19 Nov 2025 - Staying the course

'Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.'
Warren Buffett

Like maintaining a healthy diet and exercise routine, sound investment principles are simple to explain but difficult to execute. The challenge isn't understanding that you should buy quality companies at attractive prices - it's maintaining discipline when the approach is out of favour, others are profiting from speculation, and patience is tested. At Canopy, we believe having a logical investment process that can be applied consistently is critical to achieving this over the long term.

The magic formula's lesson

In The Little Book That Beats The Market (2005), Joel Greenblatt outlined an elegantly simple investment strategy. He ranked all stocks by return on capital (a measure of quality) and earnings yield (a measure of value), purchased equal-weighted positions in the highest-ranked 30 stocks, and rebalanced annually. This 'magic formula' portfolio outperformed the market in every rolling ten-year period from 1988 to 2004.

The strategy worked, but with an important catch. Within each successful ten-year period, there were stretches lasting up to three years where it underperformed, sometimes significantly. Investors who stayed the course captured the superior long-term returns, while those who abandoned it during difficult periods did not. The formula was straightforward and could be replicated by any investor. The barrier to success wasn't complexity or access to information, but temperament. This pattern repeats across many successful investment strategies: the approach matters, but the ability to stick with it through inevitable difficult periods matters just as much.

Why process matters

A well-designed investment process serves several crucial purposes beyond simply organising your work:

• Drives repeatability: A documented process ensures you consistently apply your investment philosophy rather than making ad hoc decisions. We believe success is driven by consistently behaving in a methodical way, not from random, occasional flashes of brilliance.
• Creates accountability: A formal process creates commitment to your stated approach. It's much easier to avoid making emotional decisions when doing so requires consciously deviating from your framework.
• Distinguishes noise from signal: Markets are volatile, the future is uncertain, and individual positions can underperform for many reasons. A systematic process helps you evaluate whether poor performance reflects a broken thesis or simply short-term market noise.
• Enables systematic learning: When you capture your thinking at each decision point - the quality assessment, valuation rationale, risks identified, and conviction level - you create a record that can be honestly evaluated later. This prevents hindsight bias (convincing yourself you "knew it all along") and allows you to identify patterns to drive systematic improvements.
• Supports collaboration: In a team environment, a documented process ensures investment knowledge isn't locked in any single person's head. When decisions, research, and company interactions are systematically recorded, team members can effectively challenge each other's thinking and provide continuity when someone is unavailable.
• Manages discipline versus rigidity: There's an important distinction between process discipline and inflexibility. A good investment process should be robust enough to minimize flawed decision-making, yet flexible enough to incorporate new information. The key is understanding what aspects are fundamental to your philosophy (these should rarely change) versus those that should evolve as you learn. For us, the principle of only investing in high-quality companies at attractive prices is fundamental, while the specific metrics used to assess quality and value can be refined over time.