[TOP STORY] The average return rarely exists over time

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SIMON BROWN: I’m chatting now with Wade Witbooi, portfolio manager at Glacier Invest. Wade, I appreciate the early morning time. In a recent article you put out a couple of really great points stood out for me. The one is missed days – but I want to come to that in a moment.

Last year was really [characterised by] high volatility, low returns. It felt an absolute horror. It’s not that much of an outlier according to the data. It doesn’t come every year, but it’s something which, if we are in the markets, we kind of need to expect that there are going to be those more painful years for investors.

WADE WITBOOI: Absolutely. Good morning, Simon, and thanks for the opportunity. You are spot-on in terms of looking back at the year. It was way more emotionally damaging than financially damaging because, if you look at the statistics, it wasn’t an outlier at all because what we do know – and they they’ll teach us this in the textbooks or at the start of any course – yes, markets go up through time, but they also go down in certain periods as well.

Living through those typical periods feels a lot worse than anything else because the data will change through time and, frankly, markets don’t care about our feelings.

And when our feelings are at the worst, it probably means that the bulk of the bad news is already in the price.

SIMON BROWN: I love that phrase: It was emotionally damaging. My portfolio was okay, but my emotions were on a rollercoaster from it. A point you made –and I read it a couple of times because it really resonated, but I’d never actually thought of it before – [was] that you can see that the average return rarely exists over time. So an average return of whatever [is] not actually what we get.

To your point of a moment ago, it’s going to be wild and volatile at points and, if we want that average return, unfortunately sometimes we are going to get emotionally damaged and sometimes we are going to get 2021, where we have a great year and think we are geniuses.

WADE WITBOOI: You are correct. So naturally we just want the average return because the average doesn’t sound too bad; it’s very likely to get you there. But what isn’t encompassed in the average is the path of the return.

It’s like when your favourite cricketer comes to bat and they say he is batting at an average of 40, we kind of expect him to score 40. But we know that rarely happens.

It’s either going to be above or below, and sometimes at extremes as well. But sticking to it skews the odds in your favour to experience the average or the middle point of the whole entire distribution. Therein lies the magic and compounding of investments.

SIMON BROWN: Yes. That cricketing is a nice analogy. They might get a duck, they might get a double century; they are unlikely to get 40. That’s over time. And then the one that stands out. I’ve heard this data point many times. I’ve seen it a few times. You got it back in 1995. It’s the million rand invested in the market, and what happens if you just miss the 10 best days or the 20 best days – which doesn’t sound like a lot. But [if] at some point last year [you] were perhaps worried [and] went into cash, you missed a couple of good days. That has a massive impact on your long-term performance.

WADE WITBOOI: Absolutely. Naturally when things are tough, when the news flow is bad and when you see negative returns, the emotional side of us wants to actually jump out, whereas the investment side of us should actually look at the data and say, you know what, after these big losses it’s probably time to do the opposite. It’s probably time to start entering the market aggressively.

So if you’re actually not going to be there you miss those best days, and the unfortunate thing about the best days is that volatility normally clusters. So in the environment where you normally get your worst days, you will get these thrusts of great days as well in the market, and you don’t have to look further then.

I think it was in November last year where, coming out of a weak October, suddenly there was an outside piece of news that came to light with regard to China – their treatment of the Covid policy.

Suddenly our market gave its best single-day performance that we’d ever seen since about 2020 when our lockdown started. If you weren’t there, even though the news flow was terrible, you would’ve missed one of the top 15 days [of] all time.

That can be detrimental to your long-term financial plan.

SIMON BROWN: Yes, the stats are astounding. Going back to ’95, a million rand invested becomes, call it R34 million. If you miss the 10 best days, you get R18 million. So you’ve gone from R34 million to R18 million. And if you miss the 20 best days you get let’s call it R11 million. You’ve gone from R34 million to R11 million. As I said, I’ve seen this chart before. It grabs my eyeballs every single time.

Wade Witbooi, portfolio manager at Glacier Invest, I appreciate the early morning insights.

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