The Capitalisim Distribution
At CGI Las Vegas I listened to presentation by John Del Vecchio from Ranger Alternatives. John manages the Ranger short book and has a strong background in accounting forensics. Specifically finding companies with low earnings quality before the market does and building “short” positions based on that information.
In his presentation he referenced some stats from a Blackstar Funds paper on the Russell 3000 index between years 1983-2006.
Russell 3000 stats 1983-2006
39% of stocks were unprofitable investments 18.5% of stocks lost at least 75% of their value 64% of stocks underperformed the Russell 3000 25% of stocks were responsible for all of the market’s gains
Well obviously an enterprising investor after reading this would be diligently researching looking for the %25. If you only invest in those companies you are sure to outperform the market. Well not always…
What a difference a day makes
The paper also gives us a sampling of some of the best performing stocks during that time period and their performance after the peak:
Thoughts
It would be interesting to see of the %25 that made up %100 of the gain in 1983-2006, how many companies would still be worth owning today. Looking at that list there are a couple. Of course there are some that would have resulted in a permanent loss of capital and some that are not permanent losses yet but for which the immediate future is not bright. Lets take a quick look at a couple…
GE
If you had bought GE on 01/03/83 at its closing price of 91.75, split adjusted (48:1) each share would be worth around $670 today. I figure thats about %8.3 compounded annual gain. If you had sold that share before the market drop you would have approximately 3x that amount somewhere around %12.5 compounded annually. Not including dividend payments. While GE is a mess today, its fair to say you could of done worse things than buying a share of GE in 1983.
MSFT
If you had bought MSFT when they went public on 03/13/86 at $28, split adjusted (288:1) each share would be worth around $8000 today. Around %29.3 compounded annually. Not including dividend payments.
Conclusion
This data reinforces a couple of points that I sometimes temporarily forget.
1. If you own a sub par company because it was undervalued when you bought it, sell it when it reaches intrinsic value and take your profit. There is no reason to hold it afterwards because it is likely to fall into the %64 that under perform the market. If you sell it and move on to the next value you will be on your way to out performing the market.
2. Paying a little bit of a premium for a a great business with a great moat and great management can pay off big time.
3. I think people should really call “buy and hold” “due diligence, buy and due diligence hold, rinse repeat”.
Tags: 2009, buy and hold, compounding, index, investing, russell 3000, stocks, Value Investing