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Oct 31, 2023

Trailing Returns Signal Buying Opportunity

Christina Siegel Malbon, Samantha McLemore

"In investing, what is comfortable is rarely profitable." — Robert Arnott

“Buy low, sell high” may sound easy, but implementing that strategy is anything but natural.  The recent sell-off has triggered a buy signal that’s historically worked very well. 

Since July, the market declined -10% triggering a risk-off mentality.  Stock sales picked up as prices went lower. 

The Opportunity Equity Representative Account gained over 30% net of fees from early May through the end of July, a big move for a diversified portfolio.  In the recent pullback, the trailing 3-month performance hit -20% net of fees, a decline that has historically been a good indicator of strong forward performance. Since inception in 2000, there have been 25 instances where the portfolio's returns declined more than 15% on a 3-month basis. In these instances, the portfolio showed strong forward performance gaining an average of 44% net of fees in the next 12 months, well above normal returns.  In addition, longer-term returns were also stronger at 20% and 21% net of fees per year, respectively over the next 3- and 5-year periods1.

While the future is uncertain, we know historical periods like today presented attractive buying opportunities. Based on a report by Vanguard Research, outperforming managers underperform their benchmark 40-60% of all one-year periods. Over a ten-year period, investors in top performing managers can expect to experience a drawdown lasting two years, with the majority of funds experiencing a maximum drawdown of greater than 20% vs the benchmark.

While all investors want to “buy low and sell high”, it’s challenging to maintain this conviction because lower prices are associated with higher perceived risk.

We believe today’s prices will prove an excellent buying opportunity for investors willing to take a long-term view and willing to make decisions based on historical facts rather than fear. 

1The performance figures in the above piece are for the representative Opportunity Equity account and reflect the deduction of investment management fees and certain other expenses. Returns greater than 1 year are annualized.

Opportunity Equtiy Strategy Annualized Performance (%) as of 9/30/23
  1-Year 3-Year 5-Year 10-Year Since Inception (12/30/1999)
 Opportunity Equity (gross of fees) 20.31 -0.05 0.40 7.85 7.27
 Opportunity Equity (net of fees) 19.13 -1.04 -0.60 6.78 6.21
 S&P 500 Index 21.62 10.15 9.92 11.91 6.63

The views expressed in this commentary reflect those of Patient Capital Management portfolio manager(s) as of the date of the commentary.  Any views are subject to change at any time based on market or other conditions, and Patient Capital Management disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. For additional information about Opportunity Equity Strategy performance, please click on the Opportunity Equity Strategy Composite Performance Disclosure. Past performance is no guarantee of future results.