Value fund buy and hold - 10 years later

[MichaelB]

The only IRA I have is a one year non-deductable of $2K I made either in tax year ’98 or ’99. I put it into the clipper fund – a fund that M* was in love with at that time. I invested and forgot about it – literally. No other retirement accounts or deferred income and it was never important enough to bother with. Besides, by '02 the folks at clipper were geniuses. Everybody thought so, including themselves.

Well, I just got a statement in the mail. That $2K with reinvested distributions, minus yearly account management fees ($10 or $15) is now worth a whopping $1119. A loss of almost half after a decade (I think it was done 4/99)

A true, pitiful lesson on:

Buy and hold
Active management
Value stocks
Fees, even small ones,
M* and their [-]lust[/-] [-]obsession[/-] regard for certain active funds, especially deep value (Weitz, Dodge)

There is a moral to this story but I'm not sure what it is. Maybe it's that you gotta stay on top of things - there's no such thing as a portfolio on autopilot. I'm just grateful it was only $2K (well, actually $4K 'cause I opened a spousal IRA as well.) At least my uncle (sam) is sharing the loss...

Of course, on a positive note, it sure makes it easier to convert to a Roth.

 

[LOL!]

I'm sure there are many stories just like yours. There are also many stories that are kinda the opposite. I put about $2K into an IRA a long time ago and it is now worth about $28K.

A few years ago, I arrived at the unsurprising conclusion that tax-advantaged accounts were special and that you did not want to lose much money in them because you could not easily "top them up" because of contribution limits and you could not deduct capital losses on your taxes. The tax-advantaged accounts were also good locations for tax inefficient investments like fixed income funds.

Conversely, taxable accounts were bad places to keep bond funds and funds that had any bonds in them like balanced funds. So given this enlightenment, I filled all our IRAs with fixed income funds and removed almost all traces of equities from them.

So I have preserved tax-advantaged assets in the last 18 months, but our taxable accounts have taken a major hit. The consolation is that the major hit means we won't be paying any capital gains taxes for the next 250 years.

 

[audreyh1]

Wow!

Unfortunately I also was strongly influenced by Morningstar's "deep value" bias. It worked well in the early 2000s but killed last year. Fortunately, in the interest of diversification, I own other types of funds as well and so I haven't suffered badly as I might have. Rebalance, rinse, repeat.

Audrey

 

[Free To Canoe]

Thank you for the post Michael B. There are a million stories in the naked city. I have been spending some of my ER trying to determine which ones are valid. Hard evidence counts for much in my book even if it is only one data point. It is one real data point.

A story such as this is worth at least two FPA white papers to me.

Free to Canoe

 

[IBWino]

Speaking of M*'s love of value funds, can someone explain why M* gives the Eaton-Vance Large Cap Value Fund (symbol EHSTX) a four star rating when it has a 5.75% front-end load?

This fund is being added as a choice to my company's 401k. Apparently the load fees are being waived for the 401k.

 

[tuixiu]

How much was that fund worth in October of 2007?

Just curious, too lazy to look it up.

 

[MichaelB]

How much was that fund worth in October of 2007?

Just curious, too lazy to look it up.

Oct 1 it was worth $1734
Oct 31 it was worth $1424
Jan 1 08 it was worth $2494

Even though it is - and was - a lousy fund, the fault is clearly mine for not doing something about it much sooner.

Thank you for the post Michael B. There are a million stories in the naked city. I have been spending some of my ER trying to determine which ones are valid. Hard evidence counts for much in my book even if it is only one data point. It is one real data point.

A story such as this is worth at least two FPA white papers to me.

Always glad to help.

 

[rrandol]

Thanks, I feel better now!

I have a very similar experience with a self directed annuity I opened about 15 years ago with $2300. It's been in three stock funds ever since. My recent statement showed a balance of $2064!

 

[audreyh1]

I looked at my rollover IRA (from 401K) from 9/99, and as of 3/31/09 down about 7% from then, not anything like Michael's experience. As of Friday it's only off 1%.

