It’s been more than five years since Sep 2008 when famed fund manager Mohnish Pabrai told The Motley Fool’s Morgan Housel to “not be surprised if those guys end up outperforming the market by enormous margins over the next few years.” Even the legends get it wrong Fools, meet Bill Miller and Richard Pzena, the ‘guys’ whom Pabrai was referring to. American mutual fund manager Bill Miller etched his name into investing folklore by beating the S&P 500 Index (a US market-barometer) consecutively for 15 years from 1991 to 2005 while running the Legg Mason Value Trust Fund….
It’s been more than five years since Sep 2008 when famed fund manager Mohnish Pabrai told The Motley Fool’s Morgan Housel to “not be surprised if those guys end up outperforming the market by enormous margins over the next few years.”
Even the legends get it wrong
Fools, meet Bill Miller and Richard Pzena, the ‘guys’ whom Pabrai was referring to.
American mutual fund manager Bill Miller etched his name into investing folklore by beating the S&P 500 Index (a US market-barometer) consecutively for 15 years from 1991 to 2005 while running the Legg Mason Value Trust Fund.
But from then onwards, all hell started breaking loose, culminating in the fund’s 58% collapse in 2008. Miller eventually stepped down from the fund that made him into an investment icon in April last year.
Richard Pzena started Pzena Investment Management at the end of 1995. From then to March 2007, Pzena led his clients in the Value Service fund to compounded annualised returns of 15.3%, far-outpacing the S&P 500’s 9.5% annual gains.
But, the fund got smashed in 2008 as it fell 44% in the year, far worse than the S&P 500’s 37% decline.
Both Miller and Pzena were lauded money managers –legends, even – in their own right prior to 2008. But, both got crushed during the Great Financial Crisis of 2007-2009. That was what prompted Pabrai to make the statement after Morgan brought it up in a meeting between them.
Five years on… much has changed
Five years on however, and Pabrai’s bold statement is proving to be eerily prophetic. Miller once again reigns supreme with the other fund he’s managing, the Legg Mason Opportunity Trust fund.
Pzena’s no slouch himself, as his Value Service fund returned a cumulative 93% from 2009 to the end of 2012, way ahead of the S&P 500’s 72% gain.
Looking at them, I think there’s a lesson in there for us all.
Persistence is key
Miller and Pzena were both value investors, an investment style that has been shown to help achieve great success in the stock market over the years. Even when their chips are down, they stuck by their guns. They did learn a lesson or two in their funds’ dramatic collapses, but the cornerstone to their investment approach – value investing – did not change.
They had the patience and persistence to stick with a tried-and-true approach they knew would work over the long-term, but which might (and eventually did) falter in the short-term.
In money manager Joel Greenblatt’s book The Little Book That Beats The Market, he wrote of a simple investment strategy consisting of buying a basket of shares that are highly-ranked by two simple metrics: a share’s earnings yield and return on capital.
Greenblatt believed that buying cheap (those with high earnings yield) and good quality shares (good returns on capital) for the long-term would serve an investor very well.
He back-tested the approach – calling it the Magic Formula – by going back 17 years from 1988 to 2004 and found that it handily trounced the market over that period: the Magic Formula achieved a compounded annualised return of 30.8% while the S&P 500 returned ‘merely’ 12.4% a year.
But here’s the thing, Greenblatt wrote that “during those wonderful 17 years for the magic formula, there were even some periods when the formula did worse than the overall market for three years in a row!”
It seems that even a great approach with superb long-term results like buying cheap, quality shares can fare poorly over short spans of time.
So, what’s the lesson here for us individual investors?
It’s that, over the short-term, even great investment strategies can lose us money. In fact, I’ll dare to wager and say that as investors, we’re almost guaranteed to make short-term paper-losses in most of our investments (or even our portfolio as a whole) at some point in our investing-life.
But if our investments were made based on a sound investment strategy that’s built upon a logical premise, then short-term losses shouldn’t matter to us. Sound strategies, when given time, has a great chance of working out for us.
The key though, is having that persistence to stick with a sound investing strategy that resonates with you.
And if I may, once such sound strategy that resonates with me would be buying, and then holding for the long-term, well-run companies (with solid balance sheets and great cash flows among other characteristics) that are selling cheaply in relation to their underlying fundamentals.
Foolish Bottom Line
I’ve previously shared how shares in the USA can have remarkably predictable returns over the long-term based on their starting valuations; basically, buying shares when they’re cheap and holding them for 10-20 years would give much better returns over buying shares when they’re expensive.
But crucially, over the short-term – 1 year to be precise – share prices go all over the place. “Cheap stocks could just as easily do well or falter, as could expensive stocks”, I wrote.
So, an investor that has thrown in the towel when cheap stocks falter in the short-term would have given up on a great chance for having solid returns over the long-term.
Shares like Jardine Strategic Holdings Limited (SGX: J37), Dairy Farm International Holdings Ltd (SGX: D01), Super Group Ltd. (SGX: S10) and Raffles Medical Group Ltd. (SGX: R01) have generated total returns (where gains from reinvested dividends are included) of more than 1,500% since the start of 2003. Those returns have handily trounced the Straits Times Index’s (SGX: ^STI) gains of around 150% in the same period.
But, throughout the course of their ascent, there were times when their share prices collapsed, sometimes by more than 50% as in the case of JSH, Super Group, and RMG during the throes of the Great Financial Crisis of 2007-2009.
Investors who did not have the persistence and cashed out during their sharp falls would have missed out on their subsequent rebounds to even greater heights.
Without persistence and patience, investors would have missed out on great long-term returns. Don’t underestimate the importance of those two traits – persistence and patience – when investing, Fools. Continue your investing journey with us by signing up for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock Singapore. Sign up here to learn how you can grow your wealth in the years ahead.
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This article was first published on fool.sg in November 2013. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Super Group and Raffles Medical Group.