High-Low

High-Low is a form of poker, also called Hi-Lo and Omaha Hi-Lo. As I recall, it was popular when I was in the U.S. Navy, about a million years ago. In it and some variations, the pot is split between the best hand and the worst hand.

In investing, over a three-year period, the best hand for three years can be the worst hand for one. In the February issue of the AAII Journal — AAII stands for American Association of Individual Investors — there is a listing of the top 50 mutual fund performers for 2010. If you extract the gold and precious metals fund performance as an aberration (I couldn’t resist that mining term; sorry), it is clear that small-caps were great performers, as were some emerging-market offerings. Here’s an example: Royce Low Priced Stock (RYLPX). Chuck Royce & Company are small-cap and micro-cap masters. The fund was up 31.4% in 2010 and 53.5% in 2009. That’s about 84% in two years, right?

Yes, but it was down 36% in 2008. So when the fund was bleeding red ink, did we add more money, or did we withdraw all and go to cash? This fund averaged better than 9% yearly for the last five years and better than 11% for 10 years. The only way to win this game of High-Low, though, was to stick with the fund through thick and thin. It would have been even better to add funds in 2008, when prices were cheap.

Interestingly, if you take the funds that have been around for five years, each and every one was positive on average for five years. And, yes, those that have been around for 10 years were, on average, positive for 10 years.