Bear's Portfolio at the end of August

You are going to lose a lot of money if you keep this up.

The best performing asset class of the last 100 years is the small-cap-value stocks. Its average annual return is about 14%. You are far better off putting your money into an ETF that tracks that segment. IJS is one such ETF.

Your portfolio is -11% YTD. IJS is up 16%. You are 27% behind!

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" You are going to lose a lot of money if you keep this up.

The best performing asset class of the last 100 years is the small-cap-value stocks. Its average annual return is about 14%. You are far better off putting your money into an ETF that tracks that segment. IJS is one such ETF.

Your portfolio is -11% YTD. IJS is up 16%. You are 27% behind!"

I am not sure that that is fair or accurate. Firstly past performance is absolutely not a guarantee of future success and there is nothing that says that small cap value is the place to be going forward.

Secondly you seem to be implying that anyone that YTD is not up 16% would have been better off in IJS - Saul included.

I think that Bears portfolio is risky and needs fine tuning but I take my hat off to him. By posting his success and mistakes not only do we get to learn but hopefully he is learning as well and with time will refine his process into something more successful. I get the impression that he is young and therefore has many years to refine and improve his technique and see what works and what doesn’t. As long as he is open to new ideas and processes a couple of bad years will not hamper his long term success.

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I think Bear shows courage and refreshing transparency in his willingness to tell the flat-out truth about his portfolio.

Kudos to you Paul Bryant!

Frank

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I am not sure that that is fair or accurate. Firstly past performance is absolutely not a guarantee of future success and there is nothing that says that small cap value is the place to be going forward.

100 years of data is not good enough? This is not a stochastic random process. This is not a coin toss where the next one is independent of the previous 100. Past results matter!

He is chasing performance and zigzagging like crazy. You are doing him a dis-service by egging him on and “supporting” him in this journey.

People in their 20’s have no business messing with individual stocks. they have time and can build fantastic wealth by simply investing in some small-cap index.

Those that chase returns of 25% annually, will end up making 6%.

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You are number Six, I am sure Bear appreciates your concern and passion.

First off no one is “egging him on”. Most have us have expressed concern about his choices and have suggested ways to take a more conservative and safer approach.

That being said what you are suggesting is that anyone that cannot duplicate a 14% return has no place being in stocks and should be blindly pouring money into an index fund just because it has many years of excellent returns.

A middle aged Saul came back from a greater than 50% drop to go on to significantly outperform the market and yes we are not all Saul but if Bear truly learns from his mistakes and truly becomes a better investor because of them I am absolutely sure he can more than overcome a couple of bad years in his young investing life.

Yes if he is not learning and continues to “gamble” then an index approach might be more logical but I think we should give him some leeway and credit.

As to the 100 years of data. While 100 years might be impressive the world changes dramatically with each passing year and the amount of change is exponential. Life did not change much between 1955 and 1975 and yet the change in our lives between 2006 and 2016 is huge. 100 years of back data has little bearing on what will happen going forward and so to suggest that just because an index has delivered 14% returns previously, that it will continue to do so is potentially very misleading.

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That being said what you are suggesting is that anyone that cannot duplicate a 14% return has no place being in stocks and should be blindly pouring money into an index fund just because it has many years of excellent returns.

I wish people would take a good look at the systemic nature of wealth distribution before coming to conclusions about what to or not to do in the market. I’m NOT taking sides in this debate. The aim of this post is to have Fools rethink their convictions.

I start out from Pareto’s 20-80 observation that 20% of the population owns 80% of the wealth. This observation has been verified in other countries and in other markets. This is the real reason why three out of four mutual funds underperform the market averages. This is a mathematical reality, the proportions can change but the distribution is always uneven, it is always a power law distribution. There are many things in nature that follow the power law distribution like earthquakes, a few large ones and very many small ones.

The second point is that when some investor improves his performance he does it at the expense of others. Stuart Kauffman (and others) have described the environment in which we live as “evolving fitness landscapes” meaning that as we individually improve our fitness we change the shape of the landscape and some of our older skills become less valuable. HFT is one such development, HFTraders learned to squeeze a few pennies out of each trade, changing the shape of the market.

If you accept the above, clearly you have two options to choose from: index funds or self directed investing. What you need to accept is that three out of four self directed investors will underperform the index funds. This is mandated by the power law distribution of wealth.

There is no one perfect answer to this conundrum, the choice depends on your wealth, age, obligations, desires, ambitions, your willingness and ability to take on risk. Please don’t settle on a pat answer, think it through.

To beat the indexes, to belong to the top 20%, you have to have mastered enough investing skills to do so. If you are young, you have time to do so, if you are old, you have less time.

