Outperforming the S&P 500
“What’d you think I’ve been taking? Stupid pills?!”
The year had started off really badly...
It was the third week of January 1996, and clients were getting their statements in the mail.
Our performance for 1995 had been nothing to write home about.
We'd stayed pretty much in cash for most of the year, which was a bad move.
My research and analysis told me that stock prices were too overvalued.
And the stock market didn’t give me a chance to buy on pullbacks. In 1995, there weren’t any.
The stock market went almost straight up — the biggest decline from high to low was 3%! Ugh.
The S&P 500 closed the year higher by over 38%. It had one of its best years in history.
Our performance: about 5% after fees. Terrible by comparison.
The fax machine in our office started to hum. Redemption letters were rolling in.
It didn’t matter that, just a few years earlier, we'd been ranked as the No. 1 market timer in the country. And it wasn’t over a one-year period either.
Over a seven-year period, we'd had the best performance in the country. Period.
Our clients avoided the October 1987 crash and the bear market of 1990. And even though we'd outperformed the S&P 500 by a wide margin, clients didn’t care...
It’s Human Nature to Remember Your Losses More Than Your Victories
When I was thinking about becoming a money manager, I went to seek advice from my mentor.
This guy was one of the best on Wall Street.
He'd started managing money in the late 1950s and had a terrific track record. He encouraged me to open my own shop and introduced me to clients.
The first day I opened for business, he called me to wish me luck and gave me advice, “No matter what they tell yah, all they give a crap about is performance. Don’t forget it.”
He was talking about clients.
He went on. “They’ll tell you they are long-term investors, but as soon as you underperform, they'll head for the hills. All they want to know is ‘what have you done for me lately?’"
Ten years later, his words were bouncing around my head. He was so right.
On the first day of February 1996, I got the call.
It was our biggest client, "John." His company’s investment made up 10% of our assets.
I started to sweat, and my mouth went dry. It was time to face the music.
After a minute of niceties, he pulled the trigger, “Charles, we’re closing our account.” I reached for the garbage can under my desk — I was about to vomit.
When I asked him why, he responded matter of factly, “Poor performance.”
John’s account had been one of our first. His allocation was very important to us. He'd allowed us to drop his name to get other accounts. I also considered him as a good friend.
I tried really hard to save the account.
I told him about how since he started investing with us, his account had been outperforming the S&P 500.
I also told him how we'd done that with very low volatility. He knew all that.
“Yeah, but you missed the big move last year,” he told me...
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Failure Not an Option
When I heard that, I lost it.
“John, you gotta be kidding me. We've been outperforming the market since the day you invested with us. We also did it by sidestepping the crash. I’m the same guy who did that. Do you think I took stupid pills in 1995?”
I shouldn’t have said that and instead kept my cool. This was business and John had a board of directors to answer to.
All his other investments did double digits... except mine. He didn’t want to have to take the heat and look even dumber and run the risk if we underperformed next year. Instead, he took the easy way out and fired me...
Make Fear Your Friend
Over the next several years, the markets were good to us.
By the end of 1998, we'd returned 113% for our clients. Barron’s ranked us the no. 1 trading advisor in the country. And over a three-year period, almost from the day that John closed his account, we'd returned a stunning 313%.
It hurt being out of touch with the market, but it taught me a very valuable lesson.
If you want to outperform the market, you have to think differently.
If you don’t, at best, you’ll match the market. I learned that you have to be willing to buy stocks that everyone hates because, by the time everyone loves them, it’ll be too late.
Warren Buffett started buying stocks and making major investments in 2008 during the height of the financial crisis. He even wrote about it in the New York Times. If you wait for everyone to agree with you and for the coast to be clear, it’ll be too late. Buffett wrote: “If you wait for the robins, spring will be over.”
The stock market fell more than 26% after Buffett wrote the article. And it finally bottomed out five months later. There were many in the media who said Buffett was taking “stupid pills” and had lost his mojo.
But Buffett had the last laugh.
The stock market is up more than 300% since then. We're now in the second oldest bull market on record.
Over the past year, I’ve recommended stocks to Park Avenue Investment Club members that made me look, well... stupid.
We added US Navy ship-builder Huntington Ingalls (HII) when former President Barack Obama was cutting military spending. HII is now up more than 545%.
In the spring of 2017, retail stocks were dumped in the unloved and unwanted pile. It was a bloodbath. After all, Amazon was going to rule the world.
We added apparel retailer American Eagle Outfitters (AEO) in June 2017. We looked stupid for a bit, but we didn’t mind. We recently sold AEO for a quick 50% profit.
It’s now semiconductor’s time to look stupid.
Wall Street hates them. But after looking at the numbers, we still like them a lot.
We added Micron Technologies (MU) a few months ago, and we think it’s still a good buy. We see more room for the stock to run.
And we’re doing it again with a company so under the radar of the mainstream investing public that it trades an average of less than 40,000 shares per day.
But that’s how we like it. While all the noise in the market is about Bitcoin and cryptocurrencies, we're buying a solid, profitable, and well-managed company that mimics the investment thesis and returns of Warren Buffett’s Berkshire Hathaway and at a fraction of the price.
It’s the kind of stock you could buy and hold forever. Take a look.
All my best,
Founder, Park Avenue Digest
Charles cut his chops on the trading floor of the New York Futures Exchange before he moved on to become a wildly successful money manager on Wall Street.
And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball. He's compiled an amazing record of success and posted gain after gain for his loyal readers. He's the founder of Park Avenue Investment Club and Insider Alert newsletters.
Charles is also the author of the highly acclaimed book Getting Started in Value Investing.