My non-deductible IRA that I invested into from 1995 through 1999 has doubled since I stopped investing in April 1999 (my last year employed). It was Fidelity Contrafund and Fidelity Low-Priced Stock for many years, and then I switched it to all Fidelity Low-Priced Stock in 2006. It had actually tripled by Oct of 2007 (quintupled my original $10K investment), but by March 2009 got royally hammered down to only double the April 1999 value.

Just some comparisons!

Michael - I suspect the yearly account fees you paid played a large roll in the poor performance. Those fees are pretty high compared to a $2K base. Looking at the 10 year chart in M*, I'm sure one reason the fund has continue to be so lauded was the superior performance 2001-2002. 2003 though it started falling way behind it's peer. But it didn't fall through the initial 1999 value until the end of 2008 when it lost 50%, but that was from a high of approx double the value at the start of 1999. According to the 10 year chart at Morningstar, at the end of 2008 CFIMX should have been about break even with an early 1999 investment plus reinvested dividends, then down another 11% in the first quarter of this year. So I think the fees are what ate your lunch! But still looking at the charts it's hard to see how you could be off 44% from your original investment when the charts indicate that down 11% plus 10 years of fees.

Original $2K investment, subtract -11.1% down from 1999, subtract $150 in fees, and I get $1628. Where did the other $509 go, man? Did the management fees really reduce the performance that much during the "good" years? [I'll let someone else do the calcs].

It is interesting comparing CFMIX to SLASX which is also managed by Davis and Feinberg. (I own SLASX) Somehow it has done much better over the last 3 and 5 year period.

At least I own my deep value funds mixed in with others which means I got more invested in them when they were down and took profits when they outperformed others. It's tough when you only own one fund and can't rebalance!

Audrey
P.S. Funny how a "quick reply" can turn into a not-so-quick reply!

 

[MichaelB]

I looked at my rollover IRA (from 401K) from 9/99, and as of 3/31/09 down about 7% from then, not anything like Michael's experience. As of Friday it's only off 1%.

My non-deductible IRA that I invested into from 1995 through 1999 has doubled since I stopped investing in April 1999 (my last year employed). It was Fidelity Contrafund and Fidelity Low-Priced Stock for many years, and then I switched it to all Fidelity Low-Priced Stock in 2006. It had actually tripled by Oct of 2007 (quintupled my original $10K investment), but by March 2009 got royally hammered down to only double the April 1999 value.

Just some comparisons!

Michael - I suspect the yearly account fees you paid played a large roll in the poor performance. Those fees are pretty high compared to a $2K base. Looking at the 10 year chart in M*, I'm sure one reason the fund has continue to be so lauded was the superior performance 2001-2002. 2003 though it started falling way behind it's peer. But it didn't fall through the initial 1999 value until the end of 2008 when it lost 50%, but that was from a high of approx double the value at the start of 1999. According to the 10 year chart at Morningstar, at the end of 2008 CFIMX should have been about break even with an early 1999 investment plus reinvested dividends, then down another 11% in the first quarter of this year. So I think the fees are what ate your lunch! But still looking at the charts it's hard to see how you could be off 44% from your original investment when the charts indicate that down 11% plus 10 years of fees.

Original $2K investment, subtract -11.1% down from 1999, subtract $150 in fees, and I get $1628. Where did the other $509 go, man? Did the management fees really reduce the performance that much during the "good" years? [I'll let someone else do the calcs].

It is interesting comparing CFMIX to SLASX which is also managed by Davis and Feinberg. (I own SLASX) Somehow it has done much better over the last 3 and 5 year period.

At least I own my deep value funds mixed in with others which means I got more invested in them when they were down and took profits when they outperformed others. It's tough when you only own one fund and can't rebalance!

Audrey
P.S. Funny how a "quick reply" can turn into a not-so-quick reply!