Denny Schlesinger

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Thanks Frank and Craig. I appreciate the support.

YouAreNumberSix,

Your diligent, unfailing concern for my well-being surpasses all reasonable expectation of dutiful benevolence. I am as grateful for your guidance as for your interest. However, let’s examine your appraisal of my circumstance and see if you err.

  1. Your loving confidence in IJS may be somewhat misplaced. You conveniently point out its superior performance since 1/1/2016. I suggest a different, but equally arbitrary, horizon for the evaluation of this security. On Jul 3, 2014, IJS was at 116.77. Performance since then has been less than 8% total return…less than 4% annualized (this improves only minimally if you add in the small dividend it pays). No investment is perfect through every period in which it can potentially be apprehended.

  2. “People in their 20’s have no business messing with individual stocks.” “Those that chase returns of 25% annually, will end up making 6%.” Allow me nothing in response to these statements other than to humbly posit that the dogma evinced therein requires substantially greater support than you have henceforth provided (ie, none).

  3. It may even be that the reports of my inability to outperform the market are greatly exaggerated. My monthly reports have spanned a period of seven months. In another baseless effort in data cherry-picking, let me refer you to my first ever monthly post, regarding my performance in February of this year. In this I stated that my performance in the first semester of 2015 was a positive 25%, or 50% annualized. I no more expect to achieve that performance regularly than I do my negative performance in later 2015 and in 2016. I propose that the period in which we agree to examine my abilities as an investor must be expanded.

I wish again to express my gratitude for your warm care and ceaseless guidance regarding my investment trajectory.

I remain:

Your obedient servant,
Bear

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1) Your loving confidence in IJS may be somewhat misplaced. You conveniently point out its superior performance since 1/1/2016. I suggest a different, but equally arbitrary, horizon for the evaluation of this security. On Jul 3, 2014, IJS was at 116.77. Performance since then has been less than 8% total return…less than 4% annualized (this improves only minimally if you add in the small dividend it pays). No investment is perfect through every period in which it can potentially be apprehended.

There are no Klein charts for ETFs but I can calculate the average CAGR at five year intervals using the best fit line which I think is a better reflection of reality than using start and end points which are required for cash flow and accounting:


 **Average CAGR**
 **Dividend included**
**Ticker   15Y     10Y      5Y**
IJS     8.6%    9.6%   14.1%

Denny Schlesinger

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I did not come up with this idea. here is a Motley Fool article that gives interesting facts:

http://www.fool.com/investing/beginning/investing-strategies…

… at the 12.7% compound average annual return of small-cap stocks, that $10,000 would grow to $361,175 after three decades. Definitely not bad.

That’s 12.7% annual for small caps, covering the period from 1926, including the spectacular collapse of the Great Depression. It gets even better for small-caps-value which is what the IJS tracks. The IJS launched in 2000, so it cannot use the terrific 1990’s to juice the record, but still, it is the best performing asset class since inception in 2000.

If you want to create wealth, you need to look no further. If you just want to play and gamble for the adrenaline rush, that’s a different story.

The point of this is not necessarily to help the original poster. There are hundreds of people reading these posts, 90% will not beat 14% annual returns in their investing life. Many of them will underperform so badly they will kick themselves 20 years from now. If I gave even one young investor a pause, that’s good enough.

Saul is an extreme outlier.

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I guess I don’t see it as an all or nothing.
Maybe a guy, or girl, could have a set amount (dollar cost averaging) going into a fund such as IJS as well as keeping portfolio of individual companies. As time goes by, can adjust amounts in each, learn from both, and reallocate.

Just a thought.

Kevin

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I guess I don’t see it as an all or nothing.
Maybe a guy, or girl, could have a set amount (dollar cost averaging) going into a fund such as IJS as well as keeping portfolio of individual companies. As time goes by, can adjust amounts in each, learn from both, and reallocate.

Agree. Take 20% of your money and play with individual stocks. If you can beat the index over a 5-year period, then start expanding individual stocks at the expense of index investing.

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Agree. Take 20% of your money and play with individual stocks. If you can beat the index over a 5-year period, then start expanding individual stocks at the expense of index investing.

Wow, I remember that I did something like that when I first started out. I put part in Mutual Funds (I don’t even think there were Index Funds back then in the age of the dinosaurs), and part in stocks. As I started realizing that the part I had in stocks was consistently doing better than the part I had in mutual funds, I gradually switched funds over (perhaps over the course of a year or two) to all stocks.
Saul

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Dear YouAreNumberSix,

If you want to create wealth, you need to look no further. If you just want to play and gamble for the adrenaline rush, that’s a different story.

