In time Michel Pireu     | Business Day Wednesday, March 13, 2019
From Jim O'Shaughnessy of O'Shaughnessy Asset Management:

Over shorter periods, your results are highly contingent on luck and chance. This is vital to understand because you might see a bad process provide excellent results due entirely to chance and a good process provide poor results for the same reason.

Consider a simple strategy of buying the 50 stocks with the best annual sales gains. But consider this not in the abstract but in the context of what had happened in the previous five years: $10,000 invested in the strategy grew to $33,482 dwarfing the same investment in the S&P 500, which grew to $16,220. The three-year return was even more compelling, with the strategy returning an average annual return of 32.9% compared to just 7.4% for the S&P 500. Also consider that these returns would not appear in a vacuum—if it was a fund it would probably be featured in business news and the “long-term” proof would say that this intuitive strategy made a great deal of sense and would attract a lot of investors.

Here’s the catch — the returns are for the period from 1964 through 1968, when, much like the late 1990s, speculative stocks soared. Investors without access to the very long-term results of this investment strategy would not have the perspective that the longer term brings, and might have jumped into it before it went on to crash and burn. Over the very long term, this is a horrible strategy that returns less than U.S. T-bills. Buying stocks based just on their annual growth of sales is a horrible way to invest—the strategy returned just 3.9% per year between 1964 and 2009! By comparison, investing in the S&P 500 would have earned 9.5% per year.

Over shorter periods your results may profit from luck, but time dissolves that advantage.

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