Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. –Charlie Munger
Compounding over a lifelong investment program to accumulate wealth is your best strategy, bar none. The historical annualized double-digit returns for this fund are certainly satisfactory. Yet, relative to our benchmark, I expect us to do even better. While our gross returns are outperforming our benchmark (the S&P 500 including dividends), our net performance is currently lagging. The fund’s objective is to deliver net returns that outperform the index including dividends over the long run. For most of the fund’s existence, we have maintained this impressive result, and I fully expect net returns to grow above this benchmark again soon.
Compounding derives its power from its geometric non-linear nature. The compounding achieved over past 60-month period is a solid foundation for the fund. The longer you compound, and the greater the rate of return, the more parabolic the performance line will become. You can live a long life, you can compound at high levels, or both. Warren Buffett, in his early partnership years, used the following table to illustrate the enormous power of compounding:
Table 1: $100,000 compounding for 10-30 years with returns between 4%-16%
So, where are we after five years? Our gross returns are literally off the chart, and our net performance at 11.58% annualized is well approximated by the 12% column.
Wharton Professor, Jeremy Siegel, demonstrates in “Stocks for the Long Run” that since 1800, for over 200 years, equities have been by far the greatest performing asset class. Furthermore, he derives a very carefully constructed historical annualized real (after inflation) return in equities of 6.7% over centuries. During the last 5 years the S&P 500 has compounded at over 16% while inflation has remained extremely low. This is a historical outlier and undoubtedly gives retail investors overconfidence in their investment ability. Passive indexing certainly will not continue to provide the same high level of returns that it has for the last five years. It is a cyclical environment and as market indices revert to mean levels, active management will shine again.
The important distinction between our portfolio and the market is the undervalued nature of our current holdings. Market prices swing like a pendulum, from irrational highs to irrational lows, around the true value of a business. The market prices of our securities are extremely low relative to their intrinsic value and are positioned to move considerably higher. Our positions, at low prices today, provide great confidence in future appreciation, and our patience will be rewarded.
Over the last five years, our value-based investment philosophy has remained steadfast. We have maintained our discipline of low turnover and low leverage. By concentrating on the very best investment opportunities, we apply an optimal diversification strategy that provides the environment for outperformance of our benchmark. Since inception, our operational philosophies have kept frictional costs low. And, as we continue to grow our asset base, economies of scale continue to increase this advantage.
Today, we hold an undervalued portfolio of wonderful businesses. Our investment and operational philosophy, alignment of interest principles, investment process, and the portfolio positions provide great return potential for the fund over the coming years. I have not been this optimistic about the fund’s future performance since the inception of this fund. The next five years can be even better than the last.
The above post has been excerpted from a recent letter of Peterson Capital Management.
In 2016, we sat down with Matthew Peterson for an in-depth interview about Dhandho Holdings, Mohnish Pabrai’s permanent investment vehicle. Watch Matthew share insights into the team at Dhandho Holdings:
The performance data presented represents that of Peterson Investment Fund I, LP. This document does not constitute an offer to sell, or a solicitation of an offer to buy membership interests in Peterson Investment Fund I, LP. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to the fund, we advise potential investors to carefully read the offering memorandum, the operating agreement, the related subscription documents, and to consult with their tax, legal and financial advisors. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. All investments involve risk including the loss of principal. This transmission is confidential and may not be redistributed without the written consent of Peterson Capital Management, LLC and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum. Please contact us if you would like any materials such as our investment presentations, legal documents, or web access. We have compiled all information herein from sources we believe to be reliable but cannot guarantee its accuracy. Copyright © 2016 Peterson Capital Management, LLC. All Rights Reserved.