40% Returns over 20 Years

(One of the benefits of being in freezing Berlin for the week is that I am getting a lot of writing done.  Just finished a paper on investing in stocks and hopefully it will be out soon.  What a beautiful city this is (as was Paris), and looking forward to some great food, beer, and meetings this week.)

I like reading Joel Greenblatt’s books, and there is a nice summary from the recent VIC where Greenblatt presented here (referring to Tilson’s Value Investing Congress, different than Greenblatt’s Value Investing Club (recent post here) which is confusing since Greenblatt is speaking at Tilson’s).  I often see references to Greenblatt’s Gotham Capital returns over 20 years – 40% a year.  If true, those are some of the best returns in the history of markets.  Indeed, an investor in his fund would have seen returns of almost two orders of magnitude above his initial investment.  ie assuming the fund was started at a reasonable $10mln, after 20 years it would be worth $8.4 BILLION.  That is without any withdrawls or additions of course.  Although my best guess is that the fun was small, existed largely during the go-go ’80s and ’90s, maybe used a little leverage, and paid out regular distributions.  Regardless, those are awesome numbers.

To see just how difficult that is check out the great blog post by my buddy Wes at Turnkey Analyst:  Mission Impossible:  Beating the Market Over Long Periods of Time.  (Also lots in the blog archives on the difficulty of sustaining alpha returns…)

From the Turnkey Analyst Blog:

Summary Findings

Before I even begin, here are some findings (I use the CRSP return database which starts January 1, 1926 and runs through December 31, 2010):

  • Earning 20%+ returns over very long horizons is for all intent and purposes virtually IMPOSSIBLE(assuming the market experience of the past ~90 years is representative of the future).
  • 31.5%+ returns over the 1926 to 2010 period imply that an investor will end up owning over halfof the ENTIRE stock market.
  • 33%+ returns imply that an investor will end up owning the ENTIRE STOCK MARKET!
  • A 40% return will have you owning the entire stock market in ~60 years–not a bad retirement plan!
  • A “doable” 21.5% a year implies an investor will own .62241% of the market at the end of 2010. With a $16.4 trillion total market value as of December 31, 2010, this would imply a personal stock portfolio worth $102 billion!!!
  • Warren Buffett–and perhaps a very select handful of others–have been able to achieve 20%+ returns over very long time periods. These individuals represent some of the richest people on the planet because of this very phenomenon.
  • An investor might have an epic run of 20% returns for 5, 10, maybe even 15, or 20 years, but as an investor’s capital base grows exponentially, the capital base slowly becomes ALL capital, and all capital cannot outperform itself!