Over 40 Years of Reliable Investing
Essential Wisdom forTodays Market
Recognize That Historically, Periods of Low Returns for StocksHave Been Followed by Periods of Higher Returns1
Though frustrating, stretches of disappointing results for the market are not unprecedented. History shows however, that these difficult stretches have been followed by periods of recovery. Why? Because lower prices increase future returns.
Christopher C. Davis Portfolio Manager, Davis Advisors
History shows that disappointing 10 year periods for stocks, though rare, do occur. While such stretches can test an investors conviction, long-term investors should recognize that these poor periods have always been followed by periods of recovery.1
This important concept is illustrated in the chart below. The tan bars represent the worst 10 year stretches
for the market since 1928. The green bars represent the 10 year average annual returns that followed these difficult periods.
In every case, the 10 year period following these disappointing stretches produced satisfactory returns. For example, the disappointing 1.2% return for the 10 year period ending in 1974 was followed by a 14.8% return for
the 10 year period ending in 1984. Furthermore, these periods of recovery averaged 10% per year.
While no one knows what the next 10 years will bring, history shows that investors with long-term goals should consider maintaining or adding to their stock holdings after a prolonged period of poor market returns.
1. There is no guarantee that in the future the market will be better than it has been in the past. Discussion of stock performance refers to the Dow Jones Industrial Average for the period from 1928 through 1957 and the S&P 500 Index for the period from 1958 through 2012. Past performance is not a guarantee of future results.
Poor Periods for the Market Have Always Been Followed by Stronger Periods
Subsequent 10 Year Market Returns 10 Year Market Returns Less Than 5%
Source: Thomson Financial, Lipper and Bloomberg. Chart represents when the annualized market returns were less than 5%. Periods where there is not a subsequent 10 year period are not shown. The market is represented by the Dow Jones Industrial Average for the period from 1928 through 1957 and by the S&P 500 Index for the period from 1958 through 2012. Investments cannot be made directly in an index. The performance shown is not indicative of any particular Davis investment. Past performance is not a guarantee of future results.
There is no guarantee that the average stock fund will continue to outperform the average stock fund investor in the future. Equity markets are volatile and average stock funds and/or average stock fund investors may lose money.
Avoid Self-Destructive Investor Behavior
Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March 2013) and Lipper. Dalbar computed the average stock fund investor return by using industry cash flow reports from the Investment Company Institute. The average stock fund return figures represent the average return for all funds listed in Lippers U.S. Diversified Equity fund classification model. Dalbar also measured the behavior of an asset allocation investor that uses a mix of equity and fixed income investments. The annualized return for this investor type was 2.3% over the time frame measured. All Dalbar returns were computed using the S&P 500 Index. Returns assume reinvestment of dividends and capital gain distributions. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. The performance shown is not indicative of any particular Davis investment. Past performance is not a guarantee of future results.
Average Stock Fund Return vs. Average Stock Fund Investor Return
Average Stock Fund Return
Average Stock Fund Investor Return
Investor Behavior Penalty
A study by Dalbar underscores the importance of controlling emotions and avoiding self-destructive investor behavior. From 1993 to 2012, the average stock fund returned 8.6% annually while the average stock fund investor earned only 4.3%. We call the gap between these results the investor behavior penalty.
Why have investors historically sacrificed half their potential return?
Driven by emotions like fear and greed, they succumbed to negative behavior such as:
Pouring money into the latest top-performing manager or asset class, expecting the winning streak to continue
Avoiding areas of the market that have performed poorly, assuming recovery will never occur
Abandoning their investment plan by attempting to successfully time moves in and out of the market, a near impossible feat
Successful investors throughout history have understood that building long-term wealth requires the ability to control emotions and avoid self- destructive investor behavior.
Individuals who cannot master their emotions are ill-suited to profit from the investment process.
Benjamin Graham Father of Value Investing
Understand That Short-Term Underperformance is InevitableMost investors find periods of short-term underperformance frustrating. Yet such periods are inevitable when building long-term wealth.
To prove this point, we conducted a study to determine what percentage of top-performing investment managers from 2003 to 2012 experienced a period of short-term underperformance on their way to building an attractive long-term track record.
The results are eye-opening:
95% of the top-performing managers from 2003 to 2012 fell into the bottom half of their peer groups for at least one three year period
70% fell into the bottom quarter of their peer groups for at least one three year period
Though each of the managers in this study delivered excellent long-term
returns over the entire 10 year period, almost all experienced a difficult stretch along the way.
Investors who recognize and prepare for the fact that short-term under- performance is inevitableeven from the best managersmay be less likely to make unnecessary and often destructive changes in their investment plans.
History shows that even the most successful investors have encountered periods of poor performance. Such periods are inevitable and will measure whether an investor has the conviction, courage and discipline necessary to beat the market over the long term.
Shelby Cullom Davis Legendary Investor, Davis Investment Discipline Founder
Source: Davis Advisors. 150 managers from eVestment Alliances large cap universe whose 10 year gross of fee average annualized performance ranked in the top quartile from January 1, 2003 to December 31, 2012. Past performance is not a guarantee of future results.
Bottom Half Bottom Quarter
Percentage of Top Quartile Large Cap Equity Managers Whose Performance FellInto the Bottom Half or Quarter for at Least One Three Year Period
Sixty years of successfully investing in equities has
taught us that long-term investors will inevitably
encounter economic and market uncertainty. History
shows that uncertainty is the rule, not the exception.
Despite these frustrating stretches, the market has
continued to grow over the long term.
To benefit from the wealth-building potential of stocks,
investors must remain unemotional, disciplined and
focused on the long term. With that in mind, we have
collected three essential pieces of investment wisdom
that all investors should remember as they navigate
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All investments contain risk and may lose value. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market.
Davis Advisors investment professionals make candid statements and observations regarding economic conditions and current and historical market conditions. However, there is no guarantee that these statements, opinions or forecasts will prove to be correct. All investments involve some degree of risk, and there can be no assurance that Davis Advisors investment strategies will be successful. The value of equity investments will vary so that, when sold, an investment could be worth more or less than its original cost.
Dalbar, a Boston-based financial research firm that is independent from Davis Advisors, researched the result of actively trading mutual funds in a report entitled Quantitative Analysis
of Investor Behavior (QAIB). The Dalbar report covered the time periods from 19932012.
The Lipper Equity LANA Universe includes all U.S. registered equity and mixed-equity mutual funds with data available through Lipper. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future.
The charts in this report are used to illustrate specific points. No chart, formula or other device can, by itself, guide an investor as to what securities should be bought or sold or when to buy or sell them. Although the facts in this report have been obtained from and are based on sources we believe to be reliable, we do not guarantee their accuracy, and such information is subject to change without notice.
Benjamin Graham is not associated in any way with Davis Selected Advisers, Davis Advisors or their affiliates.
The S&P 500 Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. The Index is adjusted for dividends, weighted towards stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue chip stocks. The Dow Jones is calculated by adding the closing prices of the component stocks and
using a divisor that is adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers. The average is quoted in points, not in dollars. Investments cannot be made directly in an index.
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