Of Marathons and 15% Baselines

Someone in cyberspace picked up our name from a recent Forbes article and called our shop today. This particular caller was both curious and somewhat informed about energy, commodities, and international ideas. He wanted to know how well our picks had performed this year and last. Finally, and most disturbing, was the statement regarding return expectations.

I asked some questions about the caller’s recent trading activities and why were they in 100% cash today. I also asked about the last ten years of investing and what sort of investment philosophy the person had. Granted, there wasn’t enough time to get into the nitty-gritty, as a conversation surrounding goals, objectives, plans, expectations should take hours, not minutes. However, the disturbing part was how the caller commented about a baseline minimum requirement for returns is 15% per year.

Now I could have taken the tangent surrounding the real estate market (as this person has some history and background in the real estate industry). What if I presumed a minimum return for investing in real estate is 15% and placed $1mm in real estate two years ago. How would I feel today? Would I lay the blame somewhere other than myself?

Nonetheless, the reality is that this person caught me on a day when I have the post marathon blues. On Monday, I ran the prestigious Boston Marathon. This endurance race takes a toll on both the mind and body. Not only does it take great physical effort to travel 26.2 miles in the fastest time possible, but it also takes significant mental fortitude to overcome the pain and keep pounding the pavement for three plus hours.

What does this have to do with investing? Everything! You’ve heard it before and you will hear it again: Investing is a MARATHON, and NOT a 100 METER SPRINT!

Why do investors expect and assume 15 or 20% type returns? Why should investors even assume the long-term equity return of 10% per year? Why should we assume anything about the unknown future? I am always stunned when folks make announcements about substantial future equity returns and potentially set themselves up for failure. This is different than suggesting good ways to invest in the current market environment and how to best position a portfolio seeking equity returns (whatever they might be) versus proclaiming I or someone else has the skills to manage a portfolio and to dictate a minimum of 15% per year or more. Frankly, if someone came to me and said they could deliver 15+% per year in good times and bad, I’d be immediately skeptical.

Running the marathon distance of 26 miles and 365 yards in one fell swoop is not an easy task. Navigating the investment landscape on a month-by-month or year-by-year basis is a similarly difficult challenge. Sectors, styles, regions, and countries come into and fall out of favor time and time again. We have scintillating advances, sudden declines, and a lot of back and forth action in between. Each day, headlines would suggest reasons to invest, and reasons not to invest.

Managing a portfolio is an adventure, just like running 26.2 miles. There are no easy trades, no sure things, and no quick bucks. Same with marathon running. Unless your name is Carl Lewis, and you want to blaze away at 100 meters at a time, your best bet is to focus on the long-term, setting proper expectations, and managing for the long pull.

Good Luck.