Davis - Essential Wisdom

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Davis - Essential Wisdom

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  • Over 40 Years of Reliable Investing

    Essential Wisdom forTodays Market

  • Recognize That Historically, Periods of Low Returns for StocksHave Been Followed by Periods of Higher Returns1

    Though frustrating, stretches of disappointing results for the market are not unprecedented. History shows however, that these difficult stretches have been followed by periods of recovery. Why? Because lower prices increase future returns.

    Christopher C. Davis Portfolio Manager, Davis Advisors

    History shows that disappointing 10 year periods for stocks, though rare, do occur. While such stretches can test an investors conviction, long-term investors should recognize that these poor periods have always been followed by periods of recovery.1

    This important concept is illustrated in the chart below. The tan bars represent the worst 10 year stretches

    for the market since 1928. The green bars represent the 10 year average annual returns that followed these difficult periods.

    In every case, the 10 year period following these disappointing stretches produced satisfactory returns. For example, the disappointing 1.2% return for the 10 year period ending in 1974 was followed by a 14.8% return for

    the 10 year period ending in 1984. Furthermore, these periods of recovery averaged 10% per year.

    While no one knows what the next 10 years will bring, history shows that investors with long-term goals should consider maintaining or adding to their stock holdings after a prolonged period of poor market returns.

    1. There is no guarantee that in the future the market will be better than it has been in the past. Discussion of stock performance refers to the Dow Jones Industrial Average for the period from 1928 through 1957 and the S&P 500 Index for the period from 1958 through 2012. Past performance is not a guarantee of future results.

    Poor Periods for the Market Have Always Been Followed by Stronger Periods

    0%

    5%

    5%

    10%

    15%

    20%

    Subsequent 10 Year Market Returns 10 Year Market Returns Less Than 5%

    1928

    37

    1938

    47

    0.2%

    9.3%

    1929

    38

    1939

    48

    6.6%

    1.7%

    1930

    39

    1940

    49

    0.1%

    8.5%

    1931

    40

    1941

    50

    2.7%

    12.1%

    1937

    46

    1947

    56

    4.8%

    17.6%

    1965

    74

    1975

    84

    1.2%

    14.8%

    1966

    75

    1976

    85

    3.3%

    14.3%

    1968

    77

    1978

    87

    3.6%

    15.3%

    1969

    78

    1979

    88

    3.2%

    16.3%

    2002

    11

    2012

    21

    ?

    2.9%

    Source: Thomson Financial, Lipper and Bloomberg. Chart represents when the annualized market returns were less than 5%. Periods where there is not a subsequent 10 year period are not shown. The market is represented by the Dow Jones Industrial Average for the period from 1928 through 1957 and by the S&P 500 Index for the period from 1958 through 2012. Investments cannot be made directly in an index. The performance shown is not indicative of any particular Davis investment. Past performance is not a guarantee of future results.

  • There is no guarantee that the average stock fund will continue to outperform the average stock fund investor in the future. Equity markets are volatile and average stock funds and/or average stock fund investors may lose money.

    Avoid Self-Destructive Investor Behavior

    Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March 2013) and Lipper. Dalbar computed the average stock fund investor return by using industry cash flow reports from the Investment Company Institute. The average stock fund return figures represent the average return for all funds listed in Lippers U.S. Diversified Equity fund classification model. Dalbar also measured the behavior of an asset allocation investor that uses a mix of equity and fixed income investments. The annualized return for this investor type was 2.3% over the time frame measured. All Dalbar returns were computed using the S&P 500 Index. Returns assume reinvestment of dividends and capital gain distributions. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. The performance shown is not indicative of any particular Davis investment. Past performance is not a guarantee of future results.

    Average Stock Fund Return vs. Average Stock Fund Investor Return

    0%

    2%

    4%

    6%

    10%

    8%

    19932012

    Average Stock Fund Return

    Average

    Ann

    ual R

    eturn

    8.6%

    Average Stock Fund Investor Return

    4.3%

    Investor Behavior Penalty

    A study by Dalbar underscores the importance of controlling emotions and avoiding self-destructive investor behavior. From 1993 to 2012, the average stock fund returned 8.6% annually while the average stock fund investor earned only 4.3%. We call the gap between these results the investor behavior penalty.

    Why have investors historically sacrificed half their potential return?

    Driven by emotions like fear and greed, they succumbed to negative behavior such as:

    Pouring money into the latest top-performing manager or asset class, expecting the winning streak to continue

    Avoiding areas of the market that have performed poorly, assuming recovery will never occur

    Abandoning their investment plan by attempting to successfully time moves in and out of the market, a near impossible feat

    Successful investors throughout history have understood that building long-term wealth requires the ability to control emotions and avoid self- destructive investor behavior.

    Individuals who cannot master their emotions are ill-suited to profit from the investment process.

    Benjamin Graham Father of Value Investing

  • Understand That Short-Term Underperformance is InevitableMost investors find periods of short-term underperformance frustrating. Yet such periods are inevitable when building long-term wealth.

    To prove this point, we conducted a study to determine what percentage of top-performing investment managers from 2003 to 2012 experienced a period of short-term underperformance on their way to building an attractive long-term track record.

    The results are eye-opening:

    95% of the top-performing managers from 2003 to 2012 fell into the bottom half of their peer groups for at least one three year period

    70% fell into the bottom quarter of their peer groups for at least one three year period

    Though each of the managers in this study delivered excellent long-term

    returns over the entire 10 year period, almost all experienced a difficult stretch along the way.

    Investors who recognize and prepare for the fact that short-term under- performance is inevitableeven from the best managersmay be less likely to make unnecessary and often destructive changes in their investment plans.

    History shows that even the most successful investors have encountered periods of poor performance. Such periods are inevitable and will measure whether an investor has the conviction, courage and discipline necessary to beat the market over the long term.

    Shelby Cullom Davis Legendary Investor, Davis Investment Discipline Founder

    Source: Davis Advisors. 150 managers from eVestment Alliances large cap universe whose 10 year gross of fee average annualized performance ranked in the top quartile from January 1, 2003 to December 31, 2012. Past performance is not a guarantee of future results.

    Bottom Half Bottom Quarter

    70%

    95%

    0%

    20%

    40%

    80%

    60%

    100%

    20032012

    Percentage of Top Quartile Large Cap Equity Managers Whose Performance FellInto the Bottom Half or Quarter for at Least One Three Year Period

  • Sixty years of successfully investing in equities has

    taught us that long-term investors will inevitably

    encounter economic and market uncertainty. History

    shows that uncertainty is the rule, not the exception.

    Despite these frustrating stretches, the market has

    continued to grow over the long term.

    To benefit from the wealth-building potential of stocks,

    investors must remain unemotional, disciplined and

    focused on the long term. With that in mind, we have

    collected three essential pieces of investment wisdom

    that all investors should remember as they navigate

    todays market.

  • This material may be shared with existing and potential clients to provide information concerning market conditions and the investment strategies and techniques used by Davis Advisors to manage its client accounts. Please refer to Davis Advisors Form ADV Part 2 for more information regarding investment strategies, risks, charges, and expenses. Clients should also review other relevant material, including a schedule of investments listing securities held in their account.

    All investments contain risk and may lose value. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market.

    Davis Advisors investment professionals make candid statements and observations regarding economic conditions and current and historical market conditions. However, there is no guarantee that these statements, opinions or forecasts will prove to be correct. All investments involve some degree of risk, and there can be no assurance that Davis Advisors investment strategies will be successful. The value of equ