Recently Tocqueville’s largest account, after marking a pause during the latest financial crisis, has again touched the $1 billion landmark that induced me to write “The Rear Long View” in 2007.  I have managed or co-managed this account since the end of 1974, first with my partner, Christian Humann, at Tucker Anthony; then alone; and, since 1992, with the help of my partners at Tocqueville Asset Management.
 
It is the only account for which we have audited statements going back more than 30 years and, although I had always remembered its being worth around $12 million when we took over its management, the audited record showed it multiplying by less than 38 times from the end of 1976 to the end of 2006.  So until 2007, something did not gibe: 38 times $12 million is “only” $444 million — not $1 billion.  Then, while doing some file cleaning, my secretary uncovered an old, handmade (unaudited) performance analysis, which included the years 1975 and 1976.
 
Indeed, the account was worth less than $12 million at the end of 1974.  But in its first two years it gained a touch more than 78 percent as the world’s stock markets rebounded spectacularly from the depths of the 1973-1974 bear market.  When the measuring period was lengthened to include these first two years of the portfolio’s life (1975 and 1976) it was shown to have multiplied by a bit more than 67 times, which after adjusting for capital received and disbursed over the life of the account, was generally consistent with both my recollection and the auditors’ work.
 
With 2010 under our belt, I was curious now to see how adding the last four years of financial crisis, recession, and recovery would affect the account’s overall performance.
 

 
As can be seen from the table above, the account’s performance index did make a new high (on a year-end basis) in 2010, and its annual compound rate of growth over 36 years averaged 12.85 percent per annum, implying that, without additions or withdrawals of capital, the original capital would have multiplied almost 78 times.
 
A look back at this 36-year record calls for some remarks:
 
A dollar ain’t what it used to be:  In fact, 36 years ago one dollar used to purchase roughly 4.4 times what it does today.  Our client’s true wealth, as opposed to his “paper worth,” therefore increased by 17.5 times — not 78 times — over 36 years.
 
The miracle of compounding:  Albert Einstein once stated that “the most powerful force in the universe is compound interest.”  Nothing relative about this:  He was right on the button!  (This is the only finding of Einstein’s that I am in a position to confirm.)
 
Over 36 years our largest account grew at an average compound rate of about 12.9 percent (after charging management fees).  This sounds pretty good but, in fact, it is only about 1.3 percent more per year than the 11.6 percent achieved by the S&P 500 index when the index’s dividends are assumed to have been automatically reinvested.
 
Was a mere additional 1.3 percent per year worth all our efforts?  Judge for yourselves:  Over 36 years, $12 million growing at 11.61 percent per annum will become $626 million, whereas if it grows at 12.85 percent per annum, it will become $932 million — a $306 million difference on an initial $12 million investment!
 
Performance is uneven:  There will always be some great stock market years, followed by mediocre or even negative ones.
 
Surges like the one in 1975-1976 have not been that exceptional.  There were other outsized gains throughout the period — for example, 70 percent in 1979-80; 65 percent in 1982-83; 105 percent in 2003-06; and 59 percent in the last two calendar years.  It is thus very important not to miss on these periods of large gains.
 
But, to average only 12.9 percent per year, there must have been some more-subdued years — and there were (see the table above).  One satisfaction we take from our long-term record, however, is that actual down years were few and rather mild: -5.3 percent in 1977; -1.4 percent in 1984; -1.0 percent in 1990; -4.1 percent in 2002 — until 2008, that is, when our portfolio declined 33.2 percent, almost as much as the S&P 500 stock market index.
 
I have described elsewhere how, after the Lehman Bros. failure, the markets were caught in a panic spiral that engulfed almost every kind of investment manager.  In a long-term perspective, however, what I find most interesting is that the portfolio’s average compound rate of return was only reduced from a bit more than 14 percent annually in 32 years to a little less than 13 percent over 36 years.
 
