George Soros’ investment track record made him the equivalent of a .400 hitter in baseball.
Yet, in a decade that has been lousy for all investors, even the “Granddaddy of Hedge Fund Managers” has had it tough.
Soros quietly left the hedge fund scene in 2011, turning his fund into a family office. But his last few years in the game were hardly like his first. Indeed, 2010 was Soros’ worst year since 2002, with his flagship fund up a mere 2.63%. The following year was even worse, with his famed Quantum fund reportedly down 15%.
And a quick glance at Warren Buffett’s returns shows that the Oracle of Omaha has had a tough stretch as well.
Over the past 15 years, Berkshire Hathaway’s average annual returns have shrunk to 7.89%.
Granted, that’s over a span in which the S&P 500 has risen only 4.35% a year.
Nevertheless, these anemic returns are a long way from either Soros’ or Buffett’s glory days.
Prior to the dotcom bust in 2000, both Soros and Buffett boasted enviable “30:30” track records: average annual returns of 30% over a period of 30 years.
Today, Buffett’s long-term track record in the 50 years between 1965 and 2014 has fallen to 21.6%. And last year’s drop of 12.06% did little to improve it.
The last time hedge fund managers like John Paulson and Kyle Bass were able to generate outsized returns was in 2008 with a big bet against mortgages. And both Paulson and Bass have struggled since.
With consistent double-digit percentage returns a thing of the past, it is no wonder many of the original hedge fund greats like Soros and Stanley Druckenmiller have called it quits.
So will any investor ever again dominate the financial markets the way Soros and Buffett did between the mid-1960s and the dotcom meltdown of 2000?
The short answer is “no”…
And here’s why…
Why .400 Hitters in Baseball Disappeared…
In his 1996 book, “Full House: The Spread of Excellence from Plato to Darwin,” the late Harvard paleontologist Stephen Jay Gould examined the question of why baseball had not produced a .400 hitter since Ted Williams in 1941.
Gould’s argument is straightforward. The overall quality of performance in baseball has improved over time. That makes achieving “outlier” performances like a .400 batting average less likely.
On the one hand, it became harder for batters to get on base as pitchers mastered new pitches like the slider. Bigger gloves improved fielding. Managers became increasingly savvy in positioning their players defensively and using relief pitchers whose track records indicated they performed well against particular hitters.
On the other hand, batters became bigger and stronger with improved nutrition, the use of supplements and weight lifting. Today, baseball players spend less time brawling in bars and more time working out. Some even watch their diets closely.
As everyone in baseball ups the quality of his game, the top players are performing closer and closer to the limits of what is humanly possible.
That also means less room for “variation” at the extreme edges of the performance bell curve — that is, where outliers such as .400 hitters can stand out.
As Gould puts it, the “truly superb cannot soar so far above the ordinary.”
… As did Hedge Fund Managers Who Generate 30% Annual Returns
I believe that you can apply Gould’s reasoning to the similarly fading returns of the world’s top investors.
The success of both Soros and Buffett has inspired a new generation of hedge fund managers whose own competitive streak made the likelihood of “30:30” track records ever more remote.
Today, there are tens of thousands of “quants” armed with PhDs combing through global financial markets. And these Soros “wannabes” have translated their insights into algorithms, which now account for over 50% of trading on U.S. stock exchanges.
In contrast, Soros described himself in his early career when he focused on mispriced European securities as a “one-eyed king among the blind.” When Soros was investing carefully in European securities in the early 1960s, he was the best simply because no one else was doing it.
Nor has Soros been shy to reveal his “secrets.”
Tens of thousands of George Soros wannabes have paged and parsed through the grandmaster’s classic, “The Alchemy of Finance.”
Paul Tudor Jones, who himself racked up five consecutive 100%+ annual returns in his early days as a trader, summed it up best in his foreword to Soros’ book.
Quoting George C. Scott from the movie “Patton,” as the U.S. general looked out on the tank formations of his German nemesis, Tudor Jones jokingly warned Soros: “Rommel, you magnificent bastard! I read your book!” And Tudor Jones wrote that back in 1987.
Then there is the information revolution.
Today, you have more information on your iPhone than Soros or Buffett ever had when they were trouncing the market back in the 1960s, 70s and 80s. Formerly secretive “Turtle Trading” trend-following systems are now available for free on the Internet.
Throw in the small army of “rocket scientists” at shops like Renaissance Technologies, D.E. Shaw and Goldman Sachs sucking out every tidbit of pricing inefficiency in the market… and the prospects of the world’s George Soros wannabes look even bleaker.
No wonder that Tudor Jones’ own returns have slipped into the single-digit percentages over the past few years, generating 6.3% in 2012 and 2.2% in 2011 — a far cry from his 19% average since 1986.
Why ‘30:30’ Track Records Are a Thing of the Past
There are, of course, some small-time traders cranking out Soros-like 30% per year returns. But that’s akin to comparing a star high school quarterback to, say, a top quarterback in the National Football League. You can day trade your way to huge returns on a small scale. But you can’t do it with $100 million, let alone $10 billion dollars.
You now see John Paulson and others of his ilk appear like shooting stars one day — making billions from “the greatest trade ever” — only to fade away quickly the next.
But there’s a world of difference between “one-hit wonders” like Paulson and cranking out 30%+ returns, as Soros and Buffett did, year-in, year-out for 30 years.
Gould did not exclude the statistical possibility that you could see another .400 hitter in baseball.
Nor can you exclude the possibility of another George Soros or Warren Buffett.
But another investor with a “30:30” track record would be what Gould would call “a consummate rarity.”
And that’s not a bet I’d be willing to make.
Join me at The MoneyShow in Orlando, March 2-5!
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In case you missed it, I encourage you to read my Global Guru column from last week about why you can’t master the stock market the same way as other skills. I also invite you to comment in the space provided below my commentary.