Difficulty of Outperforming

[Uccmal]

I tend not to follow Guru's anymore.  What bought this to my attention right now though is John Paulson having to back his firms lines of credit with more of his own cash.  Also, the situation with Mohnish Pabrai.  Over the long term it is exceedingly difficult to outperform the markets by enough of a margin to justify ones existence, after fees and taxes.  By this I mean an outperformance of at least 2-4% over the SPY, over ten year periods, after fees and taxes. 

 

Off the top of my head, I can think of Buffett (size is now an anchor but he got 50 years), Seth Klarman,  Bruce Berkowitz, and Walter Schloss (Is there anyone else whose flame hasn't eventually gone out?).  Some companies have had great long term performance, but reverse engineering this to predict the future is mostly luck.  Greenblatt's record is not public.  I cannot think of any others. 

 

Can we collectively name those funds, investment type companies, or hedge funds who have:

 

Beaten the S&P 500 by 4% per year pre tax BUT after fees, for 15 years. 

 

 

 

 

[NewbieD]

Can't name any of the top of my head. I Believe you are right in that outperforming 4%+/year by following someone is hard/impossible.

 

The difficulty in my mind it is strongly correlated to scale. I would believe quite a few fund managers running $100 million plus could outperform 4%+ / year managing say $5 million. Your universe of stocks go up and your transaction costs go way down.

 

Paying for stock-picking makes more sense if the universe being picked from isn't available as an index.

 

My intuition is I can have a decent edge in the universe I invest in (Scandinavian small cap stocks) up to maybe $10 million.

[stahleyp]

Not quite 4% =

 

Berkowitz has underperformed pretty dramatically under the past 10 year (but still looking good on the 15 year mark).

 

Sequoia is still beating the S&P 500 over 10 and 15 years - even after the VRX issues.

 

Fidelity's Contrafund, Low Priced Stock and Growth Company have also done really well over that time frame. 

 

over 4%-

 

The Bruce fund is over looked usually but it's performance has been really, really strong over the past 10 and 15 year periods (over 14% over 15 years). Though it has a lot of bonds at times.

 

I'm pretty sure Mecham has outperformed by 4%+ over the past decade.

[bbarberayr]

David Tepper is the current King of the hedge fund hill with gross returns of 36% and net returns of 28% (as of 2013).

 

Then there is the Renaissance Fund, which returned over 35% after fees since 1998.

 

But neither of these funds want or will take your money of course.

[tede02]

I think its important to also note that hedge funds tend to use leverage.  My only point here is strategies that don't use leverage and outperform after fees really deserve credit. 

[giofranchi]

Can we collectively name those funds, investment type companies, or hedge funds who have:

 

Beaten the S&P 500 by 4% per year pre tax BUT after fees, for 15 years.

 

Fairfax has increased BVPS at a CAGR of 6.5% since the end of 1999. That is after fees AND after taxes.

 

As we can see in the picture in attachment, the S&P500 has returned 3.73% compounded annual since March 2000.

 

This of course doesn't consider dividends (neither those distributed by Fairfax nor those distributed by the S&P500).

 

Not quite the spread you are looking for... But not bad!

 

Also the Malone's family of business should have performed pretty well... though I don't have the precise numbers.

 

Cheers,

 

Gio

[kiwing100]

I tend not to follow Guru's anymore.  What bought this to my attention right now though is John Paulson having to back his firms lines of credit with more of his own cash.  Also, the situation with Mohnish Pabrai.  Over the long term it is exceedingly difficult to outperform the markets by enough of a margin to justify ones existence, after fees and taxes.  By this I mean an outperformance of at least 2-4% over the SPY, over ten year periods, after fees and taxes. 

 

Off the top of my head, I can think of Buffett (size is now an anchor but he got 50 years), Seth Klarman,  Bruce Berkowitz, and Walter Schloss (Is there anyone else whose flame hasn't eventually gone out?).  Some companies have had great long term performance, but reverse engineering this to predict the future is mostly luck.  Greenblatt's record is not public.  I cannot think of any others. 

