Original publication date: March 31, 2016

Key takeaways:

• Sports culture has conditioned fans to think about success in one-year increments. However, investors, unlike sports fans, don’t start from zero at the beginning of each year.
• In investing, the best performers are those who perform above average, even if not spectacularly so, year-in and year-out with few if any poor years.

Major League Baseball’s 2016 season starts on April 3, and with it the hopes of every team’s fans for a World Series championship. Spring is when fans of last year’s losing teams such as the Philadelphia Phillies (99 losses last year), the Cincinnati Reds (98 losses) and the Oakland Athletics (94 losses) can erase the memories of last year and start at 0-0 like everyone else. As a sports fan and an investment manager, I’ve often thought about what constitutes excellence in both disciplines. My inner sports fan has been conditioned since childhood to think about baseball and other team sports as one-year contests of superiority. The teams play their regular season schedules, with the best among them moving into a playoff, and the winners of that playoff meeting in a championship game or series. The championship winner claims the bragging rights for that season, everyone rests for several months, and the next year the cycle repeats starting with a clean slate.

Our pattern-seeking minds might want to apply the sports season framework to the investment arena. Investors and their advisers are often encouraged by marketers, advertisers or friends and colleagues to put money with “last year’s champion” in a given category of investment. While it would seem to make sense that a top one-year performer would be a better place to put money than an average or poor performer in the same year, this mindset ignores the reality that unlike sports leagues, investors don’t reset their portfolios every year. A portfolio’s value on December 31st will be same value your portfolio has when markets open on January 2nd. This means the equivalent of a World Series championship or two cannot make up for prior years of poor performance.

In a client letter I wrote around this time five years ago, for fun I looked at the records of Major League Baseball teams over the ten-year period from 2001-2010. I’ve updated this to include the last five years - for the sake of brevity here I will show only the records of the top five and bottom five of the thirty Major League Baseball teams during the period.

If we thought of baseball records in a cumulative way, we would see things differently than we do using a season-by-season approach. Yankee fans and New York sports reporters focus on the fact that their team’s last World Series appearance was in 2009. Doing this glosses over the fact that the team has averaged over three more wins per season than the second-winningest franchise over the period. Game after game, Yankee fans have gone home happy more often than any other fans in baseball. Meanwhile the Kansas City Royals, despite two consecutive World Series appearances and a World Series title last year, remains the worst-performing team in Major League Baseball over the past fifteen years. If baseball standings were kept cumulatively, the Royals might have been out of business before finding their recent success.

Because investors, unlike baseball fans, carry last year’s record into this year, we need to focus on cumulative long-term results. One year results, while important to monitor, can be positively or negatively affected by any number of anomalies that are unlikely to be repeated. I think it is more important to see whether anything has changed about the investment process, philosophy, or managements of the underlying businesses that comprise your investments.

Going back to the cumulative baseball standings, another record that stands out to me is that of the Atlanta Braves. The Braves had the fifth-best record out of thirty MLB teams over the last fifteen years despite having no World Series appearances during that time. It was clear from looking at the Braves’ annual results that they did this by avoiding very bad seasons. From 2001-14, the team never lost more than 83 of its 162 games per season (48.8% winning percentage). Even last year’s 67-95 season (perhaps an anomaly?) did little to harm the Braves’ long-term performance relative to its peers.

While a Braves fan craving a World Series appearance has endured fifteen years of disappointment, an investor who held a portfolio in the top 17% of its peers over the last fifteen years would (or certainly should) be ecstatic with that performance. Noted investor and Oaktree Capital Chairman Howard Marks discusses the “funny bit of math” that leads above-average, consistent but not stellar, short-term performers to compile superior long-term results in this section of a longer video on the Talks at Google YouTube channel.

We don’t invest money in a business venture or to fund significant life events such as retirement or paying for a child’s college education expecting to achieve those objectives in a year. Yet we are vulnerable to media messages and our own mindset that can lead us to think in terms of seasons, tournaments and championships - periods of one year or less - when examining potential investments. Because we cannot hit the reset button at the beginning of each new year, it might help to think less about winning and championships and more about the much longer term when evaluating an investment.