Fewer Losers, or More Winners?

My memos got their start in October 1990, inspired by an interesting juxtaposition between two events. One was a dinner in Minneapolis with David VanBenschoten, who was the head of the General Mills pension fund. Dave told me that, in his 14 years in the job, the fund’s equity return had never ranked above the 27th percentile of the pension fund universe or below the 47th percentile. And where did those solidly second-quartile annual returns place the fund for the 14 years overall? Fourth percentile! I was wowed. It turns out that most investors aiming for top-decile performance eventually shoot themselves in the foot, but Dave never did.

Around the same time, a prominent value investing firm reported terrible results, causing its president to issue an easy rationalization: “If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too.” My reaction was immediate: “My clients don’t care whether I’m in the top 5% in any single year, and they (and I) have absolutely no interest in me ever being in the bottom 5%.”

These two events had a strong influence on me and helped define my – and what five years later became Oaktree’s – investment philosophy, which emphasizes risk control and consistency above all. Here’s how I put it 33 years ago in that first memo, titled The Route to Performance:

I feel strongly that attempting to achieve a superior long-term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year – and through discipline to have highly superior relative results in bad times – is:

    • less likely to produce extreme volatility,
    • less likely to produce huge losses which can’t be recouped and, most importantly,
    • more likely to work (given the fact that all of us are only human).

Simply put, what [General Mills’s] record tells me is that, in equities, if you can avoid losers (and losing years), the winners will take care of themselves. I believe most strongly that this holds true in my group’s opportunistic niches as well – that the best foundation for above-average long-term performance is an absence of disasters.