Paul Tanner, Granite Hill Capital Management: Performance Envy Diminished by Better Benchmarks and Other Factors

By Harvest Exchange

Jason Zweig’s recent Wall Street Journal article “Give Yourself an Investing Makeover,” discussing the transformation of Guy Spier’s investing habits, piqued my interest. Along with money manager Mohnish Pabrai, Spier was the winning bidder of a charity auction lunch with Warren Buffett in 2008, and his Aquamarine fund has enjoyed superb performance. Curious, I did a little digging.


Inappropriate Benchmarks Deceive

When it comes to the question, “Did I beat the market?” the answer depends on which market. Different asset classes have different risk and return characteristics. Because Spier invests in stocks priced low relative to earnings or assets, a value?oriented benchmark provides a more fair comparison than the S&P 500 (INDEXSP:.INX), which is composed of big companies and agnostic about relative price. As the graph below shows, the Aquamarine fund returned 11.6%, 5.1% better than the S&P 500.While that outperformance shrinks to 4.2% when compared to the Shares Russell 1000 Value Index (ETF) (NYSEARCA:IWD), composed of US big companies low in relative price, it’s still superb performance.

Spier limits disclosures of stocks held, but small company and international stocks have appeared in his portfolio. If international companies low in relative price dominated Spier’s portfolio, a more appropriate benchmark could be the MSCI EAFE (Europe, Asia, Far East) value index and outperformance would expand to 5.4%; in contrast, if he focused on US smaller mid?cap stocks, comparable benchmark outperformance would fall to 1.4%.

aquamarine performance vs benchmarks

Expect Value Benchmarks to Outperform in the Long Run

Adding stocks low in relative price (value stocks) can goose performance relative to broad indexes. How much of a boost can you expect? Large value and small value indexes outperformed the S&P 500 by 0.5% and 1.8%, respectively, since 1979. International value outperformed a broad international index by 1.4%. This advantage may seem small, but over time the compounding effect translates into significant differences in wealth.

Performance Envy Diminished by Better Benchmarks and Other Factors by Harvest