Should investors evaluate a fund manager's performance over time, or at a moment in time?
The former would seem the obviously correct approach.
Yet the assumptions of our system of investing—on top of powerful behavioral biases that magnify recent performance in investors' minds—may block investors from the achievement of long-term investing success.
This novel advice comes from FPA Crescent Fund manager Steve Romick and product manager Ryan Leggio in a brief commentary published on their site called, "The Importance of Full-Market Cycle Returns."
Indeed, the authors have a point. The SEC mandates that mutual funds report performance in terms of three-, five-, and 10-year returns, as well as calendar-year returns.
But such reporting periods may obscure rather than clarify how a fund manager stacks up against "the market."
To get a clearer view, Romick and Leggio pluck a definition of long-term investing out of "The New York Times Dictionary of Money and Investing" (2002).
According to this textbook definition, a full market cycle is defined as a peak-to-peak period in a broad market that includes a decline of at least 15% from the previous market peak, followed by a rebound that establishes a new market high.
While fund prospectuses and consumer-oriented publications are not typically looking at performance through this prism, legendary long-term investor Warren Buffett certainly does.
Romick and Leggio quote the Berkshire Hathaway chairman's 2013 letter thusly:
"Over the stock market cycle between year ends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results."
