Portfolio manager’s Letter January 2002
2001 Was a Good year for our Company, because it was a good year for our customers. Enclosed is an updated Spread sheet showing our companies record for the last fourteen years. You can see from this list that 2001 investment year results the aggregate gain from all customer portfolios in 2001 was 16.17%. There have been years when the over all gain has been larger, but the value of a investment manager comes from value added, and in investment business that value is measured by relative performance.
Relative performances is how well the investment manager performs relative to the over all market as measured by indexes such as the Standard and Poor’s 500 or the Wilshire 5000. In terms of relative performance 2001 Investment year results is one the best investment results Losch Management Company have had.
It is my personal belief that the most important function of a investment manager is to avoid disaster. If you can do better than the market in bad years, the good years will take care of themselves. There will always be bad markets and bad years, the trick is to get though these periods with your capital intact. Sooner or later the bull market return, but if your capital base has been decimated you will spend most of the rally just getting back to where you were when the last Bear Market started.
The last two years Losch Management Company has been able to show positive results when the over all market has been going south. This has been gratifying for me because this is what I get paid to do. In a world full of capital death traps, the Dot coms, communication stock disasters, and Enron, Our capital is not only intact but growing. The credit for this positive outcome largely belongs to Warren Buffett and Charlie Munger.
It was because of what I have learned from them that we held no Tech Stocks in 1999 and early 2000. Their teachings about value, predictability and irrational market behavior made it obvious to me that market in early 2000 was racing over the edge of the cliff.
A good index fund will track the performance of the market and charge a very small fee. For the investor the choice is easy if he is paying someone to manage his money and they can not do better than the market. He needs to fire the investment manager and put his money in an Index fund. For years most managed mutual funds have under performed the market. Managed Funds charge large fees, so there are a lot of professional money managers earning six figure salaries who are delivering nothing of value to their customers.
The implications of out-performing an index for the investors are much larger than they seem, because of the math evolved in compounding annual returns even a few points of under or over performance can have an enormous impact on the investors net worth over a period of years.
Losch Management Company’s value added over the last fourteen years has been about ten percent per years (the amount by which we have out paced the overall market) yet because of compounding the impact on the customers net worth is large. The enclosed spread sheet shows that $100,000 invested at Losch Management Company has grown to $1,559,563 were as the same $100,000 invested in a index fund would have grown to only $498, 803. So the value added by our management is not 10% but $1 million. This is a sum you will be happy to learn, that was considerably larger than our fees (the figures shown are net figures after fees have been deducted).
Many investors prefer their professional investment management in the form of mutual funds. But few funds out perform the S&P 500 and those that do only manage to gain an edge of 1% or 2%. Many investors who indulge in this kind of management prefer to own a basket of funds feeling that diversification will provide them with an extra measure of safety. This may be the case but if so it comes at a price. A basket of funds will generally under perform the S&P 500 by at least 2% because of frictional costs.
For the Fourteen year period ended December 31, an Investment of $100,000 in a theoretical portfolio of mutual funds that underperformed the S&P 500 by 2% would have grown to a Value of $386,196.39, and a Portfolio of bonds with an fixed return of 7% would have risen in value in fourteen years from $100,000 to $257,853.42. These last two alternatives may provide an illusion of safety in the short run, but what would make you feel more safe today, $1,500,000 in stocks, $380,000 in mutual funds or $260,000 in bonds?
Losch Management Company have also included with this Letter a Summery of Realized Gains and Losses for 2001 (the blue paper). Save these, as the information will be helpful when you are ready to file your tax return. In most cases, the gains turned out to be higher that I estimated early in the year. Sorry, I promise this year I will try to be more optimistic.