Review & Outlook

Our take on the investing, financial, & economic themes of the day

Comment on Long Term (ten year) Performance

18 December, 2009 by Ben O'Brien in Commentary

Investment performance here at O’Brien Greene over the past 10 years tends to be on average considerably better than the performance of the S&P 500-stock index over the same period (the S&P 500 is the customary standard of comparison in the investment business). Our portfolios vary a good deal from one to the next, but on average they rose a lot more than the 7.7% in the S&P 500 index over the 10 year period. Whenever there is a big difference between the performance of the S&P 500 and the performance of one’s portfolio, one should ask why, because it could mean there is too much risk-taking, or too little.

So why did our portfolios go up more in price than the S&P 500 over the past 10-years and what does it mean? The big reason has to do with the start of the 10-year measurement period, when our portfolios largely missed the popping of the Internet/high tech bubble in the late 1990s. Missing that bubble, or more precisely the aftermath of the bubble, made a huge difference; thereafter our performance tracked the S&P 500 pretty closely year in and year out.

We do not set out to have the price of our portfolios go up more than the price of the S&P 500. If it happens, as it did over the past 10 years, it is almost accidental. That’s because beating the S&P 500 is not the goal, at least not as far as we are concerned. Rather the goal as we see it is to take less risk than the S&P 500, while reaping most of the gain. We are willing to give up the chance for big reward if we can reduce the chance of failure. It is the standard risk-return trade-off – – except for the fact in the past 10 years the risk-return trade-off did not conform to history.

The past 10 years saw the risk-return relationship stood on its head: the less risk one took, the more one’s reward – – the very opposite of what is supposed to happen. It was one of the few such periods in American market history when risk-taking was punished.

What’s the bottom line, as far as we are concerned? It is unlikely we will have another such 10 year period when low risk outperforms higher risk. If the future is anything like the past, risk-taking will be rewarded over the long term, and performance may well trail that of the more risky S&P 500.