In Friday’s Morningstar article “Sequoia Fund Symbolizes What Was, But No Longer Is”, John Rekenthaler chronicles the recent woes of the legendary Sequoia Fund and suggests it may symbolize the end of an investing era – things have changed since the time Sequoia launched forty years ago:
- Index funds are more prevalent and fewer managers can demonstrate exception to market efficiency
- Funds today, measured by performance relative to benchmark over shorter time horizons, are less willing to take concentrated bets
- Ownership structures than align fund manager and investor interests are less common and less economically feasible today
- Funds today are managed by committee more often than a single, bold decision maker
The specific reason for Sequoia’s recent problems is Valeant Pharmaceuticals, the Canadian drug stock that after a huge run up has lost more than 85% of its value amid accusations of accounting irregularities and fraud. The Sequoia Fund, which had more than 30% of its assets in the stock, isn’t the only high profile investor who’s been burned by Valeant. Activist hedge fund manager Bill Ackman and his Pershing Square Capital Management have lost significant amounts of their shareholders’ funds betting on Valeant, which has been called the healthcare sector’s “Enron”.
While times have changed in the investment world and some of the reasons listed above may make it more difficult for players such as Sequaoia and Pershing to be successful, the article misses a very important point. The reason we know about Sequoia in the first place is that they were tremendously successful for many years, generating outsized returns for their investors – they were a winner. It actually doesn’t matter why they were successful – it may have been skill, concentrated bets, or luck. There might be a different reason they’re not telling us or they may not even know the reason! It may have been none of these things – it doesn’t matter. The fact is that they were a winner and the stories you hear about are from the winners, not the losers. Unfortunately too many believe that investing with a past winner will yield similar success in the future. The evidence suggests this is simply not true.
Winners like Sequoia are very rare, especially over longer time periods and it’s nearly impossible to identify who future winners will be in advance. The only thing you can know about the future is that there will be winners and losers and the winners will tell their stories.