David Fleer
Bristlecone Value Partners, LLC
12301 Wilshire Blvd., Suite 320
Los Angeles, CA 90025 USA
Work 1-877-806-4141

Quarterly Commentary – 1st Quarter 2013

April 25th, 2013

Dear Fellow Investors,

Before we go over recent market developments in more detail and how we are positioning your portfolios for the months ahead, we’d like to share a few thoughts on investment performance and how we pick managers for your portfolio (and ours).

For those eager to keep up with the Joneses, living in affluent areas such as Los Angeles can be challenging since one regularly runs into very wealthy people. The presumption, of course, is that such people must also be savvy investors, sometimes prompting outsiders to wonder whether rich people know something that they don’t.

A good illustration of this situation came up during a neighborhood gathering last summer.  A guest was boasting that, through a fund manager that he had found “thanks to a rich friend of his,” he had been earning close to 20% a year for the past 10 years. Needless to say, his audience was either skeptical or envious: the comparable performance for the broad stock market was about 4% a year over the same period.  The discussion hit closer to home when another guest later asked us whether Bristlecone also had access to managers that averaged 20%.

Although it won’t come as a surprise, the short answer is “no”. None of the equity managers that Bristlecone selected have outperformed the market by a factor of 5 times during the past decade. The long answer is the subject of this letter, for it helps understanding how we pick managers. Our goal is obviously to find managers that have the potential to outperform an appropriate benchmark, albeit on a risk-adjusted basis. For instance, we make adjustments for returns achieved with borrowed money. As most of you know, borrowing amplifies investment returns both on the upside and the downside.

The warning “Past performance is no guarantee of future results” is a required disclosure, yet how many investors pause to reflect on its meaning? It is probably the most important thing to understand: using past performance is not a reliable way to predict whether a manager will beat the market going forward. Despite the fact that there is a whole industry of consultants who analyze 3, 5, and 10-year performance track records, and use all sorts of statistical tools, the bottom line is that all of this work is nearly useless when it comes to determining whether past results were due to skill or luck (…)

Read the full commentary.


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