Commentary | May 10, 2019

Making Money vs. Getting Your Money Back

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So far, 2019 has been a spectacular year for investors. Stocks are experiencing their best early year gains in over 20 years, with the MSCI All Country World Index of equities up 16.3% on a year-to-date basis through the end of April.

However, when viewed in a broader context, this performance is somewhat less impressive. Using month end prices, stocks peaked at the end of September 2018 and then proceeded to decline 12.3% over the following quarter. Despite a 12.5% rally in the first quarter of 2019, global equities were still 2% lower than their end of September levels.

Only with last month’s gain of 3.4% has the MSCI All Country World Index erased Q4/2018’s losses and is now up 1.4% since the end of September. Rather than making money, most investors have merely recovered the losses they incurred during the final quarter of 2018.

Hope is Not a Strategy:

As 2018 ended, many investors found themselves at the mercy of the market gods. Luckily, their prayers were quickly answered with an impressive rebound.  However, such rapid and convenient recoveries have not and will not always be the case. It took the S&P 500 Index 75 months to recover its losses after the technology bubble bust in mid-2000, and 53 months to recover its losses during the global financial crisis of 2008.

On the other hand, those investors who did not experience significant losses in 2018 were in the enviable position of not relying on the unusually strong rally of 2019 to quickly recover their losses. For them, the rally of 2019 is a bonus rather a necessity.

Consistency Wins the Race:

According to legendary investor Howard Marks, avoiding large losses is essential to achieving superior long-term results;

“Investing is a funny thing because a lot of people think that the long-run is a series of short-runs. Yet, the long-run is a thing in itself: If you aim to pursue superior long run performance then it doesn’t work to try to accomplish superior short-run performance every year. The things you might do to try to be in the top decile in a given year increase your risk of being in the bottom decile. But if you do just consistently well, with no trips to the bottom decile or even to the bottom half of the distribution, it will make you superior in the long-run. So trying to be superior in the long-run by foregoing maximization in the short-run is the most reliable course.”

In other words, long-term investors are better served by avoiding major losses than by trying to be a top performer in every year.

This approach has been clearly reflected in our performance since inception. We participated in the rising markets of 2017, protected our clients from losses during the challenging markets of 2018, and have been taking part in the market rebound of 2019. This combination of upside participation and downside protection has resulted in superior risk-adjusted returns.