The Importance of Full Market Cycle Returns [PDF] (FPA)






A full market cycle can be defined as a peak-to-peak period that contains a price decline of at least 15% from the previous market peak, followed by a rebound that establishes a new, higher peak. Few publications or data providers publish, let alone highlight, full market cycle returns, yet we believe understanding them can help the return of your portfolio over the long-term.

Warren Buffett, in Berkshire Hathaway's 2013 Chairman's Letter, wrote "Over the stock market cycle between year ends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results."


Many portfolio managers with strong trailing three- and five-year performances in 2000 and 2007 saw their records (and, more importantly, their clients' capital) decimated by subsequent bear markets. There are other portfolio managers, however, who successfully protect principal in a weak environment yet fail to adequately commit capital when markets are inexpensive, leaving their clients with a sub-par return over the full cycle.

If you are a long-term investor, what happens in between market peaks may be nothing more than noise. Consider both the current market cycle (2007- to the most recent quarter-end peak), as well as the preceding market cycle (2000-2007) for the S&P 500 in the chart on the following page. If you owned shares in good businesses or invested with capable managers, you were better off covering your ears (and sometimes eyes) through the volatility between the green dots.

0 件のコメント: