Tuesday, August 25, 2015

Buy and Hold Investors Hit Hard Yesterday

A favorite retail investor said this morning,

"By the end of the day my Fidelity account had now officially lost all its gains of the past couple of years. My Vanguard index funds (which are held in a Vanguard account) all dropped a whopping 4% Monday. I am heavily in cash, But clearly not sufficiently. I need to raise more cash."
Wow, one bad day wiped out gains for past couple years? That's really astonishing.

But is it unusual for long-only, true believer investors? Maybe not! Look at well-respected value investors Southeastern Asset Management and their Longleaf Partners Fund which has $4.8 billion. They've gotten crushed this month, down almost 14 percent. They're down 20% year to date, and the bear market is maybe two days old!

Notice that despite some "very good years" in 2009, 2010, and 2013, their most recent fund value peak (quite a while ago now) was in June 2014. They're actually close to being down over the past five years. They've never exceeded their peak more than 8 years ago in June 2007 - and they're down 35% since then, not counting whatever dividends have been paid. [It's hard to figure out exactly what the total return including dividends has been over the last, say, twenty years. It doesn't seem great.]

So is this guy shunned and reviled? No, he's a billionaire. He gets profiled in Forbes.

There's something really odd about the psychology of most investors: they don't care how much they or their managers lose in bear markets. They're interested in how much they make at the "casino" during bull markets. So, nobody ever goes to cash. Being able (and willing) to go to cash is an advantage, but only over >1 market cycles which is too long to be relevant for any investor's career. Remember career risk:
"[B]ecause asset class selection packs a more deadly punch in the career and business risk game, the great investment opportunities are much more likely to be at the asset class level than at the stock or industry level. But even if you know this, dear professional reader, you will probably not be able to do too much about it if you value your job as did the nearly 1100 analysts in my survey. Except, perhaps, with your own assets or, say, your sister’s pension assets."
Career risk is what makes the mutual fund performance charts look like sine waves - no net progress - over the past 30 years.


Anonymous said...

Many shall fall that are now in honor, and many shall be restored that are now fallen. Looking at the "ecosystem" of investment managers, what you would expect to happen is for the fat, old, lazy managers who are coasting on something novel that they did decades ago to rotate out of the business after some shock to the system.

Anonymous said...

any style that stopped to consider the possibility of a bear market would have been maladaptive. If you think about it in terms of expected value, for any value of caution regarding a bear market, such a framework would only have lowered expected value and could only have been maladaptive.

As a result, this "genotype" has largely been purged from investing. If you were cautious, this means your boss took you aside and explained that you just didn't "get it" about how the new economy worked and maybe managing money wasn't for you. It also took the form of investing tropes about "stocks for the long run", "buy the dips", and the equity risk premium.

In contrast, people who "got it" for whatever reason have gotten constant, positive, psychic feedback for three decades. They have been carefully programmed to ignore the types of issues that we discuss on Credit Bubble Stocks. Buying the dips always seems like a sure thing, because they have been investing for their entire careers during a "cycle wave V during a supercycle wave V", that is, a bull market inside of a bull market.


Anonymous said...

When a sophisticated investor owns a stock that rises to his target price, he will sell. When a retail investor buys an ETF to get “exposure” or participate in a trend, he may not sell when the price reaches astronomical levels. Instead he will feel superior in his judgment, and see the price increase as evidence of his foresight. If ETF prices crash, he will grasp for any story that explains the price movement. If CNBC headlines tell him that this is just a hick-up and that the bull market is still intact, he may keep his ETFs but stay a bit worried. If ETF prices crash, he will hear convincing arguments of why we are entering into a new Great Depression and he will most likely sell with no regard to underlying value. The selling pressure will escalate because of “information cascades”: the more his friends are selling, the more often he will be reminded that it is the appropriate action to take. Therein lies the reflexivity.

FZ said...

I was pretty flabbergasted by these numbers as I thought he had a good record over a longer period of time. So I went to check the partners fund fact sheet. They are showing returns since inception as being 10.92% versus 9.62% for the S&P!!! hmmm on closer inspection these numbers are "Average Annual Return"!!!!

Am I right to assume this is all the yearly returns averaged out? How is that relevant? What is the compounded return over time - surely they need to provide this number?

FZ said...

finally tracked it down they claim an inception to date compounded return of 10.76% vs 9.67% for S&P. For 20 year time frame they are at 8.92% vs 8.85% for S&P (so flat). Not sure that is really reflected in your post.

innerscorecard said...

What exactly do you mean by "favorite"?

whydibuy said...

This is probably a hard correction. Corrections in Bull markets are like a bronking buck trying to throw you off. And corrections tend to be sharp, violent and very scary, just like this one. And they are unpredictable. They can come three times a year or once in three years.
As for the bull market dying, we have not seen any euphoria and giddiness that mark the end of a move. If you look at past market tops you would see values much higher when the bull ended. Valuation throughout this bull have remained subdued. Hardly giddy.

CP said...

Hard to get a straight answer on this. I was just using the price chart which, as I said, probably excludes any dividends.

Morningstar says 10 year returns of 3.36%

Meanwhile, over 10 years Fidelity government income returned 4.29%

Would be nice to get a 20 year return number somewhere.

CP said...

"Dump high P/Es especially those with big overseas exposures"

Muriel just figured my “efforts” of the last several weeks — especially when I was on vacation out west. Despite my holding much cash, it hasn’t been pretty.

Holding stocks and indexes “for the long term” has not been a good strategy, recently.