According to investing expert Richard Driehaus, investors must constantly dispute common opinion since truly great investment possibilities are not always clear.
As the father of momentum investing, he is also known as the “father of aggressive growth investing”. When stocks were in a significant upward price movement, Driehaus spotted them and bought them, staying with them as long as the upward trend continued.
Momentum investing is based on the concept that winners in the short term continue to win and losers in the short term continue to lose.
Early in his career, he started to distribute newspapers in order to earn money and bought his first shares at the age of 13 after earning his first dollars. In 2002, DePaul University awarded Driehaus an honorary doctorate.
His career began in 1968 at AG Becker, where he held a position as a Research Analyst in the Institutional Trading Department. Prior to 1982, he had worked at several other brokerage firms, including Mullaney, Wells & Co. and Jesup & Lamont.
He founded Driehaus Capital Management in 1982, which has an approximate value of $13.2 billion at present thanks to mutual funds and other investment accounts. Over 12 years, it produced a compound annual return exceeding 30%. Driehaus, one of Barron’s “all-century” team of 25 mutual fund industry leaders, was included on the publication’s 2000 list of individuals it designated as having had the greatest influence in the mutual fund industry.
philosophy of investment
Driehaus believed that the primary driver of stock price movements was investors’ expectations of firm earnings growth. According to the author, “businesses that have shown steady earnings growth have been the most successful.
Driehaus said picking high-growth stocks is essential for market-leading performance. He chose to invest in smaller, up-and-coming companies, instead of larger, well-established ones.
He took a distinctly different approach to choosing stocks, one that differed markedly from the more conservative approach known as “value investing” where an investor tries to locate undervalued stocks with low P/E ratios.
“In the event that the price-to-earnings (P/E) ratio of the stocks purchased is less than average, then this strategy is completely removing the best stocks from consideration,” he concluded.
She put most of her money into long-term holdings because of fundamentals. He utilised technical analysis to improve his entries and exit timings, and he used it to validate his stock selection.
Driehaus once gave a talk at DePaul University in which he addressed the advice he’s given over the years to investors regarding what he’s learned from the stock market and what he thinks investors can avoid when they stumble.
- Some sectors and industries benefitted more from secular changes than others, according to Driehaus. He believed investors should focus on their portfolios.
He had concluded that it was of no value to hold stocks of companies in industries and sectors where the outlook was for slow growth. If investors only held stocks of companies with poor future prospects, they should not own stocks in this way.
Look for companies in dominant industries with growing customer acceptance and improving business prospects. Dealing with the future while it is still small may help you identify trends and secular changes before other people. Alternatively, one may be able to “take care of what is difficult while it is still easy” by selling stocks of companies with bleak futures. He said, in fact.
- According to Driehaus, the valuation method was flawed and a stock’s price was seldom the same as the company’s value. He believes that market dynamics and investors’ emotions greatly affected stock prices.
Additionally, he believed that several investors bought stocks in order to hold them for more than a year, and these investors were basing their decisions on information that was relevant for a specific time horizon.
Despite having access to valuable information, investors frequently make poor investment decisions, based on the incorrect information they are using. Investing in a company on the basis of current information calls for investors to adjust the information they use much more quickly than investors tend to adapt to information.
- Investment managers should shift to new concepts and ideas by adjusting to them.
“There are many investors who prefer investment managers who claim to follow very strict rules they have followed for a long time. While managers can benefit from the ever-changing technology available today, their decisions are not always based on this technology because of a few of them being busy elsewhere “He said, in essence.
“Investors,” according to Driehaus, needed to be comfortable with being outside the norm of other investors. He noticed that a number of investment managers used a certain set of investment principles, which led to underwhelming results.
The legendary investor notes that, in his opinion, there were some conventional investment paradigms that should be avoided due to their outmodedness, and which were not only no longer accurate, but actually misleading. He explains that investors hold on to their beliefs and actively seek clues to support them and actively ignore contradictory information.
The first paradigm is to only buy stocks in quality companies and hold on to them.
Driehaus said that investors may become lazy and take their foot off the pedal if they simply buy and hold stocks of quality companies. In the authors’ opinion, only hold onto stocks until there are adverse changes to the markets.
Be greedy when others are fearful and fearful when others are greedy. To obtain the early warning signs of larger changes, keep a close eye on daily events,” he said.
The second paradigm is Buy low and sell high
Buy high, sell high is a much better approach to investment than buying low and selling high. “My investment strategy is to buy stocks that have already experienced good price movement. That have recently or are on the verge of achieving new highs. Have similar strength relative to the rest of the group, and belong to groups that also share the same characteristics. these are stocks other investors are interested in “He declared.
He explained that because there is a risk of buying near the top in this strategy, investors should instead buy stocks that are increasing in price and take the risk of them declining later.
This is paradigm number three : an investment process must be completely systematic.
“Investing does not have to be as rigidly systematic as people may believe,” said Driehaus. “While I firmly believe in the importance of a solid process, I also believe it must be flexible enough to respond to changes in the market. The longer I’ve been out of the market, the more I’ve come up with reasons why it is a bad idea to be in it. I, on the other hand, stayed invested. Investing is not the best use of your time, and what you think should happen isn’t important. Do business because of the circumstances “he told them.
The fourth paradigm states that processes must be value-based.
Investors should adhere to a structured, value-based process. Every stock should go through the same evaluation process. However, the unfortunate reality is that the real world is not as precise as financial planning requires, and thus no universal valuation method can guarantee good returns.
“In the short term, valuation is not the most important consideration. In general, the price of each company’s stock is a function of its position in the market, as well as its own current phase in the company’s development “Driehaus mentioned.
The 5th paradigm: You must purchase Street research with good quality and maintain a close relationship with the best analysts.
In the words of many market experts, research from the Street and contact with the best analysts are important for investors. But Driehaus maintains that company contacts, press reports, and technical data were most effective in the research. “This research incorporates various factors that impact a company’s financial success. They take care of such issues as product development, patent awards, and the alterations of society which could have a major impact on the profitability of a business “He said, as I remember.
a measure of investment risk that approximates the standard deviation of return is paradigm number 8.
Many investors use the standard deviation of return as a measure of investment risk.
However, he believes that short-term volatility is a risk only for liquid assets and investors should instead direct their attention towards long-term objectives. “When considering long-term investment risk, for many investors, the greatest threat is not being adequately exposed to higher-returning, more volatile assets. Because investment vehicles that exhibit the greatest long-term risk also have the lowest short-term volatility, my own opinion is that these investment vehicles pose the greatest long-term risk “He declared.