"Your older picks are doing well, but your more recent ones aren't as good"
If I had a dollar for every time I'd head that line, I'd… well, have a few dollars!
The comment comes usually from members of the investment service I run, Motley Fool Share Advisor.
Share Advisor, (as if you didn't know!), is our oldest investment service here at Motley Fool Australia. It's been running since 2011, and has a pretty good track record.
At the time of writing, our average recommendation has gained 46.2% each — including the losers — versus 32.2% for the ASX.
And — as the opening quote suggests — most of our big winners are the recommendations from 2012, 2013 and 2014.
So my correspondents are right?
Well, yes. And no.
Let me explain.
Imagine you start on Monday as the new wine taster responsible for Penfolds Grange. Yes, it'd be a hard life, but someone has to do it.
You taste the brand new 2019 vintage, and it's, well, ordinary.
"This is terrible", you say. "Your 1995 vintage is so much better!"
"You should sack the current winemaker, and get the other guy back…"
You're already ahead of me, aren't you.
Of course the 2019 vintage tastes rather ordinary. Right now, it's just grape juice.
It hasn't had the time to mature.
To take high quality ingredients, well chosen, carefully crafted and expertly stored… and given time to become the Grange we know and love.
(In theory… I'm told. I haven't had the pleasure yet.)
And just as you were already ahead of me on the wine, you're with me on the analogy, right?
You see, a great stock pick, like a great wine, only comes into its own over time.
Firstly, you need to be right.
But that's not enough. Early on, the market probably just straight out disagrees with you.
The share price might even fall after you buy it.
Then, if you're right, eventually the share price starts to head in the right direction. Your investment thesis — growth, value, turnaround, cyclical, or something else — has started to play out.
But it's rarely a smooth ride. Maybe there are setbacks. Maybe the share price is just volatile.
Or maybe, like the tortoise and the hare, your thesis plays out slowly, but steadily.
If you're right — and if there's enough juice in the story, the passing of the years will deliver growth on growth on growth… that marvellous thing called compounding.
In all cases, but particularly in the latter case, the longer you hold the investment, the better the returns look. After all, that's precisely what compounding does, right?
It's very hard to earn, in one or two years, the sorts of returns that you can earn over seven or eight… by definition!
Almost impossible.
So, yes, my interrogators are right — the older recommendations have performed much better than the newer ones… just as you'd expect.
But guess what? At some point in the future, the recent recommendations will be the old ones!
Now, I can't offer you any guarantees or promises, of course… but if we're right, as we have been in the past, compounding will hopefully keep working for us…
…at which time, someone will tell me that the new recommendations aren't as good as the old ones!
The answer? Buy 'old' recommendations when they're 'new', and let time do the work!
Think long term, Fool… Your future self will probably thank you for it.
Fool on!
