By Mark Hulbert, MarketWatch
Nate Pile has nerves of steel.
Pile is editor of two investment newsletters that are at the top of my year-to-date performance investment newsletter scoreboard. And credit for both of their top rankings goes in large part to his willingness to stick with MannKind /zigman2/quotes/207650389/composite MNKD +2.23% , the long-struggling biopharmaceutical firm whose stock has risen in each of the last seven trading sessions — including 20+% gains on Tuesday, Wednesday and Thursday of last week.
The first of Pile’s two newsletters is called Nate’s Notes, whose two model portfolios are sporting gains of 101.7% and 30.4% through Oct. 6. Pile’s other newsletter, the Wagmore Advisory Letter, whose model portfolio is nearly fully invested in MannKind’s stock, has a year-to-date return through Oct. 6 of 66%.
The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.81% , in contrast, has produced a dividend-adjusted gain of 15.7% over the same period.
To be sure, MannKind’s stock is still down 90% from where it stood when Pile first began investing either of his model portfolios in it in 2010. But, because he has continued to purchase more shares as prices fell, his average purchase-price is a lot lower than where it stood then. Still, I calculate that his Wagmore Advisory Letter has lost 24% on an annualized basis since I began monitoring its performance in August 2013 — even after taking its 66% year-to-date gain into account.
Pile’s other newsletter, Nate’s Notes, is somewhat more diversified and has fared far better: It is in first place, in fact, for 15-year returns among the services I monitor.
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It would be easy to dismiss Pile’s standing atop the 2017 leader board as little more than a lucky break. After all, MannKind’s prospects are heavily dependent on the vagaries of the drug-approval process — which could easily prove fatal to the company’s stock. And Pile’s portfolios are far more heavily invested in MannKind than probably most financial planners would deem prudent.
Nevertheless, it would be a mistake to take such criticism too far. For example, if you dismiss Pile’s record for constructing an undiversified portfolio around a speculative stock, you’d also have to dismiss the storied investment career of Benjamin Graham, author of the investment classic The Intelligent Investor and widely considered to be the father of fundamental analysis.
That’s because more than half of the lifetime profits of Graham’s firm came from an outsized investment in just one company — insurance giant GEICO, now a unit of Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.61% /zigman2/quotes/200060694/composite BRK.B +0.45% .
In a postscript to the fifth edition of The Intelligent Investor , Graham writes that his firm’s investment in GEICO was in no small part dependent on “dumb luck.” One of the morals he drew is that “one lucky break, or one supremely shrewd decision — can we tell them apart? — may count for more than a lifetime of journeyman efforts.”
That’s an astonishing admission for someone who dedicated his life to objective and meticulous analysis of companies’ balance sheets.
It occurs to me, however, that we may be looking at luck and skill in the wrong way. Perhaps they are allies rather than opposites.
I think Graham was hinting at this when he added: “Behind the luck or the crucial decision, there must usually exist a background of preparation and disciplined capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment and the courage to take advantage of them.”
Preparing ourselves for when luck strikes
From this alternate perspective, then, we can think of our job as investors as preparing ourselves for when luck strikes — whenever that may be. Fully appreciating the role luck played in Graham’s or Pile’s track record doesn’t excuse us from “a lifetime of journeyman efforts” — but instead redoubles our dedication to such efforts.
Another big investment lesson is that you should never invest more in a given stock than you can afford to hold for the long term, even when you are suffering a huge loss. The key is to be able to hold each position for however long it takes for luck to strike. That certainly has been crucial for Pile, who has been investing in MannKind for many years.
Note carefully that this ability to withstand losses and have long-term patience is not the same as having a widely diversified portfolio. You can own a relatively few stocks, and thereby be underdiversified according to traditional financial planning protocols, and still be able to hold onto your positions through thick and thin.
Berkshire Hathaway Chairman Warren Buffett, one of Graham’s protégés, famously once said that “diversification is protection against ignorance. It makes little sense if you know what you’re doing.”
The jury is still out on whether Pile’s faith in MannKind will be adequately rewarded. But in the meantime, his approach challenges us to reexamine what we unquestionably assume is the right approach to investing.