The “Value” of Long-Term Investing

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

– Warren Buffett

Dear Client:

As with trees, investment portfolios take time and cultivation to grow. There is no getting rich quickly even though so many try––and subsequently fail.

We have recently seen a number of mutual funds and other money managers boast of providing a good investment return over the past few months and even over the past couple of years. What they leave out is how they have performed over a longer period of time.

Morningstar, which is the leader in mutual fund research and surveys, provides a list of its favorite funds. There are currently many funds on this list that have performed well recently but a longer term survey shows a more accurate picture of what an individual investor can expect. In looking at five of the recommended funds with the best records the past 12 months, we see that the average return from mid-August 2004 until mid-August 2005 is 20.9%.

However, over the past five years––which includes the aforementioned one year of good performance––this same group of mutual funds is down on average 4.2% per year. This amounts to a total five year return of minus 19.3%. In comparison, the worst five year period of returns for our composite of client accounts, which measures Cheviot Value Management’s investment performance, amounts to a gain of 6% per year and a total positive return of 33% over those five years. For information on the construction of our client composite, see Our Performance Composite.

So, depending on the time frame, the above-mentioned mutual funds either made 21% in one year or they lost 19% over the past five years. Had you invested $1,000,000 in this group of funds five years ago, you would have barely more than $800,000 today. And this includes their performance during the past twelve months.

The funds that comprise this list are well regarded, including offerings from Brandywine, Fidelity Investments, Harbor Capital, and Vanguard. They are prominent as well, with combined assets of nearly $78 billion.

Value investors are unwilling to ride the ups and downs of the overall stock market the way so many mutual funds have over the long term. This is because value investors are unwilling to purchase stocks at already high prices with the hope of later selling them for an even higher price. As Benjamin Franklin once said, “He that lives upon hope will die fasting,” and we agree. We want to find and purchase undervalued stocks so that our risk is lower and your portfolio is less volatile. The test is not how much one makes in the short term but how much one makes and keeps over the long term.

With investing it is often true that what is hot today is cold tomorrow. It is just as true that what is unloved today may soon be loved on Wall Street. This is true with individual stocks as well as entire fields of investment. The Japanese stock market was soaring in the late 1980s and an increasing number of individuals piled in just as the market started to cool. Now, more than 15 years later, the Japanese stock index is 68% lower than on December 31, 1989. The fate of those who purchased hot tech stocks in the late 1990s is similar. These are just two examples where, at the time, the performance of the individual stocks or the overall market was impressive, luring in many unsuspecting investors. But what was once hot soon went cold.

We won’t invest in fads or what’s hot today. Doing so would put your capital at risk. What we will do is search continuously for safe investment opportunities that provide a great likelihood of a reasonable rate of return. When there are few stocks to buy, the cash in your portfolio will build as we accumulate dividends and interest from the holdings in your portfolio. Having this cash available enables us to act promptly when we find investments that are worthy of your hard-earned dollars.

In addition to acquiring a variety of short-term bonds that provide a yield higher than cash, we recently purchased the shares of a successful regional sporting goods retailer. In the matter of just a few days, the company’s shares had declined in price to a level that represented a bargain so we acted quickly to buy a position in the company.

We expect to find more bargains going forward and look forward to the opportunity of purchasing them on your behalf. This is the foundation for building permanent value in our clients’ portfolios.



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