October 7, 2024
Ignorance as an investment
Dear Reader,
Seth Andrew Klarman is a billionaire. The private investment partnership he founded in 1982 has realized a 20% compounded return for 40 years.
Let that sink in for a moment.
Twenty percent a year. For 40 years.
An annualized return that strong turns $100,000 into $147 million.
Klarman’s Baupost Group hedge fund started with around $270 million in funds under management.
Today, it’s worth around $25 billion.
Since 1982 the stock market has — according to Wikipedia — crashed 10 times.
The 1987 Black Monday crash alone was enough to inflict serious, lasting financial damage to someone close to me.
The rest of their life they lived with the consequences, and regret, of having sold in panic as investors all over the world rushed to get out.
That fear and anxiety investors feel when markets are bad and everybody is racing to the exit, you could characterize as impatience.
And as Warren Buffet says, the stock market is essentially a machine that transfers wealth from the impatient to the patient.
Seth Klarman is one such patient investor. He’s even known as the ‘Oracle of Boston’, placing him alongside Buffet’s ‘Oracle of Omaha’ moniker.
Seth Klarman — one of the world’s most patient investors
Over Klarman’s 40+ years running managing his investment fund, none of the 10 crashes have, in the long term, impeded him from racking up what most of us would agree is a highly impressive return.
According to him:
‘The daily blips of the market are, in fact, noise — noise that is very difficult for most investors to tune out.’
‘Klar’, by the way, is German for ‘clear’.
Whether or not Klarman’s name had any bearing on the way he views the markets, it’s certainly clear that ignoring the so-called ‘noise’ in favour of a long term strategy has been immensely profitable for him and his investors.
Ignoring noise = essential for long-term returns
When we talk about market noise, we’re talking about a lot of things.
Daily price movements, economic changes that impact the markets, interest rate chatter, and current events are all standard examples.
Here’s a quick example of just how useless most noise is — and why smart investors like Seth Klarman ignore it, preferring instead to focus on their strategy.
The chart shows you the S&P500 index between 2009 and mid 2017. As you can see, annotated along the line is every time the financial media claimed ‘the easy money has been made’.
In other words, nine times they claimed the good times were over for the S&P500…
That things were about to get tough for investors…
That you should perhaps be scared about what was about to happen to the stock market.
And yet, while in the short term the S&P500 did indeed fluctuate — sometimes severely and abruptly — over the seven-and-a-half years this chart shows, it still doubled in value.
We can’t know how many people were scared into selling their stocks each time they read a ‘the easy money…’ headline.
But, you can bet there were quite a few, because for every buyer there must be a seller.
The impatient and the patient.
I know people who won’t even get into the stock market — on account of the fact values can fall — let alone stay in stocks they own through volatile or uncertain times.
Such is their meagre appetite for investment risk — or perhaps their inability to ignore the noise.
(Lots of) time in the market
Amsterdam Stock Exchange, circa 1670
‘Get rich quick’ has become virtually synonymous with ‘scam’. You read those words and you know there has to be a catch.
While it’s true that some investors do bag huge gains from speculative investments like penny stocks, it’s very rare that they’re able to repeat those successes by applying any sort of discipline or formula.
Getting rich quick, you could say, depends on luck.
You have to buy the right investment at precisely the right time and you sell it at the right time. The odds of doing both of these things, consistently, are very low.
Getting rich slowly, on the other hand — building financial freedom and exponential wealth by investing like the Seth Klarmans and Warren Buffets of this world — depends on something else.
It demands investors maintain discipline, patience and a healthy amount of ignorance to allow the daily and weekly ‘noise’ to pass as exactly that — short-term blips on a much longer journey.
CGT options you didn’t know you had?
Tax is a fact of (legal) life.
Capital gains tax on investments, too.
But, you’d be amazed how many investors don’t understand the (very much legal) options available to them in calculating and reporting their capital gains for tax purposes.
Navarre’s latest walks you through the four main CGT strategies in his latest vid.
Click to watch.
That’s it for The Benchmark this week.
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Invest in knowledge,
Thom
Editor, The Benchmark
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