Rip Van Winkle, 2010

A little over a year ago, we published a post entitled "If Rip Van Winkle took a one-year nap before September 15, 2008." The purpose of the post, as we explained at the end, was not to encourage the kind of negligent attitude that Washington Irving ascribed to the protagonist of his famous short story (a character of "insuperable aversion to all kinds of labor," who would rather "starve on a penny than work for a pound") but rather to point out the importance of investing in good companies of the type we discuss on this blog, a portfolio of which had returned to within 5% of its original value, one year after the collapse of Lehman Brothers and the most ferocious bear market in over seventy years.

At that time, the broader market was still down over 16%. We have previously written about our belief that "just owning the market" is not something we recommend in any economic environment, but that in periods such as the 1970s or the current environment, just owning the market can be far more problematic than in more friendly environments such as the 1960s or the 1990s.

Now, two years after the start of Rip Van Winkle's hypothetical September 2008 nap, it is the overall market that is almost back to the prices it hit in the week before September 15 (the Monday after Lehman Brothers declared bankruptcy the day before, and a day which saw the Dow Jones Industrial Average plunge over 500 points by the close).

On September 11, 2008 -- the Thursday before the "hurricane hit Wall Street" -- the Dow closed at 11,433.71 and the S&P 500 closed at 1,249.05. At the end of September of 2010, the Dow Jones Industrial Average closed at 10,788.05 (down about 5.6%) and the S&P 500 stood at 1,141.20 (down about 8.6%).

Over the same period, the Taylor Frigon Core Growth Strategy (an actively-managed portfolio of growth companies of the type we discuss on this blog, managed using a discipline based upon the principles we discuss on this blog) is above its September 11, 2008 mark by over 16%, and has grown at a compounded annual rate of over 13% per year, net of fees, between September 30, 2008 and September 30, 2010 (complete GIPS-compliant performance numbers, with important GIPS disclosures, are available here).

We hesitate to highlight market performance over a period of only two years, because we know that what really matters to real investors is performance over periods of thirty, forty or even fifty plus years. However, we believe that bringing Rip Van Winkle out into the sunlight again at the end of September, 2010 is helpful to our readers for a couple of reasons.

First, it is an important reminder to investors to "stay on the train," rather than trying to anticipate market plunges. One year later, investors who owned growing, well-run companies would not have noticed much difference in their portfolio prices if they had been asleep for a year. Investors who panicked at the bottom and bailed out, as evidence suggests many investors did, made a very grave mistake. Two years later, the results are even more conclusive.

Second, these numbers speak to the importance of selecting the right kinds of companies. We have discussed the importance of selecting companies involved in major "paradigm shifts" in many previous posts (see here for example), and have discussed the very important "exaflood" paradigm shift in many posts stretching back more than two years.

Finally, while Rip's nap illustrates the fact that investors can actually stay invested and come out ahead through even the most trying market gyrations, his laissez-faire attitude towards what we might call "due diligence" can also serve as a cautionary tale for investors.

We believe and have said before that investment is not rocket science, in spite of the air of mystery cultivated by many in the financial services industry and by those who write books about it. However, it is not something that simply "takes care of itself." Investors must follow a consistent discipline, and put in the required work on their portfolio every day (unlike the main character in Washington Irving's short story). We have discussed this topic both for those who wish to do it themselves and those who would prefer to hire someone to do that work in several previous posts, such as here and here.

While there is no way of telling what the upcoming year holds, we believe that these "Rip Van Winkle" lessons will continue to be important for investors to understand in the years ahead.

Subscribe to receive new posts from the Taylor Frigon Advisor via email -- click here.