US Market Over The Long Run

I’ve been thinking a lot lately about how long is long enough to give a strategy the opportunity to prove successful.

Roy Weitz used five years. He founded our predecessor site Fund Alarm. If a fund was in the basement the past 1, 3, and 5 years, he sounded the alarm … designating the fund a “Three Alarm” fund.

If you’re a fund manager that time frame is driven by how long your investors believe in your strategy … how long they stick with you. Setting expectations is key here.

Our US market history, back nearly 100 years, suggests much success in a buy & hold overall market strategy. In fact, based on geometric history, investors in the S&P index can expect a “ten-bagger” every 23 years.

Can you believe that?


Which is why smart folks like Warren Buffett invest for the long run … “in companies you want to hold forever.” Such advice is music to the ears of mutual fund companies.

While it’s very, very hard of make lots of money in the short term, making it over the long haul seems quite achievable given the history of the US market.

But through some 10-plus year stretches (long), the market returned nothing but volatility.

Which means, despite its beautiful long-term climb, investors may not be positively rewarded for their risk if they are unlucky (or unwise) enough to get in at wrong time. But, alas, no one knows ex ante when the wrong time is.

And if you have a more concentrated strategy than say the S&P500, I suspect, the periods could be longer. “Out-of-favor” has become quant-speak for under-performing.

Starting to think that with any long-only equity strategy, the fund (or index) manager in fairness needs probably 10 years. And that’s the time frame they should tell prospective investors.

It seems like a lot to ask, but anything less is probably unrealistic, if not misleading.