In his book “The Most Important Thing”, billionaire value investor Howard Marks from Oaktree Capital quotes from a book published in 1932 called “Oh Yeah?” by Edward Angly. It’s a compilation of wisdom from business and political leaders from just before the Crash of ’29.
There will be no interruption of our present prosperity. (Myron E. Forbes President, Pierce Arrow Motor Car Co., January 1, 1928)
The fundamental business of the country… is on a sound and prosperous basis. (President Herbert Hoover, October 25, 1929)
We are only at the beginning of a period that will go down in history as the golden age. (Irving T. Bush, President, Bush Terminal Co., November 15, 1928)
Howard goes on to say:
And yet, every decade or so, people decide cyclicality is over. They think either the good times will roll on without end or the negative trends can’t be arrested. At such times they talk about “virtuous cycles” or “vicious cycles” – self-feeding developments that will go on forever in one direction or the other.
In our latest podcast, Tony again reiterates that while he doesn’t pay a great deal of attention to the where the market is in its cycle, he agrees with Howard. The market, like most things in life, goes in cycles. And, according to both Tony and Howard, it’s impossible to try to predict the cycles, so don’t even try. Instead, predicate your investment philosophy on the inevitability that what goes up will one day come down and prepare accordingly. As Howard says, “there’s only one intelligent form of investing, and that is to figure out what something is worth and to try to buy it for less.” Value investing is the discipline of working out what equities are worth and how much you should pay for them. Tony’s issue with investing in growth stocks is that he hasn’t yet figured out a scientific way to work out what they are worth. Lots of people claim to have a system, but we haven’t seen one yet that makes sense to us.
Some investors might try to “rotate” their portfolio through growth and value stocks, like professional funds managers often do, depending on the timing of the market, but in doing so you are increasing your risk profile. Even most professional fund managers struggle to get the timing right, as the long term performance of Australian funds demonstrates. Over the last ten years, the best performing Australian super fund only managed an average 9.8% return.
The median return for Balanced funds (41-60% growth assets) was 7.4% a year on average over the past 10 years while Conservative funds (21-40% growth assets) returned 6.2%.
Tony is happy shooting for his traditional ~20 percent compounding returns year after year while obeying Warren Buffett’s Rule Number One – “Never lose money”. The QAV style of value investing involves accepting a return twice that of the top super fund with a relatively low risk, while also requiring relatively low levels of time and effort (outside of reporting period, Kyno says he spends about an hour a day on his portfolio).
Compare that ~20 percent with the 16.3 percent annualized return for growth stocks in the US over the last ten years and it seems even better.
As we keep saying, if value investors aren’t getting good enough returns, it’s possible they are just doing it wrong. As Charlie Munger says:
“It’s not supposed to be easy. Anyone who finds it easy is stupid.”