 

Can we collectively name those funds, investment type companies, or hedge funds who have:

 

Beaten the S&P 500 by 4% per year pre tax BUT after fees, for 15 years. 

 

 

 

 

 

For those of us who do not know, could you tell us what is the situation that you allude to with respect to Mohnish Pabrai?

 

Thank you in advance for your insight. 

 

 

[KCLarkin]

http://www.turtlecreek.ca/uploads/images/comparisongraph.gif

[Uccmal]

I tend not to follow Guru's anymore.  What bought this to my attention right now though is John Paulson having to back his firms lines of credit with more of his own cash.  Also, the situation with Mohnish Pabrai.  Over the long term it is exceedingly difficult to outperform the markets by enough of a margin to justify ones existence, after fees and taxes.  By this I mean an outperformance of at least 2-4% over the SPY, over ten year periods, after fees and taxes. 

 

Off the top of my head, I can think of Buffett (size is now an anchor but he got 50 years), Seth Klarman,  Bruce Berkowitz, and Walter Schloss (Is there anyone else whose flame hasn't eventually gone out?).  Some companies have had great long term performance, but reverse engineering this to predict the future is mostly luck.  Greenblatt's record is not public.  I cannot think of any others. 

 

Can we collectively name those funds, investment type companies, or hedge funds who have:

 

Beaten the S&P 500 by 4% per year pre tax BUT after fees, for 15 years. 

 

 

 

 

 

For those of us who do not know, could you tell us what is the situation that you allude to with respect to Mohnish Pabrai?

 

Thank you in advance for your insight. 

 

 

 

See Zinc thread. 

[Uccmal]

Can we collectively name those funds, investment type companies, or hedge funds who have:

 

Beaten the S&P 500 by 4% per year pre tax BUT after fees, for 15 years.

 

Fairfax has increased BVPS at a CAGR of 6.5% since the end of 1999. That is after fees AND after taxes.

 

As we can see in the picture in attachment, the S&P500 has returned 3.73% compounded annual since March 2000.

 

This of course doesn't consider dividends (neither those distributed by Fairfax nor those distributed by the S&P500).

 

Not quite the spread you are looking for... But not bad!

 

Also the Malone's family of business should have performed pretty well... though I don't have the precise numbers.

 

Cheers,

 

Gio

 

Well, you have to include dividends.  Fairfax doesn't make it, once you add dividends in.  They add >2% to S&P returns, much less to FFh returns over the whole period.  I dont know anything about Malone's companies. 

 

Buffett is often lauded for his stock investing but he started with control positions in his late 20s, and wholly owned by his mid 30s.  He wasn't a pure investor for very long. 

[Jurgis]

So some people gave examples of companies, hedge funds, etc. that outperformed for 15 years. Not a huge list, but still not bad.

 

But let's ask two more difficult questions:

 

1. Who has invested majority of their money 10 or 15 years ago into a company/fund that has outperformed? (Yeah, I know we have some BRK and FFH long term holders here, you can jump up and down, good job).

 

2. Who has conviction enough to invest majority of their money into a company/fund today and hold it for next 10 or 15 years. Which company would that be? (This would exclude hypotheticals such as Renaissance - whom I respect deeply, but nobody's gonna get their money there).

 

Edit: just to be clear: Uccmal might be looking for pure "funds". I am fine if you give an example of "not really fund" company like FFH/BRK/BAM/FRMO/whatever.

[Vish_ram]

If the smartest investor investor in the world bets for S&P to outperform an average of 10 hedge funds, then it really says something.

 

Also, even if an investor outperforms S&P over 10 years, what is the guarantee that it'll continue? In many cases, the out performance may be due to that style being in favor during that time or just plain luck that'll run out in due time. Remember Ken Heebner who did really well in CGM focus during commodity boom.

 

The other risk is that, as AUM goes up, out performance invariably drops. Also you live with a tail risk of not knowing when the fund would blow up or lose substantial money.

