Much has been written in recent days about the financial
crises ten years ago. The major themes of the articles are: (1) what caused it?
(2) can it happen again? and; (3) when will the next market crash come? From
the crises low during March 2009 through September 4, 2018 the S&P 500 has
increased approximately 186% ex dividends, which is equivalent to an
approximate annual return of roughly 10.86% ex dividends. For much of the same
period, 10 year U.S. Treasury Notes have largely traded in 2% the 3% yield
range, which implies an equity risk premium of 8% to 9%. See the charts below
for SPY ETF prices as a benchmark for the S&P 500 and ten year treasury yields
between January 2009 and September 2018.
Investors prescient enough to be out of the stock market before the crash who then jumped into the S&P 500 index as a passive investor in March 2009, at the crises lows would have earned the market return of 10.86% ex dividends per year. Investors who parked investment dollars in a fund that was invested in the S&P 500 and managed by a professional money manager at the March 2009 lows had about a 90% chance of being beat by the market, so their S&P 500 holding period return (net of fees) was likely less than 10.86% ex dividends.
The odds of putting money to work at the march 2009 low and
holding on for a decade for professional fund managers or individual investors is
extremely low. Looking backward, we know that the market beat 90%+ of small,
medium and large cap money managers during most of the ten year period since
the crash.[1] We
also know that investors putting money into the stock market at the crises lows
faced an unprecedented level of uncertainty looking ahead into the future. Investors
who stayed out of the stock market in the U.S. after early 2009, missed a long
bull market and part or all of a of a 186% gain, which was a much higher return
earned by those who played it safe by buying
2% to 3% yield to maturity ten year treasury bonds or staying in cash
equivalents.
Today, ten years after the crash there are a steady stream of
opinions about the next crash or not, put out by investors on main street and
Wall Street. The reality is that the "next crash or not," is very
difficult to, if not impossible to reliably predict in terms of timing, effect
and magnitude. Simply put, this kind of certainty does not exist in the markets,
in my opinion.
Some of the most sophisticated and successful professional investors
(pros) I know spend little if any time predicting the future of the economy or
markets in an effort to time the market. They also stay invested and tend not
to be focused on timing their entry or exit from markets. Pros are constrained
by factors such as investing mandates, flow of funds in and out of their funds at
suboptimal times and benchmark tracking, that can hurt their performance. The
professional investing community is a talented hardworking group of people with
the skills and resources that have an advantage over individual investors but
tend to cancel each other out, making it very difficult for them to beat the
market in any given year or series of years.
Markets are dominated by pros that have advantages over less
sophisticated individual investors in terms of training, research and knowledge
of how to use information flow among other factors. Despite this, pros cannot
reliability time the economy, the market or other factors that may affect the financial
markets. Individuals who try to compete head on with the pros have little
chance of beating the market. On the other hand individuals do have some legitimate
advantages over the pros that include, self defined and theoretically
unconstrained investment horizons, personal discretion to be in the market or
not, asset allocation discretion and investment strategy flexibility, among
other factors.
Similar to the pros, individual investors have no advantage
or edge in terms of practicing market timing. Anecdotally speaking, I have yet
to meet an individual investor who has been successful and beat the public markets
over time through market timing based on economic or market forecasts. In other
words trying to jump in and out of the market around recession and economic
forecasts is difficult to bordering on impossible and therefore is not a viable
investment strategy.
Ten years after the crash the best investors that I follow
and mimic, spend little time trying to predict the next one as their and my
investment strategy is not based on market or economic forecasts. I have had
little success in the past trying the time the market or attempting to figure
out its direction day-to-day and month-to-month, etc. based where I think the
economy might go. The lesson from previous market crashes and dislocations is
that forecasters do not accurately forecast them as to timing and severity. The
case can be made that top down predictions of future recessions and market
collapses will be no better than past predictions.
As a bottom up individual investor I do not focus on market
and economic or market collapse forecasts as my primary lens is a focus on
buying small pieces of equity of public companies that can be held onto for
many years, if not longer. I have also been a buyer of debt, commodities and
real estate, among other asset classes. I have not used leverage in my accounts.
I typically invest in companies that are reasonably financed, have a
competitive advantage and the potential to earn high ROIC’s well above their weighted
average cost of capital. I have invested in small, medium and large cap stocks
in Asia, Europe and the United States and also in ETF’s from time to time. My
portfolio has been weighted toward large cap U.S. companies that do business in
the U.S. and abroad. I identify
investment targets through my own primary research and the research of
others. Most of my current equity positions
were purchased when the company I invested in was out of favor on Wall Street
due to worries, concerns and company difficulties at the time of purchase. In
recent years I have also invested alongside select activist investors that I
follow. My portfolio typically consists of no more than 10 to 15 positions and
typically includes heavy concentration in 3 to 5 positions. I attempt to reduce the correlation between the
positions through security selection and by running several investment
strategies at once, e.g. growth, value and special situations investing in
equity; debt and commodity investing; and event driven bets such as the Greek
debt crises and the Japanese tsunami disaster, among others.
I have not managed the portfolio against benchmarks, but for
illustration purposes below I compare my results against the S&P 500 index due
to the large proportion of large cap U.S. stocks in my portfolio. In recent
years my returns have approximated the S&P 500 while holding significant liquid
cash equivalents (i.e. 20% to 30% of the portfolio). The portfolio has
outperformed the S&P 500 in the current year and the last 12 months due to
the performance of stocks that I purchased several years ago as well as a reduced
cash weighting. I have made no effort to time the market and held several
stocks for years with my biggest bet held more than a decade (i.e. before the
previous market crash).
Total return
|
YTD
|
||||
At 8/31/18
|
2018
|
1 yr
|
3yr
|
5yr
|
8yr
|
Portfolio - A
|
15.78%
|
30.45%
|
16.89%
|
13.95%
|
14.48%
|
Portfolio - B
|
21.00%
|
39.00%
|
16.30%
|
14.00%
|
19.60%
|
Combined total
|
17.14%
|
32.67%
|
16.74%
|
13.96%
|
15.81%
|
weighted average return
|
|||||
S&P 500 return
|
9.94%
|
19.66%
|
16.11%
|
14.52%
|
10.60%
|
Excess return - A
|
5.84%
|
10.79%
|
0.78%
|
-0.57%
|
3.88%
|
Excess return - B
|
11.06%
|
19.34%
|
0.19%
|
-0.52%
|
9.00%
|
Return above S&P 500 index
|
7.20%
|
13.01%
|
0.63%
|
-0.56%
|
5.21%
|
- combined
|
[1] Per
"Risk-Adjusted SPIVA Score: Evaluation of Active Managers' Performance
Through a Risk Lens" research published by S&P Dow Jones Indices, for
year-end 2017.
