Under-Performance

“Nothing works all the time and in all kinds of markets.” Adam Smith, The Money Game

“If there was never a day in the sun for alternative strategies, everyone would do the strategies and it would be all over. So there's bound to be that.” Terry Smith

“I am pointing out humbly that it is impossible to be right all the time on Wall Street.” Roy Neuberger

“I’m 76 years of age. I've been through a number of down periods. If you live a long time, you’re going to be out of investment fashion some of the time.” Charlie Munger

“A true believer has to endure long, lonely stretches out there in the cold and bleak winds of the investment wilderness as an exile from the herd, when his or her style doesn’t work and the world thinks he is both wrong and crazy.” Barton Biggs

“I believe superior long-term performance is a function of a manager’s willingness to accept periods of short-term under-performance. This requires the fortitude and willingness to allow one’s business to shrink while deploying an unpopular strategy.” Rob Rodriguez

“If one changes their investment approach in response to under-performance then they are doomed to mediocrity.” Jake Rosser

“Nothing works all the time.” Bruce Kovner

"To avoid any doubt – we absolutely will not change the shape of the portfolio because of the possibility of a period of under-performance." Nick Train

“We expect to have negative years on occasion (and our record makes that point clear!). Those who take a longer term perspective – and the shorter term fluctuations in their stride – tend to be amply rewarded in the long run (our record makes that clear as well).” Frank Martin

“It is also worth bearing in mind that we do not seek to outperform in every reporting period or in all market conditions, rather we seek to outperform the market and other funds over longer periods of time.” Terry Smith

"Every great investor has bad periods. The ones who stick to their approach the most diligently probably have the worst periods because approaches go in and out of favor." Seth Klarman

“We will continue to have down months, quarters, and years over time. The path to strong long-term performance is likely to be littered with both brief and protracted periods of pain and losses in the interim.” Scott Miller

"All great investors and investment approaches have bad patches; losing faith in them at such times is as common a mistake as getting too enamored of them when they do well. Because most people are more emotional than logical, they tend to overreact to short-term results; they give up and sell low when times are bad and buy too high when times are good." Ray Dalio

“If you put a manager on probation because he had a bad quarter, if he sells the stocks that are down and buys the stocks that are up, you have forced him into a poor decision. But it has happened, and now everybody wants to know how you did last quarter. Nobody says, ― how did you do in the last ten years? which is what matters. Every manager and every approach has times when he, she, or it is out of favor.” Howard Marks

“We don’t try to be anyone’s best performing manager in a given year because such an attempt would almost certainly fail. It would distract us from our focus on risk-aversion and the pursuit of excellent long term results, while shifting our attention towards quick gains, short-term trades and market momentum.” Seth Klarman

 “In our industry, 75th percentile annual performance done consistently becomes 95th percentile performance over time. The key is consistency at significantly lower risk.” Yen Liow

“According to Munger, it is a common psychological tendency that people overweigh the vivid evidence (or recent experiences). This is clearly what can happen via the mark-to-market effects of quarterly reporting. The ‘Pavlovian’ association of poor short- term results with long-term incompetence and confusion between the two can lead to disastrous decisions.” Nick Sleep

“To capture superior long-term results you have to be willing to endure short-term underperformance.” CT Fitzpatrick

“We do not expect the fund to perform well in all market conditions and portfolio concentration can cut both ways – with the potential for outsize falls in different conditions.” Nick Train

"We have under-performed in ten of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%." Warren Buffett

“Our results have exceeded those of the S&P over a long period, so there’s something about the process that’s valuable. But we’ve probably done less well than the market in one-third of the years I’ve been doing this. That’s OK.” Chuck Akre

“If I can forecast anything, it is that we will have years in which we underperform and years where we over perform. Across all those years and all those markets, we will strive to eliminate the noise, keep our focus, maintain a long-term view, trade lightly, dig deep, and cover the ground.” Rajiv Jain

