Our most satisfying result was calendar year 2008, a horrible year for investors globally, the S&P/ASX200 (TR) index declined by about 40%. I do not think it appropriate to quote an un-audited result here, but suffice to say that while our portfolio declined in value; it was nowhere near the quantum of the broader market. Any loss of capital is undesirable; however, if the cause of it enables you to accumulate significant positions in some seriously mis-priced issues then, in the longer term, it is not such a bad thing.
We were fortunate in that this attitude was handsomely (and rapidly) rewarded when the market bottomed in March 2009 and took off. Although the margin of victory over the benchmark in 2009 was not as wide, it came against an opponent (the S&P/ASX200 (TR) index) that had added about 35%. In years when the market advances so quickly, just keeping up is quite satisfactory.
When I think about benchmarks, I prefer to think in longer terms. On current values, the S&P/ASX200 (TR) dating back to 1980 has achieved returns in the order of 12.5% annualised. When you factor into that period, the 2 biggest market declines (1987 & 2008) since the great depression, that is pretty amazing, $1,000 invested in the indices (dividends reinvested) would be worth over $33,000 today, without doing anything more than being average. If, however, you managed to beat the market by a further 2.5% annually, your investment's current value would approximately double (about $66,000), add another 2.5% over the indices and your $1,000 would be over $125,000.
The sound performance of the indices, without the stress of individual stock selection is the reason that I recommend index investments to the vast majority of investors seeking exposure to the share market. Provided you take a long view and accumulate steadily a significant holding, you will build a handsome asset.
If you think for a moment the next 30 years will not be as good as the last, I think you will be proven wrong by a good margin. Provided we (as a country) make no substantial economic missteps, we are poised on the brink of a period of massive economic growth. I would happily bet that if you reset the benchmark – the S&P/ASX200 (TR) to 1000 on December 31 2009 (as it was at December 31 1979), that it would be at least at the 33,000 it is currently by 2040.
However, being as good as ‘average’ has always struck me as not being quite good enough. It would be much more satisfying to beat the market by a handsome margin. A 10 year record of beating the market by 5% per annum would place you firmly in the top 1% of investors over such a period, and as pointed out above, in a period of ‘normal’ market performance, would lead to the creation of substantial wealth.
The purpose of the informal/un-marketed commencement of EPG fund No. 1 is in order to establish, under an auditable reporting format, the formalisation of our investing track record, to - we hope - create the type of performance record that will serve as its own advertisement for the reasons you would want to invest. I am very excited about the market at the moment, in my view the whole market is quite cheap, meaning (I expect) over the medium term, gains will be better than their historic average. Better still, if we can beat that by a few points, we will stand our long-term wealth position in excellent stead. Tony Hansen 10/11/2010.
You wrote "A 10 year record of beating the market by 5% per annum would place you firmly in the top 1% of investors over such a period, and as pointed out above, in a period of ‘normal’ market performance, would lead to the creation of substantial wealth."
ReplyDeleteActually, the creation of wealth is done by the companies producing the valuable products and services. For the investor who is becoming the new owner of company equity by purchasing shares of the former equity owner, it is almost exclusively accumulation or allocation of wealth rather than creation of wealth.
I think that's what you meant, but better to be clear what it is you're chasing.
Nice blog btw.
I agree, someone else is 'creating' the wealth from your capital. It is important to remember, in a capitalist marketplace, if no-one ponies up the capital in the first place, huge portions of the wealth would never be created (and we would all be worse off for it). So although I don't invest in IPO's or start-ups, by my purchasing the capital from someone who does, they will have the capacity to do so. From time to time, I may participate in a capital raising of a company I already hold equity in, so I do sometimes provide the fresh capital (if the reasoning is good). But I see your point - Tony.
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