Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

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Gary Lenhoff, CFA®
Chief Investment Officer - Fundamental Equities
Great Lakes Advisors

According to a recent study of stock market returns, Apple has generated more profit for investors than any other American company in the history of the markets since 1926.1 The study’s data suggest that the total wealth that Apple has created for its shareholders exceeds the current value of one-month U.S. Treasury bills—more than $1 trillion—and as the graphic shows, all this was done in a period spanning less than 40 years.

While this is an interesting finding, another observation in the study offers even greater insight into equity investing: the entire net wealth earned by investors from all publicly traded stocks since 1926 has been produced by only four percent of those stocks. That means, as Barry Ritholtz of Bloomberg notes, “Only one in 25 companies are responsible for all stock market gains. The other 24 of 25 stocks—that’s 96 percent—are essentially worthless ballast.” 2

Ritholtz (an avid proponent of passive, index investing) argues that it is too difficult to develop an active approach to investing that will allow you to “pick” the one in 25 stocks needed to generate market returns, or to find an active manager who can do so. Of course he is being simplistic—the “other” 96% is comprised of both winners and losers, and a manager who can pick more winners than losers can also outperform a market index. At Great Lakes Advisors, we believe we have the investment philosophy, process, and experience to do just that. To borrow Ritholtz’s words, we think we have developed a methodology to identify those rare companies that will generate outsized returns over time.

But perhaps the most important aspect of this whole discussion is the element of time. The study covers more than 90 years of investing experience. Even the most patient of long-term investors may not have that long to demonstrate their investment management prowess. However, many, including us, do manage portfolios with a truly long-term focus—an approach that we stand behind but which appears to have gone out of style in the last several years.

The investment management business has grown increasingly competitive since the 2008-09 downturn, while the Federal Reserve has used monetary policy to engineer a rebound in asset values (led by equities) for more than nine years. U.S. equities have gained more than 250% since the March 2009 lows, yet many active managers have underperformed their equity index benchmarks. The pressure on many investors to “beat the market” has also grown more intense, fueled in many cases by the financial media, consultants, and others whose focus has become shorter and shorter in duration.

As Baupost Group founder Seth Klarman says: “Most of our competitors feel intense pressure from their clients to generate short-term performance and have trouble maintaining a truly long-term perspective, whether in bad markets or good…Our ability to stay the course and move in a decisive and concentrated way into the most attractive areas of opportunity was enormously important during the 2008-2009 financial crisis, as many of our competitors pulled back from making new investments after sustaining significant losses. We, by contrast, were able to consistently add to positions that were becoming increasingly attractive. We expect that this same value discipline and long-term focus will help us avoid getting caught up in market bubbles that most competitors simply cannot resist, while serving us well in future pockets of turbulence.” 3

We at Great Lakes Advisors may not identify the next Apple, Exxon Mobil, or Microsoft, and we will likely never hold a stock for 40 years. However, we are confident that a truly long-term investment horizon, married to our disciplined investment methodology, should produce satisfying returns to our equity investors over time. We are determined to hold onto that long-term horizon, even in the face of increasing short-term pressures, for it may be the most important variable in deciding the success or failure of an active manager.

 

Graphic notes: Wealth creation is total stock gains, including dividends, in excess of one-month Treasury bill returns. Company listing follows the guidelines of the Center for Research in Security Prices. Companies that are new iterations are marked with an asterisk*. Companies that no longer trade are marked with a dagger †. Source: Prof. Hendrik Bessembinder (W. P. Carey School of Business at Arizona State University), By Karl Russell/The New York Times

1. Study conducted by Bessembinder, Hendrik of the W.P. Carey School of Business at Arizona State University
2. Ritholtz, Barry “So Few Market Winners, So Much Dead Weight,” Bloomberg View, September 26, 2017
3.Klarman, Seth, “Seth Klarman Cash Return: Time To Sell?” Web blog post. ValueWalk, September 13, 2017