Are you experienced?

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  By Guest Blogger Doug Rowat

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I’m not quite old enough to remember Jimi Hendrix’s groundbreaking 1967 album release, but I’m old enough to be celebrating this week my 10th anniversary with Turner Investments and my 25th anniversary in the finance industry.

I won’t be celebrating by kneeling down and setting my Bloomberg on fire, but these milestones do have me thinking about the value of experience.

Best-selling business author Mogan Housel once witnessed someone at an airport berating front-desk airline employees over a cancelled flight. Housel recognized him as the CEO of a large corporation and he wondered how someone who had gained such enormous responsibility could have so little self-control when faced with a circumstance that he had no ability to influence—and to berate others who had no ability to influence it either.

Experience has certainly taught me to be more even-tempered in the face of randomness. I remember, for instance, being far more upset by the Japanese earthquake and tsunami in 2011, which primarily affected only Japanese markets, than I was by the Covid outbreak nearly a decade later, which, of course, affected nearly every market. Experience leads to more composure, especially when outcomes are beyond one’s control, and, hopefully, to wiser, more disciplined decisions as a result.

While it’s obviously impossible to quantify the value of experience, I thought it would be interesting to analyze CEO tenure across all S&P 500 companies to see how this might influence underlying stock performance.

The average S&P 500 CEO has a tenure of 7.5 years. So, do CEOs with longer-than-average tenures achieve better long-term share-price performances? Indeed, they do:

Experience matters: average 10-year annualized share-price return (%)

Source: Bloomberg, Turner Investments

If you think that the inclusion of Nvidia in the ‘more experience than average’ CEO category distorts the numbers, you’d be mistaken; the Nvidia influence is minor. I’ll also point out that there are 30 companies in the ‘less experience than average’ CEO category with 10-year annualized returns of 20% or more—Netflix, Amazon, Alphabet, Lululemon, and so on. There are roughly the same number of companies (33) in the ‘more experience than average’ CEO category with 10-year annualized returns of 20% or more—Apple, Microsoft, Broadcom, Eli Lilly, and so on. In other words, there are strong company performances across both tenure categories and an overall sample size that’s sufficient to suggest that experience does, in fact, add value.

There remains the possibility that excellent share-price performance simply perpetuates tenure even if you’re not actually that good a CEO; however, the overall data is still revealing.

Of note, those S&P 500 CEOs with below-average tenures had substantially inferior 1-year, 3-year and 5-year share-price performances as well. So, the argument that short-tenured CEOs aren’t getting full credit because they don’t yet have a 10-year performance track-record isn’t accurate:

Experience matters: average annualized share-price return (%)

Source: Bloomberg, Turner investments. Total return.

Finally, the current S&P 500 CEO with the longest tenure of any active CEO? Warren E. Buffett at almost 55 years.

Need I say more about the value of experience?

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2024/11/23/are-you-experienced/