The calendar makes it look better:  That being said, customarily used annual performance figures can be misleading.  A well-known mutual-fund manager, whose 16-year streak of beating the S&P 500 index every year was brutally interrupted in 2006, once commented that at least some of his extraordinary record was due to the vagaries of the calendar.  In many interim periods, he pointed out, his fund had performed poorly or actually declined.  The same could probably be said of most managers with superior long-term records, including us.
 
It is good to remember that, as I argued in an earlier paper, “volatility is not risk.”  Risk comes either from shaky investment fundamentals, unforeseen outside factors (“black swans”), or gross discrepancies between stock prices and companies’ values.  From that perspective, short-term or medium-term volatility (unless extreme) is mostly “noise” to be largely ignored.  To paraphrase Warren Buffet, time is the investor’s friend and the speculator’s foe.
 
Timing or not timing the market — that is not the question:  I don’t know of any investment manager who has made a lot of money over a significant period of time (several major cycles) by timing the market.  In fact, various studies stress the opportunity loss of being uninvested during market advances that, generally, are near-impossible to forecast — at least in their precise timing.  One such study, from Townley Capital Management and the University of Michigan, covers 30 years; it shows that $100 invested in the stock market in 1963 would have earned $2,333 by 1993.
 
But missing the best 90 days of that period (an average of 3 days a year) would have cut the earnings from $2,333 to just $110.
 
Of course, an opposite argument could be made for avoiding the worst days.  But the debate is pointless in any case, because there is no way one can pick the few best or worst days a year in advance.  Meanwhile, staying out of the market most of the time in order to avoid those elusive bad days would almost ensure missing most of the historical uptrends in stock prices, whereas staying invested keeps one “in the game.”
 
Some of my partners feel a responsibility to be more or less fully invested at all times.  I don’t feel quite as strongly about this.  But all of us always give precedence to stock-picking over economic or market considerations.  We follow contrarian-value criteria to identify and select stocks globally:  If we find compelling new ideas, we buy them regardless of our market views; if we don’t, we do not buy, and cash tends to build up as other stocks in our portfolios reach full value and are sold.
 
Differences among us really better qualify as nuances about the definition of “compelling new ideas,” especially when we view the stock markets as generally overvalued.  But interestingly, in the particular case of the account that is the object of this nostalgia trip, and for which we use several in-house managers, my observation is that, though our individual performances have diverged at times, they show a surprising convergence over the longer term.
 
Catch a rising star:  Receiving fresh cash to manage in a rising market constitutes a conundrum, because whether you invest before or after a stock market surge makes a significant difference.  Investing at the end of 1974 yielded an average annual return of 12.9 percent over the 36 following years, while investing at the end of 1976 (after a two-year surge) yielded an average annual return of only 11.8 percent in the following 34years.  Even though we cannot “time” the market, there are some guidelines we can, and do, follow.
 
At any particular point in time, our existing portfolios typically comprise 1) cheap stocks at or near their buying points; 2) stocks that have moved up, but are neither dirt cheap nor excessively overpriced; and 3) stocks that are approaching our selling target price.  For a new account, stocks in the first category clearly can be bought immediately, and those in the third category should not.  For stocks in the second category, however, the decision is more difficult.  Often we will buy some partial positions; but sometimes we will just wait for a better opportunity.
 
In such situations, some view of where we stand in the market cycle can be helpful.  A glance at the table below, derived from a study by Crestmont Research, makes it fairly clear that it is generally better to buy when prevailing price/earnings ratios are low than when they are high.
 

 
This observation, though not perfect, is consistent with our contrarian-value approach.  We cannot “time” the market, but we can identify periods when the ratio of perceived risk to potential return augurs poorly for future stock market gains.  In such periods (usually ones of high price/earnings ratios), I believe that “constructive inaction” is the best response:  Keep actively looking for new, compelling ideas and, until you find them, buy nothing.  On the other hand, if you do find them, forget about the market’s position and buy them.
 
