"Higher volatility is essential for higher returns"
Highlights from the BloombergSen 4th Quarter 2018 Report
The Partners at BloombergSen have invested through economic boom, bust and everything in between and experience has taught us that irrespective of macroeconomic or geopolitical turbulence, patiently owning high quality, undervalued assets generates good returns and significant wealth over time.
In the fourth quarter, U.S. equity markets caught down to the rest of the world, experiencing their worst quarter in over seven years as investors feared that the slowdown would impact the American economy. The S&P 500, Nasdaq and Russell 2000 small-cap indices declined 13.5 percent, 17.5 percent and 20.5 percent, respectively. It was the worst fourth quarter since the Great Financial Crisis of a decade ago. Interestingly, there are few signs today of the excesses that led to the drop in 2008. In fact, the U.S. economy is still very healthy.
In November The Wall Street Journal reported that 90 percent of the 70 asset classes in a Deutsche Bank index produced a negative return in 2018. This was the highest percentage on record going back nearly 120 years. The previous high was in 1920, when 84 percent of the existing asset classes produced losses. By comparison, just 1 percent of asset classes delivered negative returns in 2017.
Below are the returns for some of the key category classes in 2018. We have included bitcoin purely out of interest.
After a calm 2017, we were not surprised by the increased volatility in 2018. Stocks generate the highest long-term return versus bonds and cash, but they also experience the greatest volatility. Were volatility lower, stocks would be bid higher and their future returns would no longer be superior. Thus, higher volatility is not only the price of higher returns, it is essential to them.
Below are summary statistics of U.S. assets from 1926 to today.
Equities are the ultimate long-term asset. Over 80 percent of the value of most companies is determined by their terminal values, which lie more than five years out. It is only because of investor psychology and short time horizons that investors concern themselves with volatility. To quote The Wall Street Journal, “Volatility matters a lot if you have a short-term investing horizon, but if you have a long-term one, volatility is an opportunity.” We welcome volatility as an opportunity to take advantage of irrational selling because the odds of making money in stocks increase significantly when you invest with a 5-year or longer time horizon.
The graph below shows that if you check your portfolio just once per day, you have a coin flip's chance of being up, while if you check it only once a year, your odds increase materially to 73 percent. Over the last 90 years, if you bought your portfolio and left it alone for 5 years, you would have had an 89 percent chance of having made money through all kinds of economic and market environments.
At BloombergSen, we continue to take advantage of dips in the market to add to our portfolio of businesses that have excellent management teams, recurring revenue, strong earnings and cash flow growth and solid balance sheets and trade at a significant discount to their intrinsic value.
For more information, contact Brian Ginsler at [email protected].