Average For a Very Long Time

“Compound interest is the eighth wonder of the world.
He who understands it, earns it …. he who doesn’t … pays it.”

 Albert Einstein

I am humbled to have worked with a number of families for over 25 years. Their long-term returns have ranged from 7% to 9%*, which, on the face of it, seems fine, but not necessarily outstanding. But here’s the thing … 7% to 9%* returns compounded over a quarter century has resulted in some truly extraordinary dollar gains for these same families. One of today’s most successful institutional managers, Howard Marks, once spoke of an investor whose annual results were never ranked in the top quartile, but over a 14-year period he was in the top 4% of all investors. If he keeps those mediocre returns up for another 10 years he may be in the top 1% of his peers – one of the greatest of his generation – despite being unmentionable in any given year.

When it comes to investing, so much of the focus is about what people can do right now, this year, or maybe next year. “What are the best returns I can earn?” seems like such an intuitive question. But, like evolution, that’s not where the magic happens. If you understand the math behind compounding you realize that the most important question is not, “How can I earn the highest returns?” but rather, “What are the best returns I can sustain for the longest period of time?”.
That’s not to say good returns don’t matter. Of course they do … just that they matter less than how long you are earning those returns. “Excellent for a few years” is not nearly as powerful as “pretty good for a long time.”. And few things can beat “average for a very long time” because average returns for an above-average period of time may lead to extreme returns.
To quote Howard Marks, “The only thing that matters is where you are in the long run.”

Keith N. Thomson

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