Chairman’s Letter Q1 2019: Money Is Like Soap

A financial forcast at the onset of 2019, through the lessons of 2018i.




April 1, 2019

“Your money is like a bar of soap. The more you handle it, the less you’ll have.” -  Eugene “Gene” Fama, a famous economist. 

For all the talk about robots and index funds taking over the investment landscape, and investors flocking to robo advisors, markets continue to gyrate wildly and most investors relying on these cheap solutions experience results that don’t live up to what is promised. Countless studies have shown that most investors, even if they choose to invest in the cheapest and best performing index funds, underperform the results of that index. By a lot. Why? 

The fourth quarter of 2018 saw the major US stock indices fall ~20%. The reasons for the panic were multi-faceted, analyzed endlessly by both super computers and top-ranked analysts and in the end, given what has happened this year, all were wrong. Why? 

The results of research done by Dalbar Inc., a company which studies investor behavior and analyzes investor returns, shows that the average investor consistently earns well below-average returns.

For the twenty years ending December 2015, the S&P 500 Index averaged 9.85% a year, an attractive historical return. The average equity fund investor earned a market return of only 5.19%. Why do investors continually earn less than the market despite cheap ways to own The Market and even if they pick the ‘right’ market?

“Costs” are important considerations when investing, but by far the greatest costs are emotions and impatience.  Investors own investments for an average retention period of 3.8 years. The Dalbar report states: 

“The retention rate data for equity, fixed-income and asset-allocation mutual funds strongly suggests that investors lack the patience and long-term vision to stay invested in any one fund for much more than four years. Jumping into and out of investments every few years is not a prudent strategy because investors are simply unable to correctly time when to make such moves.”

These physiological biases, which hurt investment performance, manifest themselves when investing in individual stocks. For example, Walt Disney is the largest media company in the world, with some of the strongest brands in the world. Its profits have increased 34% in the past four years and its stock price at the end of last year was lower than it was four years ago. On the evening of April 11, 2019, the company held a conference call and laid out its long anticipated and debated plans for the future and acknowledged it would hurt short-term profits. No real new information was released. The next day the stock jumped 12% and reached a record high. Why? 

We have owned Walt Disney for six years. The company has returned 103% since we originally acquired the company compared to the S&P return of 76%. However, over the last three years it has returned only 23% compared to 38% for the index return. This year Disney is back to its winning ways, up 30% versus 15% for the S&P 500 Index.  Even if we had perfectly timed the exit (odds of this are very poor) and bought back into the company at its lows we would have lost because of taxes. Our investment thesis on Disney is that it will always outperform the market over time because it has unique properties that have and always will, captivate and dominate family entertainment. Family entertainment is not going away. That’s why we owned the company and why we didn’t panic when it fell out of temporary fandom. As was witnessed just last week, fans can return quickly. 

What drives stock prices over time are profits and Disney’s profits have been rising steadily for years. Investors may worry about the short-term, but good businesses manage to grow over time. We strive to own companies that will grow profit at above average rates over time and leave them be. That can be frustrating but, in the end, a successful strategy and one that likely outperforms the average experience investors earn.

As I watched the hockey game, I was bombarded by commercials ridiculing our industry. It’s all so simple the actors imply. “Earn money while you sleep.” “Do it yourself.” “Put it in our computer.” “Get a toaster if you open an account!” It’s very easy to promise, but much harder to achieve (well, to be fair the toaster is real). Relationships like we have with you go deeper than promises; they impart a duty on our part to help you keep your eye on the long-term goals that you have and ensure you can stick to your plan.