Rational Advisor

In 1998, Robert Olstein wrote an important letter to his shareholders, on the underperformance of his fund. Robert had stayed true to his discipline and not invested in Technology, when technology had been doing well for the previous three years. After the tech crash, he beat the index by 20% margins, and recoevered all of his underperformance and more. He is ranked as one of the top Value managers in the US

Here is Bob’s comments from the June 30, 1998 sharehlder letter

“It is our opinion that everyone in the securities business eventually goes through periods of disappointing performance. If you do not understand this basic fact, you are probably not dealing with your investments realistically. Unrealitic investment expectations can create panic and lead to decisions that could be deterimental to your financial health. We believe that long term objectives are only reached by portfolio managers who stick to a successful long-term discipline even when it is out of favor and not working [during the] short-term. No discipline works all of the time… After 30 years of experience, each tiem the portfolio declines, my stomach still feels some pain. However I manage the portfolio with my head and not my stomach.”
- Robert Olstein June 30, 1998

In September 1998, Bob’s fund had a 21% decline in 6 months. Here is his notes to his shareholders on Sept 1998

“False expectations are dangerous to your investment health. Although disdained, volatility is a necessary evil that must be tolerated when committing to a diversified, long-term equity portfolio. While this volatility can create anxiety, it creates potential opportunities for future long-term appreciation. A portfolio must be managed with one’s head, not with one’s emotions. .. Market psychology goes through schizophrenic changes in reaction to the latest crisis or economic event, resulting in short-term price fluctuations that have no correlation to our long-term views. Investors are usually consumed by the events of the moment and rarely look beyond their current feelings of fear or jubilation. Sound investments need time to emerge. Patience is the greatest virtue an investor can adopt”
- Robert Olstein, September 30, 1998

In his February 28, 1999 shareholder letter, Bob writes..

“Many mutual funds that invest in large capitalization internet-related stocks are currently receiving a lot of press coverage extolling their metoeoric returns. Yet, there is little coverage of the risks taken in order to achieve such high returns. There is also very little press coverage as to what happened to the followers of previous manias that have since proven to be only short term fads. Human nature tends to be attracted to what is currently working, trendy and getting meda coverage. Returns on investments currently in the in the investment spotlight are driven higher and higher by additional investors seeking their fortune, with little regard for the underlying fundamentals or for the risks taken. As always, when conclusions are reached that a particular investment discipline is the only way to go (e.g. indexing, technology, and internet companies), the mass acceptance of that conclusion leads to classic cases of overvaluation which can eventually result in serious corrections and investor disenchantment.”
- Robert Olstein, Feb 28, 1999

Then in March 2000, the Technology bubble burst, and everything that Bob had talked about came to fruition. His portfolios recovered well, and investors that had left him becasue he was not “hot” enough came back

Here’s notes from Bob’s July 15 2000 shareholder letter.

“Although lucky with our timing, our philosophy indicated to us that the speculative bubble could not be sustained for much longer. Assuming that a hot sector or group that is currently appreciating rapidly will continue forever, is dangerous to your financial health. Wall Street’s history is littered with bubbles that have burst, and I am sure that this is not the last. This phenomenon plays on human nature, which tells us to ignore risk and seek instant gratification.”

Bobs fund to date has an 11.89% ten year number and has beaten the S&P 500 by a 5% margin over that period. Even after suffering three disappointing years becasue he did not jump on a “hot” sector.

We should all learn from Bob’s discipline and patience.

Thanks

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