Dear Superinvestor Bulletin Follower,
The 2017 investor day transcript from the legendary Sequoia Fund can be found here:
In their presentation they provide this example to illustrate the drag that taxes from realized gains on excessive portfolio turnover can have on performance:
To demonstrate how powerful this can be over time, we’ve put together an admittedly simplistic but illustrative example.
Assume an investor puts $10,000 in each of two funds on the same day. Over the ensuing twenty years the two funds generate identical pre-tax returns of 10% annually.
The difference is that fund one has an annual turnover and distributed gains proﬁle matching that of Sequoia over the past twenty years. Fund two has an annual turnover and distributed gains proﬁle matching that of our Morningstar Category peer group over the last twenty years.
After twenty years the after-tax gains from fund one are more than $7,500 higher than those from fund two on an initial $10,000 investment. Another way of saying this is that investors in fund one would have 15% more money in their pocket at the end of twenty years than those in fund two, despite identical pre-tax returns.
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Editor, The Superinvestor Bulletin
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.