Hi Guys,
A few days ago, MFOer Mark posted about possibly holding a down investment until it recovered to its purchase price. As part of his closure on the topic he said: “Then I thought of some other fairly noteworthy melt downs involving esteemed managers: Bill Miller (LMVTX), Bill Nygren (OAKLX) and Ken Heebner (CGMFX) who I thought at one time or the other were the sharper tools in the box.”
These are excellent examples of why and how we decide on a particular fund, and the difficulties associated with performance persistency or lack thereof after we choose them.
General George Patton expressed some aspects of our decision policy with the following pity observation: “Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.”
We hire a fund manager to do our investing; we don’t tell him which investments to trade or how to do it. We trust them to do it prudently and wisely. In essence, as John Stewart sang, we “Let the Big Horse Run”. For your entertainment, here is a Link to Stewart’s song:
But persistency is an illusive parameter in the investment world. There is much uncertainty, and consequently, many faulty decisions. We are too often fooled by randomness. Our patience levels melt after a bad year or two.
Yet, in many instances, all this is likely a regression-to-the-mean. How often after discarding a fund, its returns escalate while the recently purchased replacement returns are mediocre? Statistically, it happens frequently. We are slaves to rash decisions that are harmful to end wealth.
The universe of mutual fund managers is populated by far too many marginal managers who struggle to achieve benchmark returns. Study after study demonstrates that challenge. This group of guys don’t deserve their top heavy salaries. But there are exceptions. When you identify such a superior performer, cut him a little slack. Everyone suffers a sub-par year or two. Even Babe Ruth and Warren Buffett have endured slumps. Your patience will be rewarded. Stay the course is not a bad rule.
As Stewart says, “Let the Big Horse Run”.
Best Regards.
Comments
@Mark It took me a while to find this. Thought you and others might find it amusing, as well as humbling; I can't imagine anyone who invests for a significant period of time being able to avoid the psychology of a major market correction, who doesn't later reflect back on how pathetically they handled most all of it. Gotta have a plan, gotta have clarity, gotta execute it.
This is commentary from a weekly posting done by a MF portfolio manager (known to the MFO board, liked by some, disliked by others), at another time when people were wondering if we were entering a bear market/recession and wondering whether they should hold or sell. It describes the mentality of an investor in the midst of a bear market correction, who has never before had his/her general plan to be a "long-term buy-and-hold investor" challenged (or maybe has experienced it before but didn't learn anything from it): Over the next six months or so, any MFOer who simply cannot reach decisions now about particular investments.... can play along if they'd like.
@MJG - You noted: "Yet, in many instances, all this is likely a regression-to-the-mean. How often after discarding a fund, its returns escalate while the recently purchased replacement returns are mediocre? Statistically, it happens frequently. We are slaves to rash decisions that are harmful to end wealth."
Intuitively that's what I was thinking but I can't verify it at all. Yet it looks right. My plan allows for a certain loss before pulling the plug measured by the context in which the loss happens to be occurring. Heck, we reward .350 average hitters with outrageous contracts and they are only successful 3-4 times in every 10 attempts. Indeed, some players (managers) are cut a little more slack than others.
A problem for Hussman is that the bear markets don't last long enough for him to make back all the money he loses waiting for one.