FOOL ON THE HILL
By
In fact, super-normal returns generated by world-class companies or world-class investors frequently show periods of underperformance over short periods of time, sometimes by significant margins. Fund manager Robert Hagstrom details in his recent effort (and best effort on investing, in my opinion), The Warren Buffett Portfolio, the short-term and long-term track records of some excellent investors:
"In 1986, V. Eugene Shanan, a Columbia University Business School alumnus and portfolio manager at U.S. Trust, wrote a follow-up article to Buffett's "The Superinvestors of Graham-and-Doddsville." In his piece, titled "Are Short-Term Performance and Value Investing Mutually Exclusive?" Shahan took on the same question we are now asking: How appropriate is it to measure a money manager's skill on the basis of short-term performance?
"He noted that, with the exception of Buffett himself, many of the people Buffett described as "Superinvestors" -- undeniably skilled, undeniably successful -- faced periods of short-term underperformance. In a money-management version of the tortoise and the hare, Shahan commented, "It may be another of life's ironies that investors principally concerned with short-term performance may well achieve it, but at the expense of long-term results. The outstanding records of the Superinvestors of Graham-and-Doddsville were compiled with apparent indifference to short-term performance." In today's mutual fund performance derby, he pointed out, many of the Superinvestors of Graham-and-Doddsville would have been overlooked." (The Waren Buffet Portfolio, p. 68)
Let's look at some of the track records of these investors, all of whom consider themselves "value" investors in the sense that, whether they are buying growth or assets or whatever, they consider all investing to be value investing. These are John Maynard Keynes, Warren Buffett, Charlie Munger, Bill Ruane, and Lou Simpson:
*Table 4.1 The Superinvestors of Graham-and-Doddsville
Number of years Number of Years of Underperformance years as
of performance Underperformance a % of all years measured
Keynes 18 6 33
Buffett 13 0 0
Munger 14 5 36
Ruane 27 10 37
Simpson 17 4 24
Let's look at the "dog" of the group, Bill Ruane.
*Table 3.4 Sequoia Fund Inc.
Annual Percentage Change
Sequoia Fund (%) S&P 500 (%)
1971 13.5 14.3
1972 3.7 18.9
1973 -24.0 -14.8
1974 -15.7 -26.4
1975 60.5 37.2
1976 72.3 23.6
1977 19.9 -7.4
1978 23.9 6.4
1979 12.1 18.2
1980 12.6 32.3
1981 21.5 -5.0
1982 31.2 21.4
1983 27.3 22.4
1984 18.5 6.1
1985 28.0 31.6
1986 13.3 18.6
1987 7.4 5.2
1988 11.1 16.5
1989 27.9 31.6
1990 -3.8 -3.1
1991 40.0 30.3
1992 9.4 7.6
1993 10.8 10.0
1994 3.3 1.4
1995 41.4 37.5
1996 21.7 22.9
1997 42.3 33.4
Average return 19.6 16.4
Standard deviation 20.6 16.4
Compound annual return 17.9 13.7
[$1 at inception becomes $85.94 at end of 1997 in Sequoia and $32.24 in S&P 500]
Now let's look at the track record of another Superinvestor of Graham-and-Doddsville:
*Table 3.3 Charles Munger Partnership
Annual Percentage Change
Partnership (%) S&P 500 (%)
1962 30.1 -7.6
1963 71.7 20.6
1964 49.7 18.7
1965 8.4 14.2
1966 12.4 -15.8
1967 56.2 19.0
1968 40.4 7.7
1969 28.3 -11.6
1970 -0.1 8.7
1971 25.4 9.8
1972 8.3 18.2
1973 -31.9 -13.1
1974 -31.5 -23.1
1975 73.2 44.4
Average return 24.3 6.4
Standard deviation 33.0 18.5
[Compound annual return 19.8 4.9]
[$1 at inception becomes $12.57 in Munger Partnership and $1.96 in S&P 500]
(*All tables from chapters 3 and 4, The Warren Buffett Portfolio)
The data in brackets are mine. I think this very clearly shows that an analysis of "what have you done for me lately" without looking ahead is unproductive at best and a reinforcement of a poor investment worldview at worst. Super companies and super investors do not necessarily put together multi-year outperformance that is made up of outperformance in each individual year.
Whether you can outperform each year is a less useful a yardstick than whether you can outperform over a number of years. Furthermore, glaring underperformance in some years is not free-standing evidence of poor investing acumen. So if someone presents you with 365-day or 730-day evidence that Coca-Cola, Warren Buffett, David Dreman, or Garrett Van Wagoner haven't done anything lately and that they therefore have lost their touch, you'll have to look at other evidence to see what they can do for you in the future.