This is the time of year when we all love to forget about past mistakes, wipe the slate clean, and cross our fingers for better times next year. I hate betting on the future. Instead, let’s take a critical look back at 2011 through the lens of history and use this knowledge to set a New Years resolution (for our portfolios) that we are much more likely to keep and succeed at.
The S&P 500 ended 2010 at 1257.64 and closed on Friday at 1257.60. A dull result if only looking at these end points (or only +2.1% including dividends). But we all know the gyrations of the past year were anything but dull because of fears of default of the PIGS countries in Europe that brought the S&P down to its low of 1074 in early October.
S&P 500: Jan 1-Dec 31, 2011
In fact most everything you read from traders and portfolio managers about 2011 is that it was a difficult year for all. The words you hear are “big ups and downs”, “high volatility”, “difficult year”. While what’s going on in Europe is far from ordinary, but from my perspective the performance of the S&P 500 was actually quite ordinary.
From a statistical perspective (barely useful on a forward looking basis, but can be instructive when looking back), the standard deviation of the S&P 500 in 2011 was 16.0%. While in comparison, the same measure going back to January 1950 (or 62 years!!) was 14.6%. In other words, the volatility this year was comparable to the past and nothing special. Second, how often does a return of 0% occur? Using the same statistics, and an average return of 10.9% (the average annual return since Jan 1950), a return of 0% or lower happens approximately once every 4 years. In the past decade, there have been 3 years around or below zero (2002, 2008, and now 2011), 4 years with above average returns (2003, 2006, 2009, and 2010), and only 3 years with returns between 0% and 11% (2004, 2005, 2007). To the long-term investor who isn’t worried about short-term gyrations, 2011 was just a run of the mill year.
In such a run of the mill year, where so many professional investors were stumped by Mr. Market, what worked? This was one of those years when it felt good to be one of those, boring, long-term investors sitting back and watching the chickens run around with their heads cut off. The properly diversified portfolio of stocks, government bonds, inflation linked bonds, and gold that I have put together for my family returned 11%. We started the year adequately prepared for whatever might unfold, whether it be deflation from troubles in Europe, inflation from money printing, or a return to normal economic growth, and the portfolio proved itself as all of these conditions ebbed and flowed over the year.
Even more interesting was the result of our portfolio of high quality stocks within the asset allocation. The portfolio of high quality, brand names, with low debts including Altria, Coca Cola, Johnson & Johnson, CN Rail, and Fastenal returned 15%. This was a similar result to that of other famed value managers like Ruane and Cuniff at the Sequoia Fund whose return of 13.2% put them in the top 1% of all equity fund managers. Simply more proof that buying good businesses at fair prices produces results when you need them most.
So with this, what is my New Years resolution for 2012? Simple, to deepen my understanding of value investing through practice and remain disciplined with selecting good investments and maintaining a balanced asset allocation regardless of what the year ahead may bring.
Happy New Year everyone!
Comments
Very illuminating post, particularly the sd data. Thanks.
What reference did you use for the historical data, such as standard deviation over the last 50 years?