“Once you start down the dark path, forever will it dominate your destiny.” – Yoda
Unforgettable
Some numbers are just unforgettable.
I can still recite my childhood home phone number with the same speed and accuracy that I could 30 years ago. I just can’t seem to ditch those digits.
If I was to recite this next sequence of numbers, many of our readers would break out into song: 867-5309
I am not sure if Suresh Kumar Sharma is a household name, but maybe he should be. On October 21, 2015, Sharma recited Pi to the 70,030th digit. He holds the record according to the Pi World Ranking List and achieved this task in a quick stint of 17 hours and 14 minutes – YOWZAS!
Humans have an odd and quirky relationship with numbers. In sequence and song, we have a way of committing figures to memory quite easily. When we mix in a little math, like how investment returns compound, it gets a bit more murky for most mortals.
Breaking Even
It’s very common to hear someone in finance say, “If an investment goes down 50%, you need a 100% return just to get back to even.” I think that is said so often, that it has lost its potency with me. Basically, if my $100 investment goes down to $50, then I’d need to double the value just to get back to $100.
Logical, but seems disconnected from how markets behave, right? Or is it?
Someone was recently gawking at the returns of the Nasdaq in 2023. They were asking me, “Can you believe it? Don’t you wish you had all your money in the Nasdaq?” My answer: “No.” As of my writing, the Nasdaq is up some +42% on the year, and it was down some -33% the year before. So, if I take $100 and lop off a 1/3, then apply a 42% return to my $67, I am left with roughly $95 or less than what I started with.
This reminds me a lot of bungee jumping – tons of risk, a big fall, a big bounce, all to end up right where you started.
Don’t misunderstand me; this has nothing to do with the Nasdaq or a take on that index as an investment strategy. This is more about how tricky numbers can be when we sprinkle in a little math.
Let’s imagine an investment that had this sequence of returns: +20%, +20%, +20%, +20%, -50%. So, my $100 became $120, then $144, then $172.8, then 207.36, and finally $103.68. Again, bungee jumping – all thrill just to end up where you started.
The Dark Side
Yet, returns are seductive and attract that same bungee-jumping demographic of thrill seekers. They [returns] lure you into the dark side with those +20% rocket ship results and then chop you off at the knees when gravity kicks in with a 50% loss. As you saw, you can have years of stellar results, but those big drawdowns can erase those results in what feels like an instance.
Not to pick on the Nasdaq, but try this sequence of returns on for size:
2000: -39.29%
2001: -21.05%
2002: -31.53%
I’ll let you calculate what a $100 investment in 2000 looked like by 2003. The Nasdaq closed out 1999 at 4,069.31, and by 2013 – a year that saw a +38.32% return – the index was nearly at the same figure (4,176.59). A friendly reminder, this is the tale of an index, a collection of stocks, the aggregate, and the average; you can only imagine what this roller coaster felt like for a single stock. Many of those companies ceased to exist and a certain population of those companies have stocks still below their 1999 highs.
So, why does this matter? It matters because our brains can remember phone numbers like a champ, but computing a sequence of returns is not so much. Yet, our emotions – another side of our brain – can lead us down dark alleys chasing returns.
Singles & Doubles
You know this, but it doesn’t hurt to say it: past returns are not indicative of future results, AND expected returns don’t determine actual returns.
So, returns can be deceiving, and distracting, but/and they are necessary. So, where does this leave us? The simple answer is to recalibrate your expectations. As they say in baseball, less so about home runs and more so about singles and doubles. Not a few high-flying years of returns, but respectable returns for a long time, a lifetime.
The famed investor Howard Marks said he was influenced by an interaction with former head of the General Mills pension, David VanBenschoten:
Dave told me that, in his 14 years in the job, the fund’s equity return had never ranked above the 27th percentile of the pension fund universe or below the 47th percentile. And where did those solidly second-quartile annual returns place the fund for the 14 years overall? Fourth percentile! I was wowed. It turns out that most investors aiming for top-decile performance eventually shoot themselves in the foot, but Dave never did.
Marks went on to say that this helped to shape his firm’s investment philosophy:
I feel strongly that attempting to achieve a superior long-term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year – and through discipline to have highly superior relative results in bad times – is:
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less likely to produce extreme volatility,
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less likely to produce huge losses which can’t be recouped and, most importantly,
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more likely to work (given the fact that all of us are only human).
A Jedi Mindset
Perhaps Mark’s Jedi mindset here is simply a real-life example of one of Aesop’s Fables, The Tortoise and The Hare. In a culture full of short attention spans, a constant desire to be wowed, and expectations for results yesterday, maybe we simply need more tortoise fans.
Remember, a lifetime of ordinary returns will compound to produce extraordinary results.
In the end, the tortoise wins.
