In investments as in war, no guts no glory. And no fortune.
It has been two years since the stock market bottomed out in March 2009. The Dow closed at 6547 on March 9th, the Standard & Poor’s 500 stock index at 676. Since then, the market has rallied and regained most of its losses. The Dow was at 12,200 in early March and the S&P at 1320. The impact of the Japanese tsunami pushed that number back near 12,000 by mid-month, but still, that’s nearly a 100 percent gain.
If you own stocks in your retirement account and didn’t sell, you are getting back to “even.” If you bailed out at or near the bottom, you got creamed and missed two great years. And if you doubled down at the bottom, you have been richly rewarded.
The time to buy stocks, they say, is when nobody wants them. In Memphis, we can’t say some smart guys didn’t tell us.
One of the best-known and most highly rated buy-and-hold mutual funds in the business is Longleaf Partners Fund, managed by Memphians O. Mason Hawkins and Staley Cates. The fund has $8.8 billion in assets and was started in 1987. This is what the managers wrote in their letter to shareholders in March 2009, after the Partners Fund lost 50 percent in 2008 and another 2 percent in the first quarter of 2009:
“The fear and risk-averse posture in the market’s pricing today make now the perfect opportunity to go on offense.” At the shareholders annual meeting a month later, Cates repeated pretty much the same thing.
“Where we’ve earned our spurs is coming out of bear markets,” he said.
Sure enough, on March 8, 2011, on the Wall Street Journal’s list of “Category Kings,” Longleaf Partners was Number Two among large-cap funds.
I have written about the Longleaf fund family a few times on the assumption that Memphians being Memphians are probably well represented in the investor group and the fund is, therefore, one of several useful barometers of local wealth. Disclosure: I have had a modest investment in Longleaf funds since 2001 when my father died and I inherited half of his IRA.
Longleaf Partners’ 10-year average annual return is 4.56 percent. Not exactly exciting. Money doubles in about 13 years at that rate. That time period, however, includes the recession after 9/11 and the 2009-2010 recession. Longer term, Longleaf Partners has achieved its annual goal of inflation plus 10 percent. Its 20-year average annual return is 12 percent.
Civic pride is nice, but it doesn’t make much sense as an investment philosophy. I also own shares of First Horizon and Federal Express, and my ten-year return is negative in both of them. FedEx is also one of the top holdings in the Longleaf Partners portfolio and the only Memphis-based company. The big winners in 2010 were Pioneer Natural Resources and Yum! Brands. The drags on the fund were Dell and Level 3.
Other things being equal, I like investing in a Memphis-based fund. I can go to the annual meetings and look the managers in the eye and ask them a question like any other small-fry. When I asked Cates two years ago about Longleaf’s decision to hold on to General Motors until it tanked, he gave me a no-excuses, one-word, unprintable characterization. I liked that.
Taking a cue from master investor Warren Buffett, Longleaf’s formal communications are also easy to understand. When they screw up they say so. For example, this from the 2008 annual report: “Historically, the length of our letters has been inversely proportional to returns. Unfortunately, this report is long.” And they only have 23 companies in the Partners fund because, as their statement of principles says, “we will concentrate our assets in our best ideas.”
Of course none of this matters a damn if the fund doesn’t perform over the time period that you own it. I was sorely tempted to sell after 2008 but did not. But I didn’t double down either. Not that they didn’t tell me.