Investments That Are Hard to Own but Worth It? Readers Share
Bonds and Fairholme Fund top the list of investments that have tried investors' patience.
Fairholme (FAIRX) in a landslide.
That was the takeaway from a recent discussion in which I asked Morningstar.com readers to share the investment that had tried their patience but ultimately proved rewarding. The discussion was a counterpoint to last week's topic, in which I asked readers to address their favorite sleep-easy investments.
Readers mentioned Fairholme manager Bruce Berkowitz's volatile charge more than any other investment, though Third Avenue Value (TAVFX), Dodge & Cox Stock (DODGX), and international-equity funds were also cited as being challenging investments to own.
Interestingly, not every investment that surfaced in the conversation is volatile on a stand-alone basis. Indeed, some investors said that they find low-returning investments like cash and bonds challenging to own. They know they need the ballast, but they feel pangs of regret when their equity holdings post much stronger returns.
To read the complete thread or share your own love-hate relationship with an investment, click here.
'It's a Classic Hard-to-Hold Asset'
Given that Fairholme posted stunning returns from 2000 through 2010 only to fall spectacularly in 2011 and come zooming back after that, it should probably come as no surprise that so many investors rated it as their most challenging investment.
Thebestchoice said, "Fairholme was the most rewarding and the hardest to live with."
Markb agreed. "Oh, Fairholme, definitely, for the last five years. It's a classic 'hard to hold' asset because you have to believe that [manager Bruce Berkowitz] is smarter than the market long-term, even when he looks stupid in the short term. Overall it's been well worth it."
Chang said that Morningstar's investor return statistics, which depict a fund's total return alongside the average investor's return in that fund, points up the challenge of using Fairholme well. "Over 10 years, Fairholme has earned a 10.19% average annual return, while investors have only earned 4.99%. That's because they bought and sold at the wrong time, which suggests it was 'hard-to-hold.' (Or, equally likely, they bought it for the wrong reasons, or were simply stampeding toward the hottest fund at the time.)"
Proxysteve notes that Fairholme's outsized volatility owes to a compact portfolio of deeply unloved names. "The extreme concentration of Fairholme is what makes it difficult. Additionally, some of his picks are hard to completely understand. However, the only way to make outsized returns is to 'ignore the crowd.' If you do this understanding the risk, and buying when the price is cheap for the value you get, then your chances of success are much, much better (by risk, I mean risk of permanent loss, not volatility. By cheap, I don't mean that it can't get much cheaper). I feel that Bruce Berkowitz does this very well. Still, years like 2011 can make one ponder if past results were luck or skill. Additionally, the extreme concentration like now can make even the most committed value investor pay attention to the actual makeup of the portfolio more than some other funds."
For RetiredinFL, limiting the position size in Fairholme and another challenging holding, Third Avenue Value, helps limit their impact on the total portfolio, for better and for worse.
"Both funds are volatile and invest in a few assets. Both are long-term-oriented. They constitute about 6% of my portfolio so the damage they could do is limited. Unfortunately the punch of any big gains is also limited by the amount invested."
Proxysteve, meanwhile, has tried to mute Fairholme's volatility by holding it alongside a different type of value offering. "I like to pair it with Yacktman (YACKX) to give me an almost complete 'Buffett-like' long-term portfolio, with Yacktman implementing a more 'forever'-like investment style, and Fairholme a more bold, contrarian one."
But not every Fairholme owner is convinced the ride has been worth it.
Grget wrote, "I've held on for seven years. Hardest to own? Yes. Worth it? Maybe, maybe not. When is Berkowitz going to admit that Sears Holdings (SHLD) and St. Joe (JOE) are dogs? [The fund is] overconcentrated. You should own it like a stock holding, not a fund."
Weiwentg, for one, has thrown in the towel. "Fairholme recently got too hard for me to hold," this investor wrote. "I think that Berkowitz's investment in Sears has a decent chance of going to zero. He is taking on too much risk, in my opinion. I worry that somewhere, his risk management has totally failed. Fairholme was worth it over my holding period, but not anymore."
'My Patience Has Paid Off'
Fairholme wasn't the only volatile investment cited as being difficult to own but ultimately worthwhile.
Meddguy opined that "Dodge and Cox Stock has been far more difficult to own than I ever expected. When I bought into it a number of years ago, I didn't realize how volatile it could be. I figured that a highly rated value fund would do fairly well in a downturn. However, I watched it drop far more than any of my other funds during the rout in 2007-2009. [Yet] it has come back with a vengeance. My patience has paid off in the end."
Apple (AAPL) shares' jagged trajectory has proved challenging but ultimately exhilarating for Mn56308. "I'm a very seasoned Warren Buffett/Charlie Munger-inspired long-term investor. For me owning Apple has been the ultimate test. I've stuck with it since $400 per share. I've been handsomely rewarded for trusting my own valuation of it. But it's been quite the wild ride."
In the category of "hard to own but worth it," Dawgie would add small-cap and REIT funds. "[They] have a lot of volatility and often decline worse in corrections and bear markets, but those same funds have earned the most for my portfolio over long periods of time. They also have outperformed supposedly safer large cap funds during some down markets, such as 2000-03."
'Sooner or Later Their Time Will Come'
Respondents said that international investments had tried their patience, too.
Wrote Yogiman, "International funds have been the hardest because no matter how much the talking heads recommend them, most years domestic funds outperform them. I am retired and have limited my international exposure to 15%. That's it."
