Let’s face reality: times are challenging for quality investors right now. Very challenging. But as Napoleon said: “A genius is the man who can do the average when everyone else around him is losing his mind,” notes Pieter Slegers, editor of Compounding Quality.
Here are two questions we should answer for ourselves: 1) Does the strategy not work anymore? 2) Or are we in a very strange market environment today? I think it’s the latter.
To make my point, let’s look at the yearly returns of Warren Buffett, the best investor in the world. Warren Buffett compounded by almost 20% (!) per year since 1962. If you invested $10.000 in 1962:
• S&P 500 Index (^SPX): $6 million
• Berkshire Hathaway: $3.6 billion
The difference is ridiculous…$6 million versus $3.6 billion. You could take away 99% of Berkshire Hathaway’s return and you’d still have outperformed the index. That’s the power of compounding over very long periods of time.
But does this mean Warren Buffett outperformed every single year? Not at all. Just look at 1999 in the table here.
In 1999, Berkshire Hathaway was down 19.9% while the S&P 500 increased by 21%. That year, Warren Buffett lagged the index by 40%. But we all know what happened just after 1999: the bursting of the Dot-Com Bubble.
I truly think we are in a strange time in the market right now. Even though quality investing is facing a very hard time, I sincerely believe we are on the right path. My role? Try to be your guide on a wonderful hike that leads to beautiful views.