If you’re so smart…:  As value-contrarian investors, we tend to do worst (on a relative basis) when the market is carried away from its fundamentals by a strong upward momentum.  In the technology and Internet bubble of the late 1990s, for example, our selected account badly trailed the S&P 500, advancing 101.3 percent from 1994 to 1999 while the index surged 251.3 percent.  Fortunately, before our clients lost patience with our “discipline,” the bubble burst and the market suffered three consecutive years of decline while we kept plodding along.  As a result, the account finished the 1994-2003 cycle up 97.1 percent, against the 82.1 percent chalked up by the S&P 500 — with a lot less volatility.
 
After this episode, over lunch, another client recalled, “I knew all along this was crazy, but I must say that, quite a few times, I wished François were a bit crazier.  Now I know why I stayed with Tocqueville.”
 

 
Upon reading a draft of the 2007 version of this paper, one of my younger partners claimed to be surprised.  He remarked that normally I seldom mention performance and, in fact, I advocate that we not publicize it too much, because “performance chasers” infrequently turn out to be very desirable clients.  I answered him that doing so once every 32 years is acceptable, and that when I do it next, he probably would be retired.
 
In fact, this article has not been about “relative” performance and the futile competition that our industry tends to engage in.  It is really about putting wealth protection and growth into historical perspective, and drawing from that exercise some pearls of wisdom.  So, here they are:
 
There are no miracles or magical black boxes in investing for the long term.
 
Patience, discipline, and common sense will always prevail over restlessness and “genius.”
 
For the rest, we can trust in compound interest.
 
François Sicart, in Paris and Mexico 
June 25, 2007, and February 8, 2011
 
This article reflects the views of the author as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made concerning the accuracy of cited data, nor is there any guarantee that any projection, forecast or opinion will be realized.
 
References to stocks, securities or investments in this writing should not be considered recommendations to buy or sell. Past performance is not a guide to future performance. Securities that are referenced may be held in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by Tocqueville. We will periodically reprint charts or quote extensively from articles published by other sources. When we do, we will provide appropriate source information. The quotes and material that we reproduce are selected because, in our view, they provide an interesting, provocative or enlightening perspective on current events. Their reproduction in no way implies that we endorse any part of the material or investment recommendations published on those sites.
 
The returns discussed in this article are based upon the annual returns for each of the last thirty-six years for fully-discretionary accounts managed by Tocqueville Asset Management and François Sicart, founder and Chairman, for its largest client.  The client account predates the formation of Tocqueville on January 1, 1990, and was managed by Mr. Sicart initially as an executive of Tucker Anthony, R.L. Day, Inc. beginning in 1974 through the formation of Tocqueville. Other accounts were managed by Mr. Sicart during the same period, and may have had different investment objectives and achieved different results. A new account with similar investment objectives and style may not achieve similar results.
 
Performance data quoted represents past performance and does not guarantee future results. The Total Return of the client account, other than for the first two years, is calculated in conformance with the AIMR-PPS methodology. With the exception of the first three years, it is audited, but is not covered by the report of independent accountants. The US equities account segment of the client account is neither audited nor covered by the report of independent accountants. The returns were calculated using a time-weighted monthly rate of return formula and are presented net of advisory fees, commissions and other expenses and, assumes reinvestment of capital gains and dividends. The accounts are valued monthly and transactions are recorded on a trade date basis. Dividend income is recorded on a cash basis. Cumulative rates of return for multi-year periods are calculated by linking the annual rates with such periods. The annualized rate of return is equivalent to the annual rate of return which, if earned in each year of the indicated multi-year period, would produce the actual cumulative rate of return over the time period.
 
The client account includes investment in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. The S&P 500 Index is a market-value weighted index consisting of 500 stocks chosen for market size, liquidity and industry group representation. The S&P 500 Index returns include reinvestment of dividends. The volatility and other risk characteristics of the S&P 500 Index may be greater or less than those of the client account. You cannot invest directly in an index.