Investing Through Cycles (Literally!)

Patrick A. Labbe, CFA

The Tour de France, an iconic cycling event lasting more than three weeks and covering nearly 2,200 miles of some of Europe’s most varied and beautiful terrain, recently completed its 103rd competition.  Interestingly, Tour champions employ some useful strategies that successful investors may recognize.

The Tour consists of 21 unique races called stages.  Some stages are long, steep mountain climbs, others are mostly rolling hills and some are simply short sprints.  To be competitive, riders must prepare for a variety of different conditions.  Investors, too, should prepare for a variety of conditions so they can continue to implement their investment plan during either a bear market panic or the heady enthusiasm of a bull market.  Knowing in advance that some years will be better than others—some years may actually be too good to last—and that asset price volatility, sometimes a lot of it, are part of the investment terrain may help keep investors focused on long-term wealth creation rather than the mood of the moment.

Since no single competitor can be a master of sprints, hill climbs and long touring rides, top riders rarely win more than a few stages.  A champion wins by consis­tently excelling at those stages best suited to his strengths while avoiding disasters in the other stages.  Knowing he has an edge, he needn’t take unnecessary risks, which means not every sprint need be contested nor every hill descended at top speed.  For investors, it’s critical to understand that no strategy will finish first every time either.  Indeed, stock market history shows that even proven strategies, such as purchasing stocks trading at low prices relative to the accounting value of their equity, have experienced extended periods of underperformance despite producing superior long-term returns.  It’s tempting to jump from an asset that’s lagging to another that’s leading the pack, but numerous studies show this tends to reduce investment returns not only by increasing transaction fees and tax obligations, but mainly because future results of many leading and lagging companies tend to converge over time.

Lastly, Tour champions employ a disciplined, long-term approach.  Since the race lasts nearly a month, trying to win it in a single day is futile.  Instead, they consistently apply a winning strategy every time they get on the bike.  Consistency and discipline sometimes means that investors must sell some fully-priced assets into a bull market hitting new highs or that some assets should be bought in the midst of a bear market hitting new lows.  Buying or selling under these conditions can be emotionally uncomfortable.  Still, if an investor’s approach is to collect bargains, it will be necessary to accept some discomfort in the near term for a benefit in the long term.

You may not dream of wearing the winner’s yellow jersey and sipping champagne along the Champs-Élysées, but thinking like a Tour champion might help generate better investment results.