Mål

DETTA INLÄGG ÄR ETT UTDRAG UR KVARTALSBREVET JAG SKICKADE TILL PANDIUMS ANDELSÄGARE 29 APRIL 2014.

Goal

My goal is to give you the best possible return on your investment over long periods of time. Although that sounds clear and simple some clarification is needed. First, what is a long period of time? Contrary to what one might think when reading financial news, investment results is not something to be measured in days, weeks or months.[1] Anything can happen in the stockmarket over short periods of time. You can be wrong and make a lot of money and be right and look like a fool. But over the long-term your true capability as an investor will show. My opinion is that fund managers should be evaluated based on their results covering a multi-year period that includes both weak and strong markets. Five years is usually enough. This means that I would not put too much emphasis on the fund’s short-term returns, neither good or bad years.

To understand the importance of a long-term perspective it might be instructive to review the performance of one of my favorite investors, Walter Schloss. Between 1956 and 1983 Walter returned 16.2% after fees per year beating the S&P 500 with an impressive 7.6% per year. His long and strong trackrecord makes him one of the best investors of all time.[2] What is interesting is that during 8 out of the 28 years in the study, or almost every third year, Walter underperformed the index. He also had five years with negative returns. An investor too concerned with single year results would have missed the opportunity to get 67x his investment with Walter compared to 10x with the S&P 500.

What is a good return then? When I evaluate investments I do it from an absolute return perspective. That means that I try to identify investments that will produce a return that is higher than a pre-determined hurdle rate while maintaining a conservative level of risk. My opinion is that if done correctly this will, over time, translate into strong relative returns. In order to judge a fund’s long-term performance, I think that it makes most sense to compare the returns with those of an index that reflects the fund’s profile. This benchmark is not as easy as one might think, 75% of managers do not beat their index.[3] Given that we invest globally with a focus on developed markets I think the MSCI World Index is the most appropriate benchmark. [4] The index tracks the performance of 1,600 stocks in 23 developed countries and includes returns from dividends after tax and is generally regarded as the standard index for global stocks.

Despite my absolute return mindset I want to emphasize that Pandium is not an absolute returning fund that will always have positive returns. There will be times when the fund will have negative returns, although I hope they will be few and far between. But anyone investing in the stockmarket needs to be able to handle occasional drops in the quoted price of his holdings.  

There is one factor that I will not include in my self-evaluation and that is volatility. Despite that it is commonly used as one, I am not of the opinion that volatility is a good risk measure. Risk is not something that can be measured with a single backward-looking number. But, apparently most investment professionals are rather exactly wrong than roughly right. Besides, in my book a bumpy 15% return is always better than a smooth 8%.

 

[1] I just read Michael Lewis’ book ”Flash Boys: A Wall Street Revolt” about high frequency traders and apparently milliseconds are now very important.

[2] Walter continued investing until 2003 and returned 15.3% per year to his investors beating the 7.0% annual return of the S&P 500 with a wide margin.

[3] Numbers differ between studies, timeperiods and benchmarks but a 15-year study by Vanguard shows that between 62% and 88% of all equity funds in the US underperform their index.

[4] The full name is MSCI World Standard Developed Markets, Total Return Net in local currency. The index has returned 8.11% per year for the period 1970-2013.