In a bit called “Everything’s Amazing and Nobody’s Happy”, comedian Louis C.K. lampoons modern society for being spoiled by technology. We get frustrated when a text message takes an extra second to send because of a slow connection, while we should be amazed that the thing is actually travelling to space and back. The downside to living in such miraculous times is that people have become conditioned to expect instant gratification in every aspect of life.
Attitudes are no different when it comes to investing. The going assumption is that if performance is not better than the S&P 500 over a one-year period, something is wrong. People tend to view their portfolios as they do Minute Rice – if you stir continually (trade frequently), a positive outcome should be delivered promptly and predictably. The reality is that markets are unpredictable, and the gap between a company’s stock price and its intrinsic value may get wider before it gets smaller. Consequently, true investing does not lend itself well to today’s minute-long attention spans.
We think investing is more akin to planting seeds. Results are never instantaneous, and no one would sit there and watch the daily progress. Some investment ideas take longer to sprout than others. A seemingly unproductive wait may give way to a harvest over time.
We believe index investing has become so popular in part because of people’s growing inability to tolerate any deviation from the broad US market, especially when it has enjoyed a multi-year bull run. It is interesting to observe, however, that full participation in the market’s returns becomes less of a priority during sharp corrections like that of 2008. Simply put, we do not advocate indexing because we are convinced that not every stock in the indexes is worth owning, especially with valuations full and dangers looming. One consequence of this tactic is that it can sometimes be uncomfortable when the funds behave differently (worse) than their benchmarks. For the active investor however, there is simply no way around this periodic uncomfortableness. The present experience harkens back to the late 1990s, when several of our current funds trailed their benchmarks by double-digit margins. Though the past is not necessarily indicative of the future, lost ground in that case was more than made up in the subsequent bear market. Please call our office if you would like us to walk through a more detailed analysis with you.
Sir John Templeton once said, “It is impossible to produce a superior performance unless you do something different from the majority.” We urge patience as we endure the sometimes bumpy road on this quest for superior long-term performance.
Thank you for allowing us to be of service to you.
Aaron Pettersen, CFA, CFP®