"Over the 22 years of its track record, our US portfolio has underperformed the S&P 500 on six occasions (or 27% of the time). This is in line with our ‘Rule of Three’ which stipulates that we accept to underperform the index one year out of three on average. This average, if we can maintain it, would be far superior to the overall performance of portfolio managers. It is a difficult task to maintain outperforming the S&P 500 but it is our mission. We must accept the fact that we will sometimes underperform the index over the short term when our investment style or specific companies are out of favor with mainstream thinking. And we try to welcome rewarding periods of portfolio out performance with humility." Francois Rochon

"The great track records are not produced in linear fashion, and are far from consistent. Outperforming over many market cycles is not done each year, or every three years, or five years, or ten years. There are long periods of underperformance that go with every outstanding track record. All the great investors have had clients leave them after periods of underperforming. Walter Schloss, who compiled one of the all-time brilliant track records, shrugged as he was losing clients in the late 1990’s because he was underperforming and wouldn’t give them the tech and internet exposure they felt they needed. He had seemingly 'lost his touch' and was out of touch with modern thinking. Many that fired him had been clients for decades, having invested with him since the 1950’s and 1960’s. It must be expected that long term outperformance will come with durations of underperformance, perhaps as much as half of the time over short-term intervals. As the intervals lengthen, periods of underperforming recede. At the end of the day, we all know what happened with the tech bubble. It ended badly." Christopher Bloomstran

“Just as I don’t expect the best companies to show their excellence every quarter (or whenever they report operating results), I don’t expect our investment results to be any smoother. In fact, our investment approach almost necessitates a very bumpy ride. Nearly all great investors who I admire achieved high long-term returns through bumpy rides. There surely will be times, even extended periods, that we underperform our markets and may have negative results. But, just as I expect our portfolio companies to do very well over time, I expect our investment results to approximate their operating results over time.” Li Lu

"Empirical research concerning successful long term investment results indicates that under-performing the S&P 500 25%–40% of the time is not uncommon for successful investment managers. In fact, it appears to be normal. Investors who understand this are more likely to stick with a perfectly valid long-term investment strategy in the inevitable and, we believe, normal, under performing periods. It is all too human, in the field of investing, to extrapolate recent results, which have no statistical significance, rather than emphasising long-run odds and empirical data." William Browne

"Swings in performance are cyclical, and even the best investors have episodes, sometimes long episodes, of underperformance. You pay a fee to an investment manager to obtain over time annual returns that, on average, are at least a couple of hundred basis points higher than those provided by an index fund. Compounding this extra return over the years results in staggering wealth enhancements, even after paying considerably higher fees than index fees." Barton Biggs

"The common practice of hugging a benchmark (usually resulting in common results) is a practice we eschew. Ignoring this practice has allowed us to significantly exceed the return of the S&P500 over the course of 13-years; however, it almost guarantees that we will have periods where we underperform, perhaps significantly." Allan Mecham

"Trouble comes in all kinds of shapes, sizes, and directions. We find it worrisome that too many investment folks, trouble begins and ends with underperforming a benchmark." Paul Singer

“If you’re a long term investor, you’re not trying to keep up with your peers or the market on a short term basis, so by definition, every now and then you will lag. When times get difficult [and you are under-performing] you have to do some hand holding.” Jean Marie Eveillard

“Really really communicate your investment philosophy with your clients. So when you’re fighting what might be a short term mania [and under-performance], you’ve explained to them in advance what your plan was and why you were going to do that plan. They are much more likely to stay with you if you’ve prepped them. It’s very important that you educate your clients to whatever your investment philosophy is.” Stanley Druckenmiller

“The reality is that to stay rewarded and regarded in the profession a fund manager cannot afford to underperform indices for long. So the principal task for the individual and the fund management company is to preserve their job and the firm’s assets by not underperforming the index. Big, safe cash-rich companies are built for this task. The ideologues of academic portfolio theory and their avid followers in the strange trade union that is the Chartered Financial Analyst (CFA) qualification then turn this into intellectual conformity by defining risk as volatility around an index measured over short-time historic horizons.” James Anderson