Dawgie has also maintained international diversification but has been similarly disappointed in the results. "I continue to keep about one third of my stocks in foreign [securities] because I figure that sooner or later their time will come, but frankly I would have been better off to keep all or most of my investments in domestic funds. Sure, there have been a few years when foreign funds outpaced domestic, but those good years are largely offset by much poorer performance in down markets. I have been investing in mutual funds for more than 25 years, so my view isn't based on just a few years of observation."
Christopher, who holds other international investments, has thrown in the towel on Wasatch International Opportunities (WAIOX), writing, "It was so hard to hold. I sold it all last month, as it had spent the prior year seesawing, while domestic equities surged steadily. I just lost patience with it, though I own other international, emerging- and frontier-markets funds."
Market Vectors Africa Index (AFK), an exchange-traded fund, is W004dal's top love-hate investment. "A very long-term play on Africa requires a lot of patience and a strong stomach," this investor wrote.
Precious metals top Retiredgary's list of investments that can be difficult to use well. "They fluctuate widely in price and are subject to long bear markets, but pay no dividends, interest, or rent and offer no opportunities for growth in the underlying asset. Many people see them as having an insurance as well as an investment value which adds complication to their calculations. Yet precious metals do provide useful diversification and some real insurance."
For Fasaad, PIMCO All Asset All Authority (PAUIX), while theoretically appealing, has proved challenging in practice. "Intellectually, I find [manager] Rob Arnott's so-called 'Third Pillar" strategy (high-yield, REITS, emerging-markets equities, emerging-markets bonds, commodities, and long Treasury Inflation-Protected Securities)--including the ability to short U.S stocks--a terrific idea. The aim is to diversify away an investor's exposure to mainstream equity market risk. Emotionally, Arnott's dismal 2013 performance in running the fund has me questioning not his thesis but whether his stubborn inflexibility or asset bloat is the root cause."
'Life's Too Short'
But other respondents said they simply have steered clear of investments that cause them angst, even if the long-term payoff is there.
Wrote ColonelDan: "At this point in my retirement and investing life, if it's hard to own, I don't and won't own it. Simple and easy is my sleep well at night approach these days!"
Shipmad agreed. "If I have an investment that gives me heartburn, I get rid of it. Life's too short."
Jimoak is one the same page. "For better or worse I sold my last hard-to-hold investment in 2008, it was the [now-defunct] Oakmark International Small Cap Fund. It had a meteoric rise before 2008 then its wings quickly melted. While I should have been prepared for a higher level of volatility, the fact was that I wasn't. Now I prefer not to own anything that makes me worry about it."
'It's Like Watching Paint Dry'
Other respondents said that the volatile portions of their portfolio haven't been the most vexing; the supposedly conservative investments have.
Robandcindy2 lamented, "Bonds, bond funds, bond ETFs! Every advisor (including Morningstar) recommends fixed income as part of a diversified portfolio. Yet in the next breath they discuss how these investments will lose money as the Fed plays out its hand."
Several investors said they own bonds because they know they should, but they're not true believers. Peter5 opined, "The only reason I own any fixed income is that appropriate asset allocation dictates that I do because I am 10 years from retirement."
Sschullo, retired, noted that it can be difficult to settle for a lower return than an all-equity portfolio would deliver, but achieving the highest return isn't the main goal. "It's hard to own 70% of my portfolio in bonds and earning 'only' 6.9% last year in my 30% stock/70% bond split portfolio (compared to others with higher equity allocations). But I know in the long-term my goal of beating or exceeding inflation in retirement will be met. Believe me, I am very satisfied with that 6.9% return in my situation."
Dawgie agreed that bonds are unsatisfying at various points in time, but they earn their keep in tough equity markets. "Bond funds increase in value so slowly compared with stock funds. When markets are going up, it's like watching paint dry. Then there is the constant hand-wringing about whether interest rates will go up and offset the little growth you get from bond funds. However, you realize their worth when market corrections and bear markets occur. Even when they still lose money, such as 2008, at least it is less than stock funds."
BigBrownDog experienced the challenges of holding bonds during the tech bubble, and the merits during the subsequent crash. "I remember sitting with a friend who was well known for his acumen in picking the tech growth stocks. He chuckled as he asked me about the bonds that I owned. Very sad to say, a few years later, my friend watched his bubble-holdings pop at the same time he suffered some horrible health problems, unable to work. My poor little portfolio wasn't worth much, but it was worth something. Yes, Virginia, bonds are a real part of a long-term retirement investment plan."
'It Always Burns a Hole in One's Pocket'
Other respondents said that cash is the investment they find frustrating and rewarding at the same time.
Mwleach said, "[Cash] is hard to own (and unwise to hold--too much at least--over the long term). It always burns a hole in one's pocket, and there are always more attractive places to put it. However, even the small (in retrospect too small) amount of cash I raised/held during 2008 proved to be very valuable, and quite worth it, after invested at the start of 2009."
Stillers agreed that cash can seem unsatisfying, but this reader cited a number of uses, including "an unsophisticated but effective hedge against stock and bond market volatility and risk."
Chief K concurred that the meager yields of cash can be off-putting but is equating cash with his near-term goals for it helps him stay the course. "Cash is the hardest thing for me to own. I did find a way to make it a little easier. My online bank lets me create multiple savings accounts with their own nicknames. a) year 1 of retirement; b) year 2 of retirement; c) medical or dental; d) next car; e) vacation; f) Christmas.
"Logically, all that money could be in aggregated into one savings account that earned exactly the same interest (little to none). But split up that way it constantly reminds me that there is a good reason, well actually a half-dozen reasons, for having five figures worth of cash that 'isn't earning anything.'"
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.