Everyone knows beating the market is hard. What many investors still don’t seem to realize is that even surviving the market is hard.
Of the 525 U.S. stock mutual funds that existed thirty years ago, 223 are still operating today, according to Morningstar; only six are still run by the same manager. More than half of all these professionally run portfolios didn’t make it; many were shut down, while others merged into other funds.
Of all the qualities an investor needs in order to succeed, stamina may be the most underrated.
I recently spoke to four out of those six investment marathoners, who came together in Chicago this past week to commemorate the 30th anniversary of the Ariel Fund.
Ariel (current assets, $2 billion) was founded in November 1986 by John W. Rogers, Jr.. I also spoke with Robert Bacarella, who founded the Monetta Fund (now with $51 million) in May 1986; John Carey, who became lead manager of the Pioneer Fund ($4.6 billion) in July 1986; and Mario Gabelli, who launched the Gabelli Asset Fund ($2.6 billion) in March of that same year.
As you might expect from long-distance runners, these funds don’t sprint; they trot. They aim to beat the market, not to crush it by dozens of percentage points every year; most of them trade so seldom they seem to be in slow motion.
Since inception, Ariel has returned an average of better than 11% annually, a percentage point more than the S&P 500 and about the same as the Russell 2500 Value Index of small and mid-sized stocks.
Gabelli Asset has gained an average of just under 12% annually, more than a percentage point higher than the S&P 500.
Over Mr. Carey’s tenure, Pioneer has lagged the S&P 500 slightly; over its life, Monetta has underperformed the index by an average of about 2.5 percentage points annually.
Pioneer was founded by the renowned investor Philip Carret in 1928. In hindsight, the other funds were lucky to launch in 1986, four years into what would turn out to be one of the biggest and longest bull markets in history — although the crash of October 1987 made their survival seem uncertain for a while.
Mr. Bacarella, now 67 years old, had to take out a personal loan to keep his fund-management company afloat after the crash. But in the long run, he says, “market corrections are gifts, the opportunity to get free money,” as panic selling makes stocks cheap.
But declining markets also drive weak hands out of the business.
The class of 1986 was unusually fortunate. Only 43% of all stock funds in existence in 2000 survived to the end of last year, according to Dimensional Fund Advisors.
It seems to be a law of finance that investors who try to sprint their way to wealth never make it to the finish line; somehow, the last in are always the first out.
So patience is the prime directive for most of these veteran fund managers.
Mr. Rogers, 58, played basketball at Princeton University in coach Pete Carril’s “four corners” offense, which encouraged the players to pass the ball around and around until they finally saw a shot they felt they could make. Mr. Rogers holds his typical stock for three to four years at a time, triple the average holding period for a fund manager.
Patience, says Mr. Rogers, requires “not chasing the bubbles and not getting fearful during the crises.” So — yes, in the year 2016 — he doesn’t use email at work and doesn’t even have a computer on his desk.
As for Mr. Gabelli, he doesn’t use a smart phone, instead favoring flip phones he buys “for 20 bucks on eBay.”
Along with his co-managers at Pioneer, Mr. Carey typically holds stocks more than five years; one of the mottos of his mentor, Mr. Carret, who died in 1998 at the age of 101, was “turnover usually indicates a failure of judgment.”
Mr. Carey, 67, seldom trades, but he never takes his eyes off the stock market. Following it is “like shaking a kaleidoscope every day,” he says. “You get a different picture each time.”
Mr. Gabelli, 74, holds on to his typical stock for an impressive average of 14 years. “We love to watch paint dry and turtles race,” he says. He and his analysts spend years studying a handful of industries to build up what Mr. Gabelli calls “accumulated and compounded knowledge.”
Gabelli Asset Fund, for instance, has 1.8% of its assets in Genuine Parts Co., an automotive-equipment distributor on which Mr. Gabelli wrote up his first research report, he recalls, in 1968. Over the intervening decades, he says, he has seen “a lot of resilience and stability in their business.”
As these fund managers show, stamina is the key to success, and patience is the key to stamina.
With stocks hitting record highs even as the future of free trade, interest rates and government spending are thrown into doubt, investors should remember that you shouldn’t own stocks at all if you can’t live with the risk of losing at least half your money.
It feels like a lifetime ago, but U.S. stocks lost 55.3% — including the benefit of dividends! — between Oct. 9, 2007 and March 9, 2009.
Between September 1929 and June 1932, when the Pioneer Fund was young, the stock market lost more than 83% even after annual dividends as high as 6%. Losses nearly as severe came in 1973-74 and in 2000-02.
And sooner or later, they will again. Cultivate your patience now; one of these days, you will need it.