The Tortoise and the Hare

an Aesop Fable

One day a hare was bragging about how fast he could run. He bragged and bragged and even laughed at the tortoise, who was so slow. The tortoise stretched out his long neck and challenged the hare to a race, which, of course, made the hare laugh.

“My, my, what a joke!” thought the hare. “A race, indeed, a race. Oh! what fun! My, my! a race, of course, Mr. Tortoise, we shall race!” said the hare.

The forest animals met and mapped out the course. The race begun, and the hare, being such a swift runner, soon left the tortoise far behind. About halfway through the course, it occurred to the hare that he had plenty of time to beat the slow trodden tortoise.

“Oh, my!” thought the hare, “I have plenty of time to play in the meadow here.” And so he did.

After the hare finished playing, he decided that he had time to take a little nap. “I have plenty of time to beat that tortoise,” he thought. And he cuddled up against a tree and dozed.

The tortoise, in the meantime, continued to plod on, albeit, it ever so slowly. He never stopped, but took one good step after another.

The hare finally woke from his nap. “Time to get going,” he thought. And off he went faster than he had ever run before! He dashed as quickly as anyone ever could up to the finish line, where he met the tortoise, who was patiently awaiting his arrival.

A fable we are all familiar with. I would hope it would be obvious as to why this fable is relevant to successful investing. But, just in case it’s not…

A newly-released book, Muscular Portfolios, written by journalist Brian Livingston, dissects one of Warren Buffets secrets to long-term investing success. It turns out that from January 2000 through 2015 (a period which contained two serious bear markets and two significant bull markets), Buffett total real return was 169% as compared to the S&P 500’s real return of 28%. With such strong full-cycle outperformance, Livingston asks the question, “By how much did Warren Buffett outperform the S&P 500 during the last two bull markets?

  1. More than 5% annualized
  2. 0% to 5% annualized
  3. He underperformed the S&P 500
  4. Indeterminable

The correct answer is “C”. Buffett noticeably underperformed the S&P 500 during the strong markets of 2002 – 2007 and 2009 – 2017.

How then did he manage to substantially outperform the S&P 500 over the entire period?

The secret is that his full-cycle outperformance came from keeping his losses in check during the market’s inevitable slumps and crashes. On average, Buffett portfolio gained only two-thirds as much as the S&P 500 in each of the bull markets since 2000. But during each bear-market downturn, his portfolio declines were manageably low.

As Buffett himself once stated,

“We will underperform in strong years, we will match in medium years, and we’ll do better in down years. We will likely outperform over a cycle…”

Yep. We couldn’t agree more. You do not need always to be the hare. After all, don’t forget who won the race.