The Tortoise and the Hare

What does a 544 mile marathon have to do with investments? I’d say they have quite a few parallels.

The race is run across Australia, from Sydney to Melbourne, every year. Most of the competitors are young, athletic, and decked out in the latest running gear. After all, the 544 mile marathon lasts over 5 days. But in 1983, a 61-year-old potato farmer in overalls and work boots by the name of Clifford Young showed up to run the race. He ran without his dentures because he said they rattled when he ran. Young ran at a slow pace, and by the end of the first day he was behind by a large margin. The younger athletes stopped and slept for six hours, but Young kept running. He ran continuously for five days, never stopping to sleep. He won the race by 10 hours. He said while running he imagined he was herding sheep trying to outrun a storm. In all, Young ran five days, fifteen hours, and four minutes, never stopping.  

So what does that have to do with investing? Investing is about continually plodding forward day-by-day. So many investors try to win in the market by employing all the latest technology and bells and whistles and forgetting that the race is won by doggedly plodding forward with what you know is a good strategy. Slow and steady wins the race.

Consider this case study.

The client:

• Married couple
• No income required from portfolio.
• Income from other sources
• Moderate risk with conservative bias
• Growth and preservation of capital
• $618,944 beginning value – November 1998
• $263,362 added in April 2001
• Total invested = $882,332

I began managing this client’s account while I was with a national brokerage firm, however, I managed the account the same as I manage it now. The account has ridden through the dotcom bust, the Great Recession, and now through the pandemic. This past week the value of the account stood at $7,670,418. From a total deposit of $882,332 it has grown to $7,670,418!

How did that compare to the S&P 500 with dividends reinvested and a more balanced 4% account?

The case study account was fully invested the entire 22 years. The S&P result is very close to what the S&P index funds would have done. The Dalbar report showed the impact of investors jumping in and out of the market and shifting from one fund to another.

Albert Einstein called it the Eighth Wonder of the World. He elaborated saying: “He who understands it, earns it; he who doesn’t, pays it.” Einstein was referring to compound interest. Or, as Warren Buffett has said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” By the way, 95% of Warren Buffett’s wealth came after age 65.[2]

There were periodic losses, setbacks, and black swans, but market drops do not scare us into cash.

William Sharpe received his Nobel Prize for showing that there is not a statistically significant difference in risk from owning eight or nine stocks compared to diversifying to 300. This client portfolio, like all our other protfolios usually has eight to twelve holdings. I believe it was Mark Twain who said he believed in putting all of his eggs in one basket and watching the basket. This is the motto by which we invest.

This case study shows the power of compounding and the growth over time, even with some shorter-term setbacks. It  shows the significant difference compounding makes for as small a difference as 3.26% makes over 22 years.  Like Cliff Young who kept running and running, this account continued to grow over the 22 years it was managed by Mike Adams. There were no sprints or times-out where we were sleeping in cash. Yes, 2020 was an exceptional year but not likely to repeat. Overall it is the steady plodding that gets our accounts to achieve what we believe is exceptional performance. We also have to say that past performance is no guarantee of future performance.

There are two types of people in this world: those who resist change and those who recognize a change is in their best longer-term interest. Which are you? Just click the email box below to get started making that change.

The composite of the Growth Accounts since Adams founded Adams Financial Concepts, LLC:

Notes:

1. Past performance is no guarantee of future performance
2. AFC uses the S&P 500 with dividends reinvested as the comparable index for all accounts.
3. AFC Managed Accounts returns include all active accounts as well as all closed accounts with the same objective: to beat the S&P 500 over the longer-term (10 years).
4. Adams Financial Concepts (AFC) Managed Accounts results are net of all fees and expenses. The results are net, net, net.
5. AFC Managed Accounts do not include the results of the Incentive Profit Sharing Accounts.
6. The performance presented is that of actual client accounts and includes all equity Growth Accounts with one quarter or more. These are not hypothetical, models or back tested.
7. Portfolios are concentrated in as few as 8 equities. Since William Sharpe received the Nobel Prize for showing there is no significant difference in volatility risk for portfolios of 8-9 stocks as compared to 300 stocks. In other words, AFC subscribes to the Mark Twain philosophy of putting all our eggs in one basket and watching the basket.
8. AFC Managed Accounts include capital gains and losses, both realized and unrealized, but do not include the impact of taxes on capital gains.
9. “I’m always fully invested. It’s a great feeling to be caught with your pants up” – Peter Lynch. AFC accounts are always fully invested.
10. AFC accepts that there will be times when there will be periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare us out of the market.
11. Incentive Profit Sharing Accounts include all active Profit Sharing Accounts and the results are net, net, net.
12. Incentive Profit Sharing was initiated on April 1, 2020 and has a very limited history, but we believe it will be verified in the longer-term

[1] “Quantitative Analysis of Investor Behavior, 2019 QAIB Report, December 31, 2018. The 3.88% is for the 20 year time period 1998-2018, not for the entire 22 years.

[2] “Buffett made 95% of his wealth after the age of 65”, Cambridge House, August 28, 2020.

Incentive Profit Sharing Accounts

Notes:

1. Past performance is no guarantee of future performance
2. AFC uses the S&P 500 with dividends reinvested as the comparable index for all accounts.
3. AFC Managed Accounts returns include all active accounts as well as all closed accounts with the same objective: to beat the S&P 500 over the longer-term (10 years).
4. Adams Financial Concepts (AFC) Managed Accounts results are net of all fees and expenses. The results are net, net, net.
5. AFC Managed Accounts do not include the results of the Incentive Profit Sharing Accounts.
6. The performance presented is that of actual client accounts and includes all equity Growth Accounts with one quarter or more. These are not hypothetical, models or back tested.
7. Portfolios are concentrated in as few as 8 equities. Since William Sharpe received the Nobel Prize for showing there is no significant difference in volatility risk for portfolios of 8-9 stocks as compared to 300 stocks. In other words, AFC subscribes to the Mark Twain philosophy of putting all our eggs in one basket and watching the basket.
8. AFC Managed Accounts include capital gains and losses, both realized and unrealized, but do not include the impact of taxes on capital gains.
9. “I’m always fully invested. It’s a great feeling to be caught with your pants up” – Peter Lynch. AFC accounts are always fully invested.
10. AFC accepts that there will be times when there will be periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare us out of the market.
11. Incentive Profit Sharing Accounts include all active Profit Sharing Accounts and the results are net, net, net.
12. Incentive Profit Sharing was initiated on April 1, 2020 and has a very limited history, but we believe it will be verified in the longer-term

[1] “Quantitative Analysis of Investor Behavior, 2019 QAIB Report, December 31, 2018. The 3.88% is for the 20 year time period 1998-2018, not for the entire 22 years.

[2] “Buffett made 95% of his wealth after the age of 65”, Cambridge House, August 28, 2020.