 

The other issue of mine (outlined in ZINC thread) is the foolishness of looking at CAGR from inception. What is the point if in theory 99% wont enjoy those gains.

[Uccmal]

http://www.turtlecreek.ca/uploads/images/comparisongraph.gif

 

Thats impressive.

[Uccmal]

So some people gave examples of companies, hedge funds, etc. that outperformed for 15 years. Not a huge list, but still not bad.

 

But let's ask two more difficult questions:

 

1. Who has invested majority of their money 10 or 15 years ago into a company/fund that has outperformed? (Yeah, I know we have some BRK and FFH long term holders here, you can jump up and down, good job).

 

2. Who has conviction enough to invest majority of their money into a company/fund today and hold it for next 10 or 15 years. Which company would that be? (This would exclude hypotheticals such as Renaissance - whom I respect deeply, but nobody's gonna get their money there).

 

Edit: just to be clear: Uccmal might be looking for pure "funds". I am fine if you give an example of "not really fund" company like FFH/BRK/BAM/FRMO/whatever.

 

Not really fund companies are fine.  There are many "normal" companies that have beat, but can only be identified with hindsight, or extreme luck.  I would say Peter Lynch for example was lucky, especially with Chrysler.  Had he used the same thesis in 2009 with a car company he would have had a terrible record.

[Uccmal]

If the smartest investor investor in the world bets for S&P to outperform an average of 10 hedge funds, then it really says something.

 

Also, even if an investor outperforms S&P over 10 years, what is the guarantee that it'll continue? In many cases, the out performance may be due to that style being in favor during that time or just plain luck that'll run out in due time. Remember Ken Heebner who did really well in CGM focus during commodity boom.

 

The other risk is that, as AUM goes up, out performance invariably drops. Also you live with a tail risk of not knowing when the fund would blow up or lose substantial money.

 

The other issue of mine (outlined in ZINC thread) is the foolishness of looking at CAGR from inception. What is the point if in theory 99% wont enjoy those gains.

 

Too true.  Especially looking at it from inception.  Its pure survivor bias.  Anyone who flamed out early we never hear about. 

[giofranchi]

http://www.turtlecreek.ca/uploads/images/comparisongraph.gif

 

Is it a fund you have invested in? A fund you work for? Or your fund? ;)

 

Cheers,

 

Gio

[jay21]

I am skeptical of the anticipation of >100 bps of outperformance from any equity MF. Very hard structure to get that from.

[KCLarkin]

Is it a fund you have invested in? A fund you work for? Or your fund? ;)

 

I wish. Just a Canadian hedge fund I follow. Unfortunately, they are hard to clone since their 13F does not include most Canadian holdings. And they trade around their positions.

[stahleyp]

I am skeptical of the anticipation of >100 bps of outperformance from any equity MF. Very hard structure to get that from.

 

Sequoia has done it for 40+ years.  If this conversation happened before VRX, we could say that for the past 10 years, too.

[giofranchi]

I dont know anything about Malone's companies. 

 

9 years instead of 15 years...

 

Cheers,

 

Gio

2015_-_liberty_media_corp_investor_day_long_term_returns.pdf

[jay21]

I am skeptical of the anticipation of >100 bps of outperformance from any equity MF. Very hard structure to get that from.

 

Sequoia has done it for 40+ years.  If this conversation happened before VRX, we could say that for the past 10 years, too.

 

Yes - I dont know the environment back before mid-2000s but I feel like today there's more pressure to track the index. Maybe the rise of ETFs has changed the competition and pressure to perform in the short term.

 

Sure it can happen but I don't think its likely.

 

Sequoia is an outlier in terms of concentration etc. Those funds will have a chance to outperform, I just don't think I could pick them with any type of consistency.

[giofranchi]

ABT, which I think of as a diversified collection of healthcare businesses, has returned 7% compounded from December 31, 1999, to December 31, 2015, dividends excluded... And it has paid on average a larger dividend than the S&P500.