Audrey, I know three things for fact - the account value at 3/31/09 ($1119), the original $2k deposit, and clipper fund. All else is from memory - and my kids say I'm getting senile. I'll see if I can get into my files and look for details.

 

[ejman]

If I recall correctly, clipper fund is non diversified (around 20 or so holdings) with an emphasis on financial stocks. Being that financials have been the epicenter of the storm...

There are no set and forget investments but looking at my own data, Quicken shows that the often mentioned Wellesley has an annual rate of return of 4.23% in my portfolio since 1/1/99 thru last Friday, while Wellington shows 8%.

In this case, I don't think the lessons are on the merits of Buy and Hold or Value investments in general. I think the primary lesson is in the perils of concentrated investments within a mutual fund. On the other hand, if the investment in a concentrated fund is counterbalanced by investments elsewhere, then it may not be such a bad thing.

 

[MichaelB]

Upon further review

[FONT=&quot]I went back to check the numbers. Clippers web site is not much help online account history for only 2 years. I did find the original account docs and recontructed the cashflow and values from that point using yahoo finance numbers.

First, a correction. The account was opened 4/02, not 4/99. This is hard to explain, because I stopped working YE 99 and have had no earned income since then. But the statement is quite clear. For this discrepancy I apologize. Ill also look into my tax files to see how this happened.

The values are:

account opened 4/12/99 $2000 in cfimx, 22.309 shares @ 89.65

YE values from that point

2002 23.249 shares, $1760 value on 12/31/02
2003 23.887 $2101
2004 24.806 $2224
2005 26.114 $2302
2006 27.414 $2521
2007 31.145 $2523
2008 31.822 $1248

The actual account value at 03/2009 was 31.489 shares. The difference of 0.333 shares was fees.

At its highest point is had just barely kept up with inflation. Yearly account fees were less of a problem than I first concluded. The investment, however, is just as lousy. It took 7 years to lose 40% instead of the 10 I originally believed.

With regard to meaningful lessons:

First, buy and hold/forget. On the buy part , when I bought cfimx, IIRC it was because it looked like a "good investment". A better reason would be "part of an allocation strategy" . An allocation strategy can be measured and tracked much more easily, whereas a good investment isn't much more than something that has done well in the recent past, looks like a good value, or has good management (like dodge and cox or Marty Whitman) . On the hold/forget part, forget is out of the question - its just plain dumb, not a way to manage money. Hold -only if it continues to meet or fulfill am allocation need. And like when Reagan said about Russian disarmament "trust but verify" - well, here it is "hold but track carefully". IOW, continued vigilance.

Next, value. All I can say is that deep value active management is being sorely tested. I don't know if it is their approach / execution or if the concept itself doesn't work , but either way, it (in my case) did not meet expectations. It did have great moments, and as Audrey pointed out, rebalancing needs to be part of that formula.

Active management. I still have some in my portfolio, although much less. Clearly, obviously, there are dangers along with the higher costs. Still, actively managed funds can fill specific allocation needs that indexes cannot cover. All the more important to track carefully, frequently and have benchmarks. And rebalance.

M* - well, 'nuff said.
[/FONT]

 

[audreyh1]

Well the 2002 starting date would certainly explain it.

Audrey

 

[yakers]

Fron MichaelB: " And like when Reagan said about Russian disarmament "trust but verify" - well, here it is "hold but track carefully". IOW, continued vigilance."

I agree in principle but what signs do you see in order to make changes before big losses set in? My wife's IRA is in Wellesley, it is down. I am mostly in a target retirement fund, it is down. I did go to cash for this years expenses so we are not drawing down our IRAs.
If we want to delay drawing from our lessened IRAs we would have to cut expenses or go back to work.

 

[haha]

Fron MichaelB: " And like when Reagan said about Russian disarmament "trust but verify" - well, here it is "hold but track carefully". IOW, continued vigilance."

I agree in principle but what signs do you see in order to make changes before big losses set in?

One way is to read the gurus, pick the one who will be right, and do what he says. If he isn't the one who will be right, don't pick him.

