?
In 2007 and 2008 I stayed about 95% invested in stocks and do not regret the decision. There was no stock bubble during this period. The 2008 financial crisis grew out of sub-prime lending. Home buyers with marginal financial resources, who were able to buy houses with nothing down and no personal liability to a lender, were hardly acting irrationally. Wealthier home buyers/speculators received tax deductions on their interest for their trouble. The root cause of the crisis was the packaging and securitizing of flakey mortgage loans sold on as investment A grade, other collateralized debt instruments, credit default swaps, interest rate swaps and other financial derivatives, misdeeds and frauds in the financial sector and government laws and policies that facilitated the whole mess. It was another debt fueled whirligig. But, it was not a stock market bubble. The stock market rout in 2008 did not occur from bubble territory.
And, as I mentioned, in 2009 and 2010, the stock market came roaring back.
True stock market bubbles and other stock market routs
And here’s the difference between the bursting of true stock market bubbles and other stock market routs. When the Dot Com bubble burst it took many many years for the fallen to recover. This was reminiscent of the very slow and extended recovery post the Nifty Fifty/Conglomerate bubble of the early 1970s, the forever recovery of gold after the bursting of the gold bubble in the 1980s, the multi-decade recovery of the Japanese stock market and real estate market following the late 1980s bubble.
We can compare these true bubbles with the market rout at the onset of Covid or the market rout post Donald Trump’s liberation day tariff show. These routs were in no way the bursting of a stock market bubble.
Hence my plan is to side step true stock market bubbles if I can and stay the course, stay invested and hope to take advantage of market routs that offer up stocks at very attractive prices. In my post How I invest my money published April 20, 2025 I explain how I was able to take advantage of the liberation day tariff show which occurred April 2, 2025 and earlier take advantage of the Covid selloff.
Back to getting punched in the face
Let’s think again about Helmuth von Moltke’s observation that ‘no plan survives contact with the enemy’. The whole idea with Warren Buffett’s strategy of only buying superb companies with honest and competent management and then only if they can be bought at very attractive prices, is that it can be used with a plan that confronts and takes advantage of the enemy. In most stock market drawdowns stocks become less risky. A knocked down wonderful company that can be bought at a knocked down 20% or 30% discount to fair value is a less risky proposition than the same company that can be bought at a price premium to fair value or even at fair value.
The problem is that in the heat of battle we often lose sight of our strategy and our plan. The greatest danger is to come up with a new strategy or plan on the fly in the heat of battle.
Conclusion
I believe every investor can cultivate strategic thinking and develop investment plans. This can be done through study and is reinforced by practice and experience. Sticking to the plan can be difficult. But, after investors have travelled the rocky road for a while, they become better at it.
It’s worth adding one caveat: there are times to change our minds and set a different course. “A foolish consistency is the hobgoblin of little minds” are the oft quoted words from Self-Reliance, the essay by the American philosopher and essayist, Ralph Waldo Emerson. It takes discipline to stick to one’s plan. Discipline must always be tempered by a mind open to being changed. No, that isn’t inconsistent.
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For readers wishing to dig into ideas about keeping your head while everyone about you is losing theirs, take a look at some of these other posts:
The secret to keeping things in perspective
Putting a world of turmoil in perspective
Investing when others are fearful
The intelligence of successful investors
The right stuff and successful investing
The bitterest way to learn investing wisdom
A special talent for converting life’s setbacks into future successes
The personal qualities successful investors need to cultivate
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I’m also on Twitter @rodneylksmith
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