Length of stay contributes to performance – Le blog de l’week n°747

Olivier Le Moal

Focus on the blog

Most investment-focused blogs focus on individual stock picking or fund/advisor picking. I’m uncomfortable with crowded fields or markets, thinking yields are relatively low when decent.

i am blessed to be member of an informal group of still active investors who are or were professional analysts, portfolio managers and institutional salespeople. For most of my professional life, I have studied and used mutual funds and management companies/advisors. These are the results that I am studying.

Looking at the records of my peers and other performances, I am impressed that much of their highly successful records have been produced by holding titles and other connections for many years.

Holdings held for 25 years or more have performed remarkably well, with gains of 100 times or more their original cost. These gains were achieved through careful initial selection and maintenance of positions, hopefully reinvesting distributions over an extended period.

Recognizing the benefit of compounding returns led me to subdivide portfolios into length of stay (LOS) buckets.

Although the investment and economic cycles do not overlap or concisely fit within US presidential terms, they are reasonable approximations of most major ups and downs in the US stock market.

Therefore, I am of the opinion that periods of less than five years require superior trading skills, not investing. At this time, which appears to be somewhere between a long bull market and a shorter bear market, the five-year average compound growth rate of 7,433 U.S. diversified equity mutual funds serves as a useful comparison for the five coming years without making any predictions.

The five-year weighted average return (by return) through last Thursday was 11.98%. The median return of 10.04% is perhaps more significant. (Best performing funds increase the average score relative to the absolute median score. I’m more comfortable using the median for planning purposes. It’s also closer to the historical return of the S&P 500 since 1926.)

A recent discussion with a leading energy analyst regarding Berkshire Hathaway’s (BRK.A, BRK.B) interest in Occidental Petroleum (OXY) confirmed that it is reasonable to expect an 8% return from its action for the next five years. Since this is a holding in our personal and managed accounts, I thought it was a good alternative to Berkshire’s cash position, especially given the five-year returns mentioned above.

Length of stay impacts choice of value over growth

The theory of investing is based on the fact that fair value is the highest price an informed buyer would pay. Therefore, the only time you should buy an investment is when it is trading at a discount to its fair value. A value investor seeks a position selling below the price of a company’s product or service. The elapsed time is usually short and often depends on an economic cycle or a change in commodity prices. Most value investors expect this to happen within five years.

Typically, a growth investor has a different mathematical approach. Growth generally involves a decline in the price at which a company sells its products or services as demand increases. It could take many years.

When DuPont (DD) saw itself as a growing company, it was willing to build an expensive chemical plant to expand the market for its goods. It was prepared to wait twenty years to reach an overall break-even point. She expected it to be followed by very profitable years.

Value investors have a relatively short tenure and expect lower volatility than growth investors. However, most accounts capable of earning multiple multiples of their initial investment have tended to be growth-oriented.

current market

Current market leadership through mid-June showed a relatively short dwell orientation based on an anticipated recovery in price or demand levels.

In the past, mutual funds had historical net redemptions when the planned investment period was over. It was on average 13 years.

With the shift to shorter-term wealth management approaches, the new preferred sales vehicle appears to be exchange-traded index funds. This should continue to make markets more volatile.

Business leaders, on the other hand, are betting on growth. They expect major changes in the way investors will do things in the future.

Last week, we mentioned Aetna’s acknowledgment of the change in healthcare delivery through CVS Health (CVS). In a somewhat similar fashion, Amazon (AMZN) is also looking to provide healthcare directly through a new venture.

Apple’s new products and policies (AAPL) are likely to drive dramatic change in a number of markets.

We are in a volatile period. In last week’s blog, I noted that the vast majority of WSJ weekly prices were showing gains, with the two biggest declines being the Wall Street Journal’s dollar index and the Russian ruble. This week, the two biggest gainers were the two biggest laggards from the previous week, when the bulk of prices fell.


Traders who can use volatility to their advantage should continue to do so. However, relatively few possess these skills.

Those who have patience, who are ready to see the future as offering extraordinary opportunities for gains and who have patience should invest for growth.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.