May 2021 – Reasons to be a Long-Term Investor – Part I

Regular readers of this blog will recognize a recurring theme: we are strong proponents of long-term (five years or longer) investing. We have two good reasons for this: historical and theoretical. Lucky for you we will deal with the first one today, and save the finance theory for another blog. Before we start in, however, let’s eliminate a possible third reason: knowing the future. For the record, you may be shocked to learn that we don’t know the future. And neither does anyone else (not even those crypto-currency proponents or people who write financial newsletters).

Fortunately, knowing the future is not a prerequisite for being a successful investor. In fact, not knowing what the price of an investment will be next year (or tomorrow) can actually be very freeing! It keeps investors from falling for the popular notion that we should be able to perfectly time investment decisions. It’s just not possible to know ahead of time with absolute certainty which investments will ultimately do well and which ones won’t. Think about it: if it were really that easy, there would be no risk. Everyone would be doing it. And if everyone’s doing it, then there would be no returns left to go around.

To be good at timing the market, you have to get two things right every time: knowing when to buy and when to sell. Of course, this doesn’t mean you can’t get lucky sometimes at making investment decisions based on your hunches or reading tea leaves, but we don’t think that is a sustainable long-term investment strategy.

Historical stock market returns, on the other hand, should give long-term investors ample reasons to stay the course. Here is a table which breaks down returns on the S&P 500 Index from 1950 through 2020 between positive and negative return periods[1]:

While we have already said that we can’t know the future (and we should all know that past investment performance is no guarantee of future investment results), this table should none-the-less be encouraging to long-term investors. Notice how, over the past 71 years, the positive-to-negative split improves in the investors’ favor as we go from daily returns (54% positive) to 10-Year Rolling (89% positive).

For a different perspective, let’s take a longer view back in time, looking at the 95 years of annual returns from 1926 through 2020 for the S&P 500 Index. The following table groups calendar year returns by ten different return categories, from negative 40% or less to positive 40% or more[2]:

There are several things to notice about these return distributions. First, you can see that the whole “pile” of annual returns appears to be leaning to the right, and that it does not take the shape of a “Bell-shaped curve” (or Gaussian distribution, for those of you who remember your statistics class). In other words, the distribution of annual returns is skewed to the right, meaning that there were more years that produced positive returns (70 out of 95) than there were negative (25 out of 95). This kind of pattern is exactly what all realistic, long-term investors should hope for!

The average return for the whole period was about 10% per year, and we can see the returns peak around that level, with 38% of the years returning between 0% and 20% per annum. Annual returns of 20% or more happened 36% of the time, versus losses of 20% or more only 6% of the time.

Will these return patterns persist into the future? It’s impossible to know, of course, but we should ask ourselves if there are any fundamental reasons that this kind of historical wealth creation would suddenly come to a screeching halt. It can happen, of course, if the entrepreneurial spirit suddenly dies out (very unlikely), or if serious impediments to a free market system or rule of law are introduced that would impede the flow of capital to its “highest and best use,” as economists like to say.

It’s good to reflect on the fact that the 1926 to 2020 period cited above included World War II, the “Cold War,” the Vietnam War, the 9/11 Attacks, the War on Terror, the Great Depression, the Great Recession (a.k.a. Global Financial Crisis), numerous lesser recessions, periods of very high inflation, and sixteen different U.S. Presidents (eight Democrats and eight Republicans). If all this sounds a little like Warren Buffett, it’s probably because we never tire of quoting the “Oracle of Omaha.”

To close, we’d like to repeat what he wrote in this year’s Annual Letter to Berkshire Hathaway shareholders: “Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”[3]

Anyone want to argue with him? We don’t.
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All information is from sources deemed reliable, but no warranty is made to its accuracy or completeness.   This material is being provided for informational or educational purposes only, and does not take into account the investment objectives or financial situation of any client or prospective client.  The information is not intended as investment advice, and is not a recommendation to buy, sell, or invest in any particular investment or market segment.  Those seeking information regarding their particular investment needs should contact a financial professional.  Coyle, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material.  The opinions expressed were current as of the date of posting but are subject to change without notice due to market, political, or economic conditions. All investments involve risk, including loss of principal.  Past performance is not a guarantee of future results.

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[2]“By the Numbers”, Michael Higley, May 3, 2021, Distributed by MFS Investment Management



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