The Secret to Winning Big: Losing Big -- WSJ

Date : 12/14/2019 @ 8:02AM
Source : Dow Jones News
Stock : Jack Henry and Associates Inc (JKHY)
Quote : 150.44  0.39 (0.26%) @ 4:33PM

The Secret to Winning Big: Losing Big -- WSJ

Jack Henry and Associates (NASDAQ:JKHY)
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Fund managers don't buy and hold as often as you might think. Not because they don't want to, but because they can't.

By Jason Zweig 

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (December 14, 2019).

The best-performing stock of the past 30 years isn't Warren Buffett's Berkshire Hathaway Inc., Microsoft Corp. or Apple Inc. It's little-known Jack Henry & Associates Inc., which provides technology to banks and other financial firms from its headquarters in Monett, Mo. ( population 8,873).

Jack Henry's story is common among the " superstocks" with the highest long-run returns. Once-tiny companies, often neglected by professional investors for years, end up earning higher returns than stocks that were far bigger and better-known.

Surprisingly, small investors may have a big edge over Wall Street's giants in capturing these gains. That's because, to earn such superior long-term results, you have to withstand bone-cracking short-term downdrafts along the way -- something most fund managers can't do.

That insight emerges from an analysis by Wilshire Associates for David Salem, co-chairman of New Providence Asset Management L.P., an investment firm in New York.

If you'd invested $1,000 in Jack Henry stock at the closing price on Sept. 30, 1989, you'd have had $2,763,000 as of this Sept. 30, according to the Wilshire data. The same $1,000 invested in Berkshire Hathaway would have grown to $36,000; in the S&P 500, $16,000. Those figures include reinvested dividends.

Earning that spectacular gain, however, would have taken almost superhuman determination: From June 2001 through October 2002, Jack Henry's shares fell 67%. Between October 1996 and August 1999, the stock underperformed the S&P 500 by a cumulative 72 percentage points.

The numbers are consistent: Among the top 10 stocks over the past three decades, four -- Fair Isaac Corp., Kansas City Southern, Best Buy Co. and Monster Beverage Corp. -- suffered interim declines of at least 75%, according to Wilshire. To end up earning hundreds of times your original investment, you would have had to lose at least three-quarters of your money along the way.

Monster's stock dropped 92% from March 1990 through December 1995; the shares cumulatively underperformed the S&P 500 by 534 percentage points between late 1990 and early 2000, according to Wilshire. Yet $1,000 invested in Monster's stock three decades ago grew to $506,000 by this past Sept. 30.

Surely only a professional investor can withstand that kind of pain? Au contraire, says Mr. Salem: "It's potentially career-ending for a manager to hold such big interim losers. I wonder if any manager has ever been able to stay the entire course with stocks like these."

A dirty secret of the investment business is that fund managers don't buy and hold -- not because they don't want to, but because they can't.

That isn't just because clients would fire them for holding on to losers.

The more successful a little company is, the faster it becomes midsize and then large. Consider Inc. It went public in 1997 with a market value of about $300 million, qualifying it as a small company. Less than three years later, the stock had a market value of nearly $13 billion.

Small-company mutual funds that owned Amazon when it was tiny had to sell it once its market value grew into the billions. Otherwise it would have dominated their portfolios. Investors in those funds missed out on nearly all of Amazon's stratospheric growth.

Small stocks earn their highest returns not when they are small but rather as they migrate to large, according to research by finance professors Eugene Fama and Kenneth French.

That description fits Jack Henry to a T.

Founded in 1976, the company first sold shares to the public in November 1985. As of 1996, insiders still owned 41% of the stock; not until 2006 did any institutional investor show up owning 5% or more of the shares. Only in November 2018 did Jack Henry finally grow large enough to join the S&P 500 index, where it currently ranks 402nd by size.

The stock is no longer cheap -- it trades at a steep 41 times the past 12 months' earnings and eight times book value, according to FactSet -- but Jack Henry doesn't ride many market fads. "Most of our growth has been truly organic," coming from business expansion rather than acquisitions, says finance chief Kevin Williams.

Unlike a lot of larger companies, Jack Henry hasn't borrowed money to finance massive buybacks of its own stock; it has no long-term debt. On the back of the company's business cards is the founders' original motto: "Do the Right Thing, Do Whatever It Takes, Have Fun."

Today, 94% of Jack Henry's stock is held by institutions, but it's unlikely any single fund manager has held the shares continuously for the whole wild ride.

Who could? For all the talk about how individual investors have faded as a market force, results like Jack Henry's are a reminder that no other constituency is in a better position to buy and hold...and hold...and hold.

No one can fire you for hanging onto a stock that loses 75% or more; you are free to seek value in the most obscure companies or to find hope in the darkest hour.

In 1974, the financial analyst Benjamin Graham said: "I am convinced that an individual investor with sound principles, and soundly advised, can do distinctly better over the long pull than a large institution."

He was right then, and his words may be even truer today.

Write to Jason Zweig at


(END) Dow Jones Newswires

December 14, 2019 02:47 ET (07:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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