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Like a lot of folks, I sometimes check on how my former crushes are doing. What saves this from being utterly creepy is that my past flames are money managers. They're the deep thinkers whose opinions once made me—and the market—quiver with excitement.
Let me name these beautiful minds: Warren Buffett, Bill Miller, Mason Hawkins and Francis Chou. In early 2007, before the financial crisis struck, I devoured every word they uttered. They were the dream team of the investing world, and for good reason. Each had compiled a stunning record of success.
Ten years later, these gentlemen are looking more and more ordinary. Still, I give them credit for ingenuity. Each of them has let me down in a different way. By doing so, they've made me think more deeply about this treacherous investing landscape.
Start with Buffett, the biggest name of them all. With lots of cash in hand, his Berkshire Hathaway flagship was perfectly positioned for the financial crisis. As the rest of the world crumbled, Buffett was able to extract sweetheart deals from desperate borrowers like Goldman Sachs and Bank of America.
But what did all that foresight and all that cash do for him? Over the decade beginning February, 2007, he outperformed the S&P 500 Total Return Index by an average of a little more than one percentage point a year. Not bad, but not exactly eye-popping either.
The Oracle of Omaha looks even more human if you remove the first chaotic year of the downturn and start measuring his returns from February, 2008. Over the following nine years, he lagged slightly behind a plain-vanilla S&P 500 investor who simply reinvested her dividends.
At least he's done better than Miller, the mutual fund manager who became famous for beating the S&P 500 Index 15 years in a row, from 1991 through 2005. Back in the day, we investment wannabes drove ourselves crazy trying to figure out how his idiosyncratic stock-picking methods managed to work so well. After Miller's winning streak ended in 2006, we still kept the faith. But he then lagged behind the market for four of the next five years. Even we fans had to acknowledge reality: Maybe, just maybe, his streak was only luck after all.
Hawkins, a classic bargain hunter, provides an even more disturbing example of how abruptly fortune can reverse itself. In the decade before the crisis, he helped pilot Southeastern Asset Management of Memphis, Tennessee, to nearly 13%-a-year returns by focusing on a small handful of thoroughly researched, deeply undervalued stocks.
Since the crisis, Hawkins's Midas touch has vanished. Investments in casino companies and energy producers haven't worked out, and his flagship Longleaf Partners Fund has lagged far behind the S&P 500. His style of focusing on a few big bets once produced big returns; in recent years, it has hammered him.
Then there's Chou, whom Morningstar named Canada's fund manager of the decade back in 2004. He's never been afraid to follow his own path and has enjoyed periods of amazing outperformance. Over the past few years, though, he's blown hot and cold. In the decade that ended January 31, his flagship Chou Associates Fund produced an average annual rate of return of merely 3.3%.
What's gone wrong with my former crushes? The easiest explanation is that we're seeing an inevitable reversion to the mean. Luck levels out. Brilliant insights don't last. Successful strategies fade once everyone copies them or an investor's portfolio reaches a certain size.
All that is probably true. It's why I've become predominantly an index investor.
But I wonder. An alternative explanation is that my old flames are operating in a fundamentally irrational market propped up by ultralow interest rates, in which nothing is cheap. If that's the case, it's no wonder they've stumbled. The hard times that have come upon them may actually be a sign of a wider turbulence ahead.
Hey, it's just a thought. Put it down to a broken heart. But it's a notion that haunts me whenever I consider what has befallen the dream team of 2007.
Ian McGugan is an award-winning Globe and Mail writer. Reach him at imcgugan@globeandmail.com or on Twitter @IanMcGugan
Ian McGugan