What Good Performance Really Looks Like

The Haas Value Strategy has been a top performer since its inception about 6 years ago, beating by about five percentage points per year.  It’s fair to say that, at most, a handful of managers have matched its performance. In addition, virtually all managers would consider its performance “highly successful”.  But on a day to day basis it’s performance is less convincing.

Over the past 4 quarters (July 1, 2017 – June 30, 2018) the strategy has outperformed it’s benchmark (ticker: SPY) by four percentage points (before fees), which is somewhat representative of its historical performance.  During this period, the following can be said:

       49% of days the strategy underperformed – you would have been better off in an index fund

       The worst 10 days the strategy lost an average of 1.2% as compared to the S&P 500, each day!

       In the first two months of the period the strategy lost about 4% as compared to investing in the benchmark, an awful performance.

       In October alone the strategy lost about 5% as compared to its benchmark

       Looking at the graph below, it’s hard to believe that this is a successful strategy


There are two possibilities to explain the somewhat wild performance of a successful strategy as compared to its benchmark. First, the outperformance is just plain luck. I estimate that the chances of this is less than 5%, based on statistics and the fact that few funds performed this well. Therefore, luck is a possibility, but not a very good one. Second, good strategies have significant periods of underperformance. This is certainly true in the case of the Value Strategy, what about other managers?  Several years ago a study of ten year returns found that of the top 25% of portfolio managers, 79% spent at least three years in the bottom 25%. It’s seems only logical to conclude that the best strategies have bad periods. Why?

Luck plays a role. Stock prices move daily for all kinds of reasons, only a few of which are related to how a stock will do over the longer term. Perhaps a stock falls because an analyst issues a poor report, or it rises because a politician made positive comments about the industry. The market reactions to this kind of news rarely affects long term performance.

Although it can be disheartening to see a stock you own fall while other stocks are rising, it’s futile to try to adjust or refine an investment strategy based on short term price movements. If you’re feeling a bit of despair because your portfolio has done poorly the last week, month, or quarter then consider that you may just be experiencing a spell of bad luck. However, if your portfolio is performing poorly over the long term than it may be time for a change.