“Short term under-performance may result in the only risk which keeps professional investors awake at night, namely ‘career risk.’” Marathon Asset Management

“The practice of buying out-of-favor stocks, of being a contrarian, is a mindset few investors have. When it is not working in your favor, as it will not a significant portion of the time, you risk being fired. Money managers are not stupid. They realize that sticking one’s neck out and producing short-term underperformance that differs from an index that is used as the benchmark is risky.” Christopher Browne

“A strong character will use the period of underperformance to lay the foundation for the next period of good performance, by re-examining every assumption, every thesis, discarding some and doubling down on others. A weak character will freeze, their decision making impaired. Or they might take flight, mentally at least, and avoid the difficult thinking.” Paul Marshall

“Our aim is to have the same relationship with partners during periods of poor performance as we do during the good times. And we aim to do this through encouraging our partners to focus on the things we control. That is quite a goal, and we understand that what we are asking goes against human nature.” Nick Sleep

“History is replete with examples of investors with outstanding long-term track records who endured multi-year periods of underperformance at various points along their path to great success. In a speech presented to Columbia University in 1984 (The Superinvestors of Graham-and-Doddsville) Warren Buffett discussed how some of the best value-oriented investment disciples of Ben Graham managed to significantly outperform the market over decades despite having to endure some big and extended bumps along the way.” Chris Mittleman

“Hillhouse has performed well by any measure over the past ten years, but this has not precluded us from having periods of underperformance. We can hold onto (or buy more of) companies with strong long-term fundamentals and poor-performing stock prices because our investors understand what we are doing and give us the leeway to execute.” Lei Zhang

“I also tell our partners, every single one of them, that I promise you one day your portfolio will be down 50 percent. Peak to trough I guarantee it to you. You have to be mentally prepared for that and be emotionally stable enough to know that going in. And how you would react to that situation if it occurred.” Fred Liu

“My memos got their start in October 1990, inspired by an interesting juxtaposition between two events. One was a dinner in Minneapolis with David VanBenschoten, who was the head of the General Mills pension fund. 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.” Howard Marks

“Howard Marks once talked about an investor whose annual results were never ranked in the top quartile, but over a 14-year period he was in the top 4% of all investors. If he keeps those mediocre returns up for another 10 years he may be in the top 1% of his peers – one of the greatest of his generation despite being unmentionable in any given year. So much focus in investing is on what people can do right now, this year, maybe next year. “What are the best returns I can earn?” seems like such an intuitive question to ask. But like evolution, that’s not where the magic happens. If you understand the math behind compounding you realise the most important question is not “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?” That’s not to say good returns don’t matter. Of course they do. Just that they matter less than how long your returns can be earned for. “Excellent for a few years” is not nearly as powerful as “pretty good for a long time.” And few things can beat, “average for a very long time.” Average returns for an above-average period of time leads to extreme returns.” Morgan Housel

“Even a really good fund manager is wrong with at least 45 percent of his or her trades and is bound to have periods - sometimes quite extended - of poor performance. It matters enormously how the fund manager reacts to these poor periods. The combination of client pressure and peer pressure can be intense. You need deep reserves of resilience.” Paul Marshall

“No strategy – and no level of brilliance – will make every quarter or every year a successful one. Strategies become more or less effective as the environment changes and their popularity waxes and wanes. In fact, highly disciplined managers who hold most rigorously to a given approach will tend to report the worst performance when that approach goes out of favour. Regardless of the appropriateness of a strategy and the quality of investment decisions, every portfolio and every manager will experience good and bad quarters and years that have no lasting impact and say nothing about the manager’s ability. Often this poor performance will be due to unforeseen and unforeseeable developments.” Howard Marks

“Top-performing funds very rarely beget top-performing funds. Indeed, there is a negative correlation between how a fund manager performs on one fund and how they perform on the next. But investors always tend to back managers whose last fund showed a strong performance - not because it predicts good performance, but because it gives them an excuse if something goes wrong with the next fund.” Guy Hands [Private Equity]