Here is one with some success: http://streetsmartreport.com/school/Commentaries/What%20Will%20Market%20Look%20Like%20Over%20Next%2017%20Years.html

Otherwise, always sell out at a certain middling level of P/E10. You will miss many huge bull markets, you will undergo bear markets anyway, and you may pay some high taxes. But likely your portfolio will never be completely clobbered.

Ha

 

[Free To Canoe]

Interesting buy and hold article Ha. Thanks.

You had success following this guru?

Free

 

[MichaelB]

One way is to read the gurus, pick the one who will be right, and do what he says. If he isn't the one who will be right, don't pick him.

Here is one with some success: Street Smart Report Online Commentary 4

Otherwise, always sell out at a certain middling level of P/E10. You will miss many huge bull markets, you will undergo bear markets anyway, and you may pay some high taxes. But likely your portfolio will never be completely clobbered.

Ha

I tend to agree. Even if you can't "pick the one that will be right", you can find qualified advisers willing to share their thoughts with the investing public, track their recommendations, and based on that develop and execute your own plan.

I now see as critical the need to filter the continuous flow of noise and have a way to value the investment markets.

 

[Grep]

To be generous (in a back-handed way), almost everything is down over this time period. The S&P is down close to 40% since April 1999, Vanguard's value index (which didn't start until slightly later) is down by a similar amount. Of course, to be down by much more than that is poor performance.

The traditional canon of buy and hold (as espoused by many of the efficient-market types, bogleheads, etc.) is that you can't predict the future, attempting to time the market (or pick particular stocks or sectors) is futile or even harmful, hence entering and exiting the market is done broadly and essentially blind.

I subscribe to much of this canon. But one message that I've recently learned in a painful fashion is that "buy and hold" works very well if you are lucky about when you buy and sell. That is, valuations matter, and they matter tremendously. It may still be futile to try to time entry and exit points, but to make such moves while wearing a blind-fold is asking for trouble half of the time.

Now, which "half of the time" are we in now, or five years from now? As futile as it may be in principle, I'll at least be trying to keep a running estimate that going forward.

 

[audreyh1]

In a rebuttal to Grep's post (friendly of course ) - The Clipper Fund does seem to be something of an unfortunate exception.

Ironically, The Clipper Fund was one of the very few that came through the 2000-2002 debacle relatively unscathed. Buying most funds in this category in 2002, you would have bought at a low year and enjoyed a spectacular recovery in 2003. But in April of 2002, Clipper was at a value much higher than in early 2000, recovered more modestly in 2003, and then was fairly flat until late 2006 when it gained 15% and then flat in 2007.
Total returns over ten years - Clipper (CFIMX) | Performance

BTW - even though Clipper was down 11% at the end of March, as of yesterday it is only down 0.2% for the year, so your actual balance today should be looking better.

On the buy-and-hold thing: I think this past decade has debunked that simple philosophy for all but people with 30+ year horizons. It's a great strategy during a bull market like 1980-1999, but you can end up with wild gyrations going nowhere during secular bear markets. I keep my funds long term, but always within the context of rebalancing across asset classes. I don't try to predict the future, but whenever one or more asset classes way outperforms or underperforms, asset allocation forces me to sell-high and buy-low without worrying about future events or timing.

Audrey

 

[MichaelB]

To be generous (in a back-handed way), almost everything is down over this time period. The S&P is down close to 40% since April 1999, Vanguard's value index (which didn't start until slightly later) is down by a similar amount. Of course, to be down by much more than that is poor performance.

A portfolio with international large and small, US small and emerging markets saw lots of big gains for some of this period and if rebalanced, should have fared much better.

 

[Dennis]

Well, after chauffeuring around all the Major Bank and Investment Houses VIP'S for over 30 yrs and having them "In the Back Seat of My Limo"?

