Although the purpose of this paper is not to discuss performance, please make sure you read the disclaimers at the bottom.
I have managed or co-managed Tocqueville’s largest account since the end of 1974: first with my partner Christian Humann at Tucker Anthony, then alone and, since 1992, with the help of my partners at Tocqueville Asset Management.
The reason for choosing this account as reference is that, besides being our largest, at over $1 billion, it is the only account for which we have audited statements going back nearly four decades. Therefore it should be useful for drawing some lessons about investing for the long run. This is the third version of a paper originally entitled The Rear Long View, now updated and edited to include the experience of the recent crisis and recovery.
A look back at the 39-year record calls for some observations:
1. When measuring investment performance, the starting date is all important.
I always remembered this account being worth around $12 million when we took over its management but the audited record showed it multiplying by less than 38 times from the end of 1976 to the end of 2006, when I wrote the first version of this study. Something did not jibe: 38 times $12 million is “only” $444 million, not $1 billion. Then, while doing some file cleaning, my secretary uncovered an old, hand-made (un-audited) performance analysis, which included the years 1975 and 1976.
The account indeed was worth less than $12 million at the end of 1974. But in its first two years it had gained a touch over 78%, as the world’s stock markets rebounded spectacularly from the depths of the 1973-1974 bear markets. When the measuring period was lengthened to cover the thirty-two years 1974-2006, instead of the thirty years since 1976, the portfolio was shown to have multiplied by a bit more than 67 times which, after adjusting for capital received and disbursed over the life of the account, was generally consistent with both my recollection and the auditors’ work.
We have now updated the table to incorporate the years 2007 through 2013, which include the crisis years of 2007 and 2008, and the recovery years of 2009-2013. As can be seen in the appendix, the account’s performance index did make a new high (on a year-end basis) in 2010, less than three years after the onset of the crisis, and its annual compound rate of growth over 39 years averaged 12.5 percent per annum, implying that, without additions or withdrawals of capital, the original capital would have multiplied almost 98 times.
So, the rate of appreciation of our portfolio increased greatly by adding two years of strong gains (1975-1976) at the beginning of the measuring period. When investment managers present their record of performance, it is important to check the period they chose to put forward and the kind of market environment that prevailed while this performance was being achieved. This is especially true for short periods, like five years for example, which are often used for presentations but in my opinion are somewhat meaningless out of context.
2. A dollar isn’t what it used to be.
In the last 39 years, the purchasing power of a dollar was eroded by inflation, even at a slowing rate. Back then, one dollar used to purchase roughly 4.7 times what it does today. Our client’s true wealth, as opposed to his “paper worth”, therefore increased by 21 times – not 98 times – over 39 years. On the one hand, stocks seem to have been a good inflation hedge over that period; on the other, inflation makes performances look better that they have been in terms of “purchasing power”.
3. The miracle of compounding.
Albert Einstein once marveled that “the most powerful force in the universe is compound interest”. Over 39 years, our largest account grew at an average compound rate of 12.5% (after charging management fees). This sounds pretty good but, in fact, it is only 0.5% more per year than the 12.0% achieved by the S&P 500 index when the index’s dividends are assumed to be automatically re-invested.
One might wonder if a mere additional 0.5% per year was worth all our efforts. Judge for yourselves: Over thirty-nine years, without any inflows or outflows, $12 million growing at 12.0% per annum will become $997 million, whereas if it grows at 12.5% per annum, it will become $1,186 million – a $189 million difference on an initial $12 million investment!
Moreover, although the last three years saw our portfolio appreciate 24.2%, this represented a period of underperformance against the major U.S. indices, as the S&P 500, for example, gained 56.8% over the same three years. This being said, this kind of behavior has not been particularly rare in the past. Just as adding a couple of good years at the beginning of a period can markedly improve the total performance over the period, adding a couple of bad years at the end can weigh down on the overall return.
[Note that there exist many different stock market indexes with varying characteristics of company size, geographic location, etc. The S&P 500 is U.S. based and one of the most commonly used. In addition, in recent crisis-affected years, it also has been one of the best performing.]
4. Performance is uneven.
The stock market is, by nature, a cyclical beast and there will always be some great stock market years, followed by mediocre or even negative ones.
Surges like the one in 1975-1976 have not been that exceptional. Our portfolio experienced other outsized gains throughout the period: for example, 70% in 1979-80; 65% in 1982-83; 105% in 2003-06 and 98% in 2009-2013.
But, to average to 12.5% per year, there must have been some more subdued years – and there were. One satisfaction we take from our long-term record, however, is that down years, overall, have been few and rather mild: -5.3% in 1977; -1.4% in 1984; -1.0% in 1990; -4.1% in 2002. The only true exception was 2008, when the market declined 37.0% as measured by the S&P 500 and our portfolio lost “only” 33.1% but was still a disappointment when compared to the historical pattern.
It is also fairly frequent for the value approach to bounce quite strongly in the early recovery following a severe decline but then to underperform on the upside once momentum begins to rule the market – for a while. For example, in the 1982-1983 bounce that followed the 1980-1981 bear market, our portfolio gained 65.5% vs. 48.7% for the S&P 500. In 1984-1987, however, it gained only 34.5% while the S&P 500 rose 73.9%. Similarly, the portfolio gained 59% in 2009-2010 vs. 45.5% for the S&P 500; but it only gained 24.2% vs. 56.8% for the S&P 500 in 2011-2013. These, by the way are measured by comparing calendar year-end figures, but…
5. The calendar makes it look better.
Customarily-used annual performance figures can be misleading. A well-known mutual fund manager, whose sixteen-year streak of beating the S&P 500 Index every year was brutally interrupted in 2006, had once commented that at least some of his extraordinary record was due to the vagaries of the calendar. In many interim periods, he pointed out, his fund had performed poorly or actually declined. The same could probably be said