 

Cheers,

 

Gio

[learner]

POAGX

Givenry capital

[Guest longinvestor]

Can we collectively name those funds, investment type companies, or hedge funds who have:

 

Beaten the S&P 500 by 4% per year pre tax BUT after fees, for 15 years.

 

Fairfax has increased BVPS at a CAGR of 6.5% since the end of 1999. That is after fees AND after taxes.

 

As we can see in the picture in attachment, the S&P500 has returned 3.73% compounded annual since March 2000.

 

This of course doesn't consider dividends (neither those distributed by Fairfax nor those distributed by the S&P500).

 

Not quite the spread you are looking for... But not bad!

 

Also the Malone's family of business should have performed pretty well... though I don't have the precise numbers.

 

Cheers,

 

Gio

 

Well, you have to include dividends.  Fairfax doesn't make it, once you add dividends in.  They add >2% to S&P returns, much less to FFh returns over the whole period.  I dont know anything about Malone's companies. 

 

Buffett is often lauded for his stock investing but he started with control positions in his late 20s, and wholly owned by his mid 30s.  He wasn't a pure investor for very long.

 

hmmm....well then, I'd like more of the impurity working on my money.

 

We have someone who increasingly / willingly gave up "pure investing" 50 years ago, has a record like none other and did that by taking control-to-whole ownership. I suppose we need another 50 years to prove that this is perhaps the one way to outperform the index.

 

[TwoCitiesCapital]

Can we collectively name those funds, investment type companies, or hedge funds who have:

 

Beaten the S&P 500 by 4% per year pre tax BUT after fees, for 15 years.

 

Fairfax has increased BVPS at a CAGR of 6.5% since the end of 1999. That is after fees AND after taxes.

 

As we can see in the picture in attachment, the S&P500 has returned 3.73% compounded annual since March 2000.

 

This of course doesn't consider dividends (neither those distributed by Fairfax nor those distributed by the S&P500).

 

Not quite the spread you are looking for... But not bad!

 

Also the Malone's family of business should have performed pretty well... though I don't have the precise numbers.

 

Cheers,

 

Gio

 

Well, you have to include dividends.  Fairfax doesn't make it, once you add dividends in.  They add >2% to S&P returns, much less to FFh returns over the whole period.  I dont know anything about Malone's companies. 

 

Buffett is often lauded for his stock investing but he started with control positions in his late 20s, and wholly owned by his mid 30s.  He wasn't a pure investor for very long.

 

hmmm....well then, I'd like more of the impurity working on my money.

 

We have someone who increasingly / willingly gave up "pure investing" 50 years ago, has a record like none other and did that by taking control-to-whole ownership. I suppose we need another 50 years to prove that this is perhaps the one way to outperform the index.

 

It may be the one way to outperform when your managing collectively hundreds of billions of dollars over decades...

Buffet has consistently said he'd make higher returns if he stuck with pure value investing. Also, he said when he changed over and shut down the partnerships that the new platform for investing would likely have lower returns with the same risk - he recognized that it was less efficient, but that's the cost of ignoring volatility for permanent capital.

 

There weren't publicly trade hedge funds at the time so buying operating companies and investing the cash flow was pretty genius - especially using the insurance float prior to the regulation that would prevent current companies from investing a similar amount in equities that Buffett used to have. This is a lower stress form of operation - the capital is permanent, he can invest in whatever he wants without fear of periods of underperformance, and can simply be less time intensive and less stressful because now he only has to have the idea and not necessarily nail the market timing.

 

Current value managers are struggling because we've been in an environment where value stocks have underperformed growth stocks for years. When your main strategy tilt is underperforming for multiple years then you're playing with a handicap because your starting universe is already doing significantly worse than the average. These things move back and forth - in the part of the cycle when value outperforms, these guys will likely kill the market enough to make up for the years of current underperformance.

 

Fairfax's story is different - for them to outperform over the long-term track record going forward, we need a significant impairment in their benchmark that isn't experienced by their portfolio. That's certainly a possibility, but it wouldn't be enough for Fairfax to remove the hedges and simply outperform going forward to save their 10year, and possible 15 year, performance figures.