Mike
Lipper’s Monday Morning Musings
Length of Stay Contributes to Performance
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018 –
Blog Focus
Most investment-oriented blogs focus on the selection of
individual securities or funds/advisors. I am uncomfortable with crowded fields
or markets, believing returns are relatively low when they are correct.
I am blessed to be part of an informal group of still active
investors, who are or were professional analysts, portfolio managers, and
institutional salespeople. For most of my professional life I have studied and
used mutual funds and management companies/advisors. These are the results I
study.
In reviewing my peers’ and other performance records, I am
impressed that a large portion of their very successful records were produced
by holding securities and other relationships for many years.
Holdings held 25 years or more have produced remarkably good
performance, with some gains 100X or more their original cost. These gains were
achieved by careful initial selection and maintenance of the positions,
hopefully reinvesting distributions over an extended period.
Recognizing the benefit of compounding returns has led me to
subdivide portfolios into length-of-stay (LOS) buckets.
While investment and economic cycles don’t overlap or fit concisely
within US presidential terms, they are reasonable approximations of most major
up and down US stock market phases.
Consequently, I take the point of view that periods under
five years require superior trading, not investment skill. At this time, which
appears to be between a long bull market and a shorter bear market, the five-year
average compound growth rate of 7,433 US Diversified Equity Mutual Funds serves
as a useful comparison for the next five years without making any predictions.
The five-year weighted (by performance) average return through
last Thursday was 11.98%. Perhaps more significant was the median return of
10.04%. (Better performing funds raise the average result when compared to the
absolute median result. I am more comfortable using the median for planning
purposes. It is also closer to the historic return of the S&P 500 since
1926.)
A recent discussion with a leading energy analyst concerning
Berkshire Hathaway’s interest in Occidental Petroleum confirmed that it is
reasonable to expect its stock return of 8% for the next five years. As this is a holding in our personal
and managed accounts, I felt it was a good alternative to Berkshire’s cash
position, especially in view of the five-year returns mentioned above.
L.O.S. Impacts Choice of Value vs Growth
Investment theory is based on fair value being the highest
price a knowledgeable buyer would pay. Consequently, the only time you should
buy an investment is when it trades at a discount to fair value. A value
investor seeks a position selling below the price of a company’s products or
services. The elapsed time is usually small and is often dependent on an
economic cycle or commodity price change. Most value investors expect this to
occur within five years.
Typically, a growth investor has a different mathematical
approach. Growth usually infers a decline in the price a company sells its
products or services as demand grows. This could take many years.
When DuPont viewed by itself as a growth company it was
willing to build an expensive chemical plant to develop the market for its
merchandise. It was willing to wait twenty years to reach an overall breakeven
level. It expected it to be followed by very profitable years.
Value investors have a relatively short-length-of-stay and
expect lower volatility than growth investors. However, most accounts able to
earn many multiples of their initial investment have tended to be growth
oriented.
Current Market
Current market leadership to mid-June has exhibited a
relatively short-length-of-stay orientation based on an anticipated recovery in
price or demand levels.
In the past, mutual funds experienced historic net
redemptions when the expected period of investment was complete. This was on
average 13 years.
With the switch to shorter term wealth management
approaches, the new favored sales vehicle seems to be indexed Exchange Traded
Funds. This is likely to continue to make markets more volatile.
Leading corporate managers by contrast are betting on
growth. They expect major changes in how investors will do things in the
future.
Last week we mentioned Aetna’s recognition of the change in healthcare
delivery through CVS Health. In a somewhat similar fashion, Amazon is also looking
to provide healthcare directly through a new venture.
Apple’s new products and policies are likely to generate dramatic
changes in a number of markets
.
We are in a volatile period. In last week’s blog I noted
that the vast majority of the WSJ weekly prices showed gains, with the two
largest declines being the Wall Street Journal dollar index and the Russian Ruble.
This week the two largest gainers were the two biggest laggards of the prior week,
whereas the bulk of the prices declined.
Conclusion
Traders who can use volatility to their benefit should
continue to do this. However, relatively few have these skills.
Those with patience willing to view the future as offering
opportunities for extraordinary gains and have patience should invest for
growth.
Did you miss my blog last week? Click here to
read.
https://mikelipper.blogspot.com/2022/08/time-to-prune-weekly-blog-746.htm
https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html
https://mikelipper.blogspot.com/2022/07/mike-lippers-monday-morning-musings.html
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A. Michael Lipper, CFA
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