Now might not be the time to panic, but why not ride out this period of volatility with a little cash on the sidelines? Here’s some food for thought.
In his Little Book of Value Investing, Christopher Browne points to a US study by Sanford Bernstein & Company which ‘showed that from 1926 to 1993, the returns in the best 60 months, or 7% of the time, averaged 11%. The rest of the months, or 93% of the time, returns only measured around 1/100 of 1%’.
|Month||All Ords return|
I ran some numbers on the Australian market and the contrast is similarly striking. From February 1960 to February 2008, the monthly return from the All Ordinaries Index averaged 0.70%. But in the best 40 months, or just 7% of the total, the monthly return averaged 10.4%. In the remainder, it averaged zero.
Short sharp bursts
Most of the stockmarket’s returns come in short, sharp bursts and if you miss them you’ll do tremendous damage to your long-term returns. Miss the best 7% of months and you’ll end up with zero.
In Browne’s words, ‘the reality is (and it’s been proven) that the biggest portions of investment returns come from short periods of time but trying to identify those periods and coordinate stock purchases with them is almost impossible’.
Many value investors, such as Walter Schloss, Peter Lynch and the aforementioned Christopher Browne, have generated incredible returns while remaining fully invested 100% of the time. Others, like Charlie Munger and Warren Buffett, have been equally successful keeping some cash on the sidelines and pouncing in times of distress. But the one way to ensure mediocre results is to be fully invested at the top and sitting on a pile of cash at the bottom.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.