Performance on Any Particular Day Doesn’t Matter

Since 1984, Berkshire Hathaway underperforms the S&P 500 more than half the time (4,198 out of 8,363 days). Yet, Berkshire doubles the S&P 500 in average annual returns and achieves a total return ~43 times higher. Case in point: too much focus on short-term underperformance can inhibit us from capturing the long-term upside.

We all love consistency. Winning day in and day out means we’re getting ahead and making money. As long as our investments are making money, we don’t really complain. “Can’t argue with being up, right?” But, if all we care about is daily performance being positive, then we may miss the boat on better investments.

Take Berkshire Hathaway for example. Since 1984, on a daily basis, Berkshire’s stock underperforms the S&P 500 more than half the time (4,198 out of 8,363 days). If you own Berkshire and compare it to the S&P 500 every day, the index would’ve beaten you 50.20% of the time. Not exactly a great win-loss record.

But it’s also important to pay attention to how much you win or lose on any given day — or month or year depending on how often you like to measure performance. Since 1984, Berkshire’s monthly returns average 1.77% while the S&P 500 averages 0.80% (more than double). So, while uncle Warren doesn’t beat the S&P 500 most of the time on a daily basis, because his average return is much higher than the S&P 500, he outperforms in the long run.

In my experience, the more you watch your investments, the more you feel like a loser. If you measure your performance from one minute, hour or day to the next, your account is likely to show a loss a majority of the time. In general, the shorter the time frame you measure performance, the more frequent you show losses. However, it’s hard for us not to look. We want to see what we dream about in our heads — gains! We want an escape from our boring job or whatever else. Many of us use the markets as a distraction for deeper issues we’re unwilling to confront, but this is an whole other discussion.

As hard as it may be for some of us, I think taking a step back and measuring performance on a more long term basis, say every 3–5 years, serves as a more optimal approach than agonizing about every hourly tick.

When people come to me wanting to invest, I drive the point home that half of our month’s are likely to show negative returns; that I recommend staying invested for at least five years and to not get caught up in the short-term ups and downs; that, over time, despite the short-term underperformance at times, I expect to make money for them and to outperform our benchmarks. The short-term, at times, can be painful but in a cruel way it’s what’s necessary to outperform in the long run.

Berkshire underperforms the S&P 500 on more than 50% of the days since 1984, but achieves a return ~43x higher.

 

Disclosure

Past Performance is Not Necessarily Indicative of Future Results. There is always a risk of loss in futures trading.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice.

These charts show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.

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