The past calendar year was, to put it mildly, an interesting one for investors. The S&P started the year at 3,230 and ended it at 3,756, paying a dividend of around 59 points along the way. You would think that a return of something close to the indexes total return of 18% would have been easy to generate as a result. Yet the market low of 2,237 on 23 March 2020, reflecting the liquidation of risk assets in the face of the first global pandemic seen in 100 years, tested investor's nerves.
As pointed out previously, those who focus on time in the market vs timing the market can ride out such dislocations with relative ease. The dream scenario of selling before the market tanked in mid-February, to then buy back after the significant decline could have easily resulted in a 50%, or greater, gain from market timing alone. Anyone latching on to the relative strength of businesses in commercial cloud, online retail, or other lockdown beneficiaries may have been able to do significantly better.
However, the reality of the situation was that those invested in less attractive businesses probably saw their portfolios decline by of the order of 50% over that turbulent month. Many of these stocks, at the market's lows, presented excellent buying opportunities for those with the fortitude and short-term mindset to benefit from the ensuing 'value rally'. A portfolio of relatively low quality businesses could easily have returned as much as 100% from the market lows to the end of the year.
So much for hindsight. In the midst of the turmoil I managed one intelligent purchase and some very unintelligent sales. The sales mostly came in May, after the worst of the stock market's losses were over, but before there were clear signs (to me at least) that risks of any significant recession (or, indeed, depression) had been avoided.
Whatever the excuses may be, by trying to protect against market declines in late 2020, I held excess cash as markets rallied hard on vaccine approvals announced in November. At the time there were plenty of businesses with good prospects and pessimism baked into valuations to have been able to construct a well positioned portfolio. Knowing that market timing is futile is one thing - staying fully invested through thick and thin is another.
At least holding excess cash can have the benefit of avoiding stupid purchases. By consistently trying to not be stupid, and occasionally having a useful insight into a perceived price-value gap, returns should at least be adequate over time. If those insights are of a high quality and there are sufficiently many of them to create a portfolio of ideas with a margin of safety, then those returns should be more than adequate.
Many years now of observing the results of holding excellent businesses purchased at fair prices has embedded the belief that this really is a better way of consistently trying to not be stupid, and therefore generating adequate returns over time. The better the business and the lower the entry level, the more likely it is that the returns can be better than adequate.
A friend with a low turnover strategy (as trading is a hassle in his job) owns the likes of Facebook, Apple, Amazon, Google and Disney. All excellent businesses and all easily observable at times over the past few years as being available at sensible prices. This does beg the question over whether the time and energy of seeking out brilliant risk-reward situations that need to be replaced with new brilliant risk-reward situations every year or two is worth the time, energy and stress given the alternative of holding excellent businesses for the long-term.
The portfolio generated a return of 0.7% against a decline of 10.6% in the FTSE 100 and a gain of 18.4% in the S&P 500 during the course of 2020. It remains a concentrated set of interesting risk-reward ideas and the goal remains a 20% rate of compounding over time. It is, however, tempting to accept a more subdued (but still excellent) 10% rate of compounding with both less effort and with a lower risk of seeing returns fall far short of the targeted growth rate both in any given year, and also over longer periods of time.
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