Research & Performance
Performance
We are confident because we have extensively back-tested our strategy. Before knowing the results, we randomly selected 18 companies which we believed to have durable competitive advantages. We back-tested the portfolio versus the S&P 500 for the last 21 years. We deducted 1% per annum from our portfolio and kept 17.5% of the starting capital in cash. We also tested our strategy via various means to remove or minimize operator bias. Please note that these are hypothetical results; they may not be indicative of future performance, and actual results may differ. Please see our disclaimer and methodology below before proceeding to the portfolio results.
Disclaimer
Past performance is not a guarantee for future results, which may vary. All investing involves risks. The potential for profit also includes possible loss of principal. These are hypothetical back-tested returns and are not representative of actual trading accounts. Actual clients’ results may differ materially than the results portrayed, and there is no guarantee that investment objectives will be met. The results are based on information from a variety of sources we consider to be reliable, but we do not represent that the information is accurate or complete. The results do not constitute investment advice or recommendation, are provided solely for informational purposes, and are not an offer to buy or sell any securities. The studied time period of 21 years may not be of sufficient length to account for all possible market cycles and conditions. Therefore, actual results may be materially different than the performance portrayed. The reported returns reflect a deduction of 1% per annum for management fees (see methodology), but do not reflect trading costs, transaction fees, or taxes. As with any researched results, there are limitations, some of which are, but are not limited to: selection bias, confounding, survivorship bias, study scope limitations, sample size limitations, experimenter bias, and methodological limitations. Performance results are representative of one portfolio model and may not be reflective of the portfolio model chosen or customized to the client. Actual client accounts may be more or less concentrated than the model presented and may experience more or less volatility. Actual trading of clients’ portfolios may differ significantly than back-tested results due to trading slippage of the purchase and sales price or the inability to purchase/sell the desired number of shares due to market conditions. The reported results include reinvestment of dividends; however, LCM may choose to reinvest or not reinvest the dividends on behalf of its clients. This may materially affect the results as compared to the model. The value of the investments and the income derived from them may fluctuate over time. The results are based on the total return of assets and assume that all received dividends and distributions are reinvested. Clients’ results from a performance fee structure may differ from a percentage of AUM fee arrangement depending on the performance and market conditions.
Methodology
LCM randomly selected 18 businesses that it believes have durable competitive advantage. Without knowing the results in advance, a test period of 21 years (1999-2019) was chosen. Portfolio analytics was done using www.portfoliovisualizer.com. Not all of the companies were trading for the entire time period. For companies that IPO’d during the time period, the portfolio was re-balanced on January 1st the year after the IPO with equal weighting of all securities. Otherwise, there was no rebalancing. In the beginning, 17.5% of the portfolio was allocated to cash. Cash was not rebalanced, and no cash was added to the portfolio. Dividends were reinvested. Annually, there is a fixed withdrawal of 1% to represent management fee expense. Comparative index is the Vanguard 500 Index Investor via www.portfoliovisualizer.com. Annual returns were calculated using the investment calculator from www.calculator.net by using the beginning and year end values obtained from www.portfoliovisualizer.com.
Please watch the below video showing the results of our back-testing strategy:
Great Companies Portfolio 21 Yrs
Back-test
1999-2019: S&P 500 annualized rate of return: + 6.62%
1999-2019: Great Companies portfolio annualized return: + 12.83%
We were concerned about operator bias; after all, hindsight is 20/20. So we removed all the tech companies. The results were just as impressive: + 12.41% per annum. The data shows that performance is more related to the companies’ durable competitive advantage than being in any specific industry.
Great Companies 21 Yrs
Back-test w/o Tech Companies
1999-2019: S&P 500 annualized rate of return: + 6.62%
1999-2019: Great Companies portfolio without tech annualized return: + 12.41%
We then went further and removed all tech companies plus any company that became public in the past 21 years; we were left with old-fashioned companies without any new additions. The result was + 10.14% per annum.
Great Companies 21 Yrs
Back-test w/o Tech & IPO’s
1999-2019: S&P 500 annualized rate of return: + 6.62%
1999-2019: Great Companies portfolio without tech & new additions: + 10.14%
Great Co’s portfolio has fewer down years compared to the S&P 500:
| 1999 – 2019 | S&P 500 | Great Co’s Portfolio | Great Co’s Portfolio w/o tech | Great Co’s Portfolio w/o tech & new additions |
| # of down yrs | 5 | 3 | 2 | 3 |
| Worst down yr | -37.02% | -32.92% | -30.79% | -22.22% |
| Average Down yr | -16.95% | -15.73% | -20.61% | -14.50% |
Great Co’s portfolio’s up years compared with the S&P 500:
| 1999 – 2019 | S&P 500 | Great Co’s Portfolio | Great Co’s Portfolio w/o tech | Great Co’s Portfolio w/o tech & new additions |
| # of up yrs | 16 | 18 | 19 | 18 |
| Best Year | +32.18% | +40.72% | +36.10% | +38.98% |
| Average Up Year | +16.07% | +19.01% | +17.22% | +15.35% |
As you can see, the franchise portfolio performed better in both bull and bear markets.
Great Companies vs. S&P 500
Different Time Periods
The table below compares the average per annum returns of the S&P 500 versus Great Co’s portfolios during different time periods. In all of the time periods, the Great Co’s portfolio outperformed the market average despite having 17.5% of the initial investment in cash and a 1% annual deduction for fees.
Average annual returns of Great Co’s portfolios versus S&P 500 in different time periods:
| Period (# of yrs) | S&P 500 | Great Co’s portfolio | Great Co’s portfolio w/o tech | Great Co’s portfolio w/o tech & new additions |
| 1999 – 2004 (6) | 1.18% | 9.72% | 9.72% | 7.77% |
| 2005 – 2009 (5) | 0.34% | 5.96% | 5.94% | 0.73% |
| 2010 – 2014 (5) | 15.28% | 21.24% | 20.07% | 20.89% |
| 2015 – 2019 (5) | 11.55% | 15.63% | 14.95% | 12.62% |
Average annual returns of Great Co’s portfolios and S&P 500 over the last 21 years:
| Period (# of yrs) | S&P 500 | Great Co’s portfolio | Great Co’s portfolio w/o tech | Great Co’s portfolio w/o tech & new additions |
| 1999 – 2009 (11) | 0.80% | 8.00% | 7.99% | 4.51% |
| 2010 – 2019 (10) | 13.40% | 18.40% | 17.48% | 16.68% |
Relative average annual outperformance of Great Co’s Portfolios strategies to S&P 500:
| Period (# of yrs) | Great Co’s portfolio | Great Co’s portfolio w/o tech | Great Co’s portfolio w/o tech & new additions |
| 1999 – 2009 (11) [Low return period] |
9.00x | 8.99x | 4.65x |
| 2010 – 2019 (10) [High return period] |
0.37x | 0.30x | 0.24x |
Great companies portfolios do much better during periods of low returns, compared to periods of high returns. In the past decade, the return from the market has been extraordinary; however, we do not believe this is sustainable. If the market were to go into a period of low returns, investing in great companies should be even more beneficial. We believe now is an excellent time to invest in great companies.