Since I started investing almost 20 years ago, the goal I had always read about was beating the S&P 500 over time. Mutual funds were, a lot of times, compared to that benchmark for performance and it was amazing how it didn’t happen much at all. When I read books about Graham/Dodd, Buffett’s mentors, they always stated they had the goal of making 2.5% better than the S&P 500, annualized, over time. It may not sound like much, but if you do the math, if market gains 10% per year for 40 years and you are able to do 12.5% per year over 40 years, you are talking about 2.5 times more money! $1MM, after 40 years, would be $45MM @ 10% per year but $111MM at 12.5% per year and that assumes not adding anymore money. So it’s quite considerable. It makes it all the more impressive that Buffett has been able to achieve returns almost 10% more per year than the S&P 500 over a nearly 60 year career.
So how hard is it really?
I recently purchased a Bloomberg machine, which is a great machine that will allow me to pick different stock screeners and then backtest them as far back as 25 years in some cases. It will then show me the per year returns vs the S&P 500 and it even allows me to select how often I rebalance. So I decided to take a few swings to see how it would do by using some of the things I have learned in the past about equities that work over the long haul by many value investors….
What was the result? If you stayed disciplined and followed the same rule, year after year, it actually was not hard at all to beat the S&P 500. Yes, there were many years in which you didn’t beat the S&P, but over time, you easily beat the S&P and then some. And it didn’t take convoluted and complicated attributes to search for. (More on that in another post).
So why do so many money managers fail to beat the S&P 500 year after year and over long periods of time? Well, that’s when human nature comes into play. Money managers chase returns. They’re almost forced to, which is sad, but it is the business they are in. Granted, they tend to not do a great job explaining the reason for their investment decisions and they tend to be made because other managers and the market are doing well in certain areas, but the bottom line is, it proves that chasing returns is a sure way, in the long run, to lose. When you finally get to the party, as has been proven time and time again, you will find that everyone has either left or are on their way out.
Side Note: I have found a very nice screener that over a 22 year period beat the market by over 4.5% per year. Based on the # of stocks in that screener each year, I was VERY pleased to see the results and I will discuss, in more detail in another post, what I found with this screener. Unfortunately, I won’t be offering the exact screener because then my work on the Bloomberg machine I paid for will be released and I’m too selfish to give away the things I have spent time looking for.