Bottom line is? 95% of us Amatures haven't got a Chance Investing and then Managing our own $.. Most do it from being over-confident.. from being successfull doing their own professions, think they can do as well in another..by only needing to spend a few hours reading some Articles, Books, etc.. That most of those are designed to make the Authors &/or their Employers $ and not anyone else..

and Wall Street was Based upon using Insurance Salesman Techniques...
Buy and Hold All depends on What you Buy and Hold..> Warren Buffet..another Insurance Salesman..

It takes a Pro to Defend against other Pro's and to Even Beat other Pro's..
and my favorite? 11 reasons passive investors let Wall Street steal their money - MarketWatch

Until I got enough $ to use a Firm, I owned Balanced Funds..and 50% of my $ has been with a Very Conservative Investment Firm ( Bond Pro's ) and the othr 50% in several Balanced & Bond Funds with a 30/70 Mix ...( Mostly Treas. Last yr )

And trying to Make the Market Make up for your Short Commings of not being able to make enough in your own profession? Is Suicidal. Just like trying to Win in Las Vegas... The Odds are Against you and the House Always Wins..and they prey on your Greed...Dangling the Carrot if you will..

For Beginers? HSTRX and OAKBX and Learn from Them for the next 5-10 yrs... And Don't expect to make more than 7% apy on your $ when figuring out how much you have to save for your Retirement.. This will force you have to Save more and Spend Less..

Something Our Gov't and Wall Street doesn't want you to do..
Our Seniors learned this after the Tech Yrs and then succeeding Bear Yrs of 00-02'
Now this Current Generation (hopefully) will learn from this past Bear Crash..of 08' going forward and will tell their Kids and Grandkids..

 

[ejman]

I do think that the key to "buy and hold" is re balancing periodically. I keep fairly wide bands (stocks at 50 -60%) because I don't like to re balance constantly. As a result, I tend to re balance a little early in the cycle ( Early 2007 instead of peak in October 07) but it is a simple approach that has kept my ER going since December 02 (no pensions or SS but I'm looking forward to SS at 62 - I hope its still around). Of course just about EVERYTHING is down in this cycle but bonds less so that stocks and cash is still king in a deflationary period.

 

[Grep]

Yes, rebalancing is a important part of buy-and-hold for many people.

Some would say it is a distraction, and even counterproductive, to review individual funds in isolation. It's your over-all portfolio balance that counts. Indeed, if everything rose and fell together, there would be no benefit to diversification or rebalancing. One actually needs volatility to cause a risk premium and to reap the benefits of diversification and rebalancing.

 

[Grep]

Dennis,

I'd say Farrell correctly points out the mental errors that many people make (though with an insulting tone rather than a compassionate one). However, he's also right when he says:

"... more Wall Street bankers, brokers and fund managers own more yachts and make 10 to 100 times more than the average clueless investor."

The education required for successful passive investment can be boiled down to a few easy rules. I won't attempt to devise and summarize an appropriate set of rules here, but a starting point would be:

1) Keep x years of living expenses in cash.
2) Invest only for the long term and only what you can afford to lose.
3) Invest in the lowest cost, broadest index funds appropriate for your level of risk tolerance, e.g., an appropriate passively-managed target retirement fund.

That, and the stern admonition "now don't mess with it until you are retired!" will get people 80-90% of the way there.

 

[haha]

The education required for successful passive investment can be boiled down to a few easy rules. I won't attempt to devise and summarize an appropriate set of rules here, but a starting point would be:

1) Keep x years of living expenses in cash.
2) Invest only for the long term and only what you can afford to lose.
3) Invest in the lowest cost, broadest index funds appropriate for your level of risk tolerance, e.g., an appropriate passively-managed target retirement fund.

That, and the stern admonition "now don't mess with it until you are retired!" will get people 80-90% of the way there.

The part of #2 that I have bolded is a cliche that cannot be followed by an ordinary person who has to rely on his portfolio for his retirement.

How many people on this board could "afford to lose" their investments? I would guess only those who have governemnt pensions. And most of them wouldn't like it much.

Ha