In Praise of Stan A. Poors, Master Portfolio Manager

I’d like to introduce you to the greatest portfolio manager you’ve never heard of.

His name is Stan. A. Poors and he manages several portfolios, the most well-known of which comprises approximately 500 of the largest American companies.

It’s possible you’ve never heard of Stan (though he is a bit of a recluse, he does insist on being on a first name basis), probably due to the fact that the company he works for isn’t primarily in the portfolio management business. 

It also seems that Stan sees little value in speaking with the public, perhaps because he has a long, long history of being told that he’s doing it all wrong since he doesn’t set out to try to "beat the market."

Here’s what we know about Stan’s portfolio management style.

• He’s the ultimate consensus follower. He never sells winners and he allows them to grow without trimming.
• He doesn’t shun stocks simply because other investors like them.
• He doesn’t consider valuation at all when constructing his portfolio, nor does he consider himself a "value" or "growth" investor.
• His annual turnover rate averages 4-5% per year on a names basis, but well less than 1% on a market cap basis.¹
• He neither hedges nor manages for volatility or currency fluctuations. His knowledge of the Greeks is limited to "Alphabet" and "Delta."
• Though his portfolio contains around 500 companies for diversity, he doesn’t avoid substantial concentration by company or industry. In fact, at present his largest position is the same weight as the smallest 221 positions.²
• Positions exiting his portfolio generally only do so after they’ve lost much of their value.
• Since he’s been managing the portfolio, approximately 30% of the 98 years have been losers.³
• The overwhelming majority of his gains since inception have come from a small percentage of stocks.

Stan’s been doing it long enough that his returns are statistically meaningful. He’s never had the hot hand, and yet his returns—just shy of 10% annualized for the last century⁴—have been enough to turn small fortunes into massive ones for those patient enough to invest alongside him. 

How good is Stan’s track record? According to SPIVA, which tracks the performance of active managers against their benchmarks, Stan outperformed 65% of all large cap portfolio managers in the past year, 84% over the last decade, and 90% over the last 15 years.⁵

When asked what explained his long-term outperformance of his peers, Stan wouldn’t bite. "None of them talk to me, so I wouldn’t really know what they’re doing." When pressed to offer some conjecture, Stan said, "Well, I suspect that the people in the 10% are mostly doing something different than the 90%."

Stan voiced some surprise that so few of his peers had adopted a low-turnover strategy. "Maybe because it doesn’t sound clever enough. So you do all this when it makes more sense to not do it?" Stan said this as he was leaving to go fish. It was 10 in the morning on a Thursday.

The thing is…

The S&P 500 is an index, not a portfolio. You can invest directly in an index. There is no "Stan," at least not in the way that I’ve conceived of him here. (There is a technical and not-a-little-bit tedious discussion to be had about whether indexes are actually actively managed since they’re based upon rules that were set out by human beings, but this isn’t the place for that conversation). 

We tend to think of investing as being evidence-based, with one of the central precepts of the financial markets being that they are efficient, which is another way of saying that they are rational in aggregate.

But that doesn’t mean that you hear a whole lot of professional asset managers talking about how little they do to manage their portfolios. 

Why don’t more managers start thinking like Stan? It isn’t to say that rapid portfolio turnover is the cause of underperformance, but the numbers suggest that turnover hasn’t helped. 

Similarly, buying cheap stocks and selling expensive ones seems smart and logical. After all, who doesn’t love a bargain? And how on earth can selling something at a profit be harmful?

And yet, Stan’s model of lethargy bordering on sloth, of benign negligence, of beautiful simplicity, has outpaced nearly all comers. What if the answer to providing the best outcomes for investors is simply to do less?

Here at Motley Fool Asset Management, we don’t believe it makes much sense to be doctrinaire about investing processes. Clearly there’s no one way to long-term investing success, but the failure of most asset managers to outperform the S&P 500 suggests strongly to us that low-turnover investing offers a higher-probability route to satisfactory returns.

While our turnover rates aren’t quite as low as Stan’s, at a minimum, our strategy comes with a nod to the wisdom of Blaise Pascal, who said, "All of humanity's problems stem from man's inability to sit quietly in a room alone."

We believe that Stan, were he real, would approve.

A public sighting

I was recently honored to join Ben Carlson and Michael Batnick on their Animal Spirits podcast to discuss the philosophy that underpins how Motley Fool Asset Management manages our portfolios, and how humans' default to action has been so expensive over time. Please give it a listen!