Can you be in the top 4% of investors?!

Hi,

I read the following from Morgan Housel’s /Collaborative Fund blog:

Howard Marks once talked about an investor whose annual results were never ranked in the top quartile, but over a 14-year period he was in the top 4% of all investors. If he keeps those mediocre returns up for another 10 years he may be in the top 1% of his peers – one of the greatest of his generation despite being unmentionable in any given year.

So much focus in investing is on what people can do right now, this year, maybe next year. “What are the best returns I can earn?” seems like such an intuitive question to ask.

But like evolution, that’s not where the magic happens.

If you understand the math behind compounding you realize the most important question is not “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”

That’s not to say good returns don’t matter. Of course they do. Just that they matter less than how long your returns can be earned for. “Excellent for a few years” is not nearly as powerful as “pretty good for a long time.” And few things can beat, “average for a very long time.” Average returns for an above-average period of time leads to extreme returns.

“The only thing that matters is where you are in the long run,” Marks said.

That’s the second lesson: Less focus on change, more focus on the exponent.

I thought it was an interesting idea that if you invest with average returns, but do so for an above-average period of time, you can be within the top 4% (or even 1%!) of investors over your whole investing career.

The whole article is here, if interested:
Nature Shows How This All Works · Collaborative Fund

Regards,

Ben

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Hi Ben,

Yes, I am a fan of this ‘tortoise and hare’ approach. Grind out respectable results over time and you should outperform those employing attention-grabbing strategies that eventually blow up.

Had to double check exactly what being in the top 4% of investors meant in reality. As a rough guide the total return of investment trusts from the last 14 years are show below:

The list is subject to the usual survivorship-bias caveat. But the 260 names with 14-year returns makes a top-4% performer at number 10 and, if you adjust for the REITs, you need to have six-bagged your portfolio through a c14% annualised return to get into this top-4% club.

Registering a +14% annual return would have only received many plaudits in 2008, 2018 and 2020 during the last 14 years. Otherwise the performance would have been mostly “unmentionable” as Howard Marks says. I will take +14% every year for the next 14 years.

Maynard

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Hi Maynard,

I would certainly be pleased with 14% p.a. over 20 year, basically doubling every 4 or 5 years!

It goes to show the story stocks are not what they appear to be (quel surprise!), and maybe I should relax a little (and get less stressed!) about short-term returns vs long term potential, especially when taking on turnarounds.

Sometimes the risk to reward doesn’t make sense despite whatever various commentators may say. I need to focus more on long term returns and (dare I say it) annual candlestick charts and gross margin trends, rather than weekly or monthly charts or metrics!

Thanks and regards,

Ben

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