How Big Losses Handicap Future Returns

Published on: 02/28/2023

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss the math of investing to explain how big investment losses can affect future returns.

 

TRANSCRIPT

 

TONY:

Welcome to another edition of Chart Talk.  I’m Tony Ogorek.  I’m here with our Portfolio Manager, Jeff Viksjo.  And Jeff, today, we are talking about how big losses can handicap future returns.  And one of my investment heroes, Warren Buffet, was always, sort of, adamant about the first rule of investing, which was ‘don’t lose’. And his second rule was ‘don’t forget the first rule.’ Now, it’s obvious Jeff, that markets are going to go up and down, and losses are an unavoidable part of investing.  However, there are losses, and then there are losses. So, let’s take a look at the chart we’ve got here, which takes a look at two different sectors of the economy.  And how would you like to comment on this?

 

JEFF:

Yea, so we split up the different sectors into Boring Sectors, which tend to do smaller returns year-to-year, but not as much volatility. And then the Exciting Sectors, where you can get big gains, but also big losses.  And those Boring Sectors, Consumer Staples; things like Coca-Cola and McDonalds, Utilities, and Healthcare, they don’t move around a lot.  And so, when you have a terrible year, like we had last year, you can see that first column, they held up relatively well.  And Tony, our clients know this is our high dividend portfolio, right.  These are the stocks that we own in that group. 

The Exciting Sectors, of course, when you have a down year like last year, you see those losses are accentuated.  So, Technology down 28%, Communications, which is mostly I believe Facebook, down 37%, and Consumer Discretionary, things like Amazon, down 36%.

 

TONY:

Well, if we look at Healthcare, it’s been down an average of 2% a year, for the past couple of years.  Contrast that with Communications, and that’s been down an average of 13% over the past two years.

I think a lot of people misunderstand the math of investing.  And they think, you know “down, up, if it’s equal I’m good”.  But, often times, I won’t say often times, always, that is never the case.

JEFF:

Yea.  Sometimes you have to win by not losing.  And last year was one of those years where you definitely wanted to win by not losing and being in these Boring Sectors.  To run with your point Tony, Technology was down 28% last year.  It is up 14% this year, but you’re still down 18%.  So, like you said, a long way to go to get back to even.

 

TONY:

Right.  All right, thank you, Jeff.  And thank you for joining us for this edition of Chart Talk.

 


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