Gamble it may be, but suggesting that the only potential payoff is an adrenaline rush is not only disingenuous, but absurd. Wherever you put the odds of achieving it, the chance to do Saul has done stands as its own justification for taking increased risk.

Bear

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“Agree. Take 20% of your money and play with individual stocks. If you can beat the index over a 5-year period, then start expanding individual stocks at the expense of index investing.”

Wow, I remember that I did something like that when I first started out. I put part in Mutual Funds (I don’t even think there were Index Funds back then in the age of the dinosaurs), and part in stocks. As I started realizing that the part I had in stocks was consistently doing better than the part I had in mutual funds, I gradually switched funds over (perhaps over the course of a year or two) to all stocks.
Saul

I wish I had started out with most of my hard earned cash in an index fund when I started out 16 yrs ago, “playing” with 20% to see how I would actually do before committing more. It can be a very expensive lesson figuring out if one is in the top 20% or bottom 80%. As Denny appropriately points out, which group is obviously the most likely camp we’ll fall into? This isn’t a defeatist attitude, but perhaps hard reality. Most of us feel we can be better than average (we’re all better than average drivers, right?), but the huge hurdle is that in this endeavor, we CAN be better than average and yet STILL under perform the indexes.

Furthermore, of those lucky enough (to be that smart, skilled, etc) to be in the top 20%, what are the odds people just starting out are going to be in that group?? If they are in that group, LUCK most likely does have a lot to do with it. With even 1-2 years of outperformance as in Saul’s case, it’s still likely due to luck. The long run is what matters.

As Charlie Munger was quoted in Howard Marks’ memo It’s Not Easy, he says, “It’s not supposed to be easy. Anyone who finds it easy is stupid.”

It’s a great read if you haven’t read it already:
https://www.oaktreecapital.com/docs/default-source/memos/201…

For Bear, it’s great that he’s being brave and whatnot to post his results. It’s a great way to track his progress and his thought process. For some of us it may appear as though he is wandering a bit and hasn’t found a clear strategy. This often doesn’t end well, and I had the same urge to offer some warnings or “advice.” Like, be careful out there, that looks dangerous!

Saul has been very generous with his time and I think offers some great advice with stock picking and selling. His timing for getting into and then out of certain stocks before they plummet has been pretty impressive. Unfortunately, it’s really hard to emulate. Is it luck? Is it skill? Hard to know. We’ve had a bull market now for the past 7 years, so his style is definitely geared towards a bullish slant. Will it do as well in a bear market?

Back to Bear. Here’s my unsolicited 2 cents:

-Keep an open mind when others offer advice and try not to be defensive.

-Don’t overestimate your own intelligence or edge in the market. There’s a whole crapload of other very smart folks out there on the other side of the trade. Pay head.

-Figure out some more objective rules with your stock picking, or perhaps longer term thoughts that aren’t swayed from one week to the next in order to reduce your turnover.

-Try not to anticipate things happening that have yet to be proved. We all want to get in early, but sometimes it’s wise to wait for earnings to start showing up before just assuming or hoping they will (thinking of SUNW here). There’s often plenty of time to enjoy the gravy train after it starts moving.

-Don’t get wrapped up into feeling like you need to tinker with your portfolio to best optimize it. Often the less you mess with it the better you’ll be.

-Keep most? half? of your money in some index fund of your liking while you can get an accurate assessment of where you’re going to fit in with regards to the 20/80 concept. You can still have lots of fun figuring this stuff out, but have some comfort knowing that you’ll match the market at the very least with most of your funds. And by that, you’ll be ahead of at least 75% of investors out there!

Good luck,

Jeff

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Bear,

You’ve taken quite a bit of stick on this thread, and received some support also.

There are many smart people posting on this board - it is one of my favourite port of calls.

But don’t forget that we are all second rate in comparison to the really great investors like Warren Buffett, Peter Lynch or Shelby Davis - all of whom achieved greater than 20% plus returns over very long periods.

The great thing about these people is that their methods are all laid bare for us to study - in Buffett’s shareholder letters, in Lynch’s ‘One up on Wall Street’, and in John Rothchild’s book ‘The Davis Dynasty’.

There is also a great study in how amateur investors can achieve market beating returns in Guy Thomas’ book, ‘Free Capital’.

You may already be aware of all of these sources. But I am impressed by your youth and ambition, and I just wanted to make sure that you are taking your main guidance from the big hitters - rather than relying on the odd useful comment from our community of moderately successful amateurs.

Don’t be discouraged. Determination, a willingness to learn, and sheer ‘stickability’ will get you there in the end - and you will outperform the S&P by a mile.

Ian

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Isn’t small caps performance very economