Regular Daily readers know I pounce on any chance I get to share timeless investing wisdom from Agora Inc.’s all-time best stock picker, Chris Mayer. Every $100,000 invested in Chris’ recommendations turned into $480,000 over 10 years. When he says something, we listen…
Today Chris explains why master investors are always prepared to look like fools…
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From Chris Mayer, chief investment strategist, Bonner Private Portfolio: Track records are one of the most misunderstood things in finance…
Many people think a great investor puts up great numbers all the time. But that’s not the case.
Berkshire Hathaway, the investment firm founded and run by legendary stock picker Warren Buffett, held its annual meeting in Omaha earlier this year.
I was there. I mention it because I heard Larry Pitkowsky, co-manager of the $277 million GoodHaven Fund, give a talk that touched on this idea.
“If you invest for decades, you will look like a fool on multiple occasions,” he said. “Get used to the concept.”
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Then he talked about an internal study GoodHaven did of great investors. He said these investors exceeded the market average over the last couple decades. But there was something else in the study that may surprise you.
GoodHaven found these investors trailed the market roughly one-third of the time.
This mirrored a famous study by Eugene Shahan in 1986. Shahan looked at a number of great investors and investment firms and ranked them by their total annual returns during their investing careers (as of the 1986 study):
Any investor would be delighted to achieve those numbers. Yet these investors underperformed the market average about a third of the time!
Pacific Partners trailed the market for six years in a row. Yet its total annual return was just a shade below Buffett’s.
Pitkowsky also mentioned the Templeton Growth Fund, a top-performing fund for 30 years, which underperformed 36% of the time. There are plenty more like it.
This reminds me of an example from Nassim Taleb’s book Fooled by Randomness. (If you haven’t read this book, buy a copy immediately. You can’t think seriously about markets until you understand the concepts in this book.)
He imagines a dentist who’s also an exceptional investor. The dentist earns 15% per year with volatility of 10% per year. His chance of earning money over any given year is 93%.
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But over shorter periods of time, his odds of success drop:
The point is… investment results are, by nature, uneven and fickle. Superior results come not by trying to beat the market all the time, but by finding ways to tilt the odds in your favor… and then being patient. And not being afraid to look like a fool.
As Pitkowsky said, “Get used to the concept.”
Reeves’ Note: Today Chris is recommending a brand-new pick he believes could triple. It’s a stock that just made a move that caused two similar stocks to soar 121% and 205%. No wonder Agora Inc. founder Bill Bonner is investing $250,000 in it through his family trust later this week. Click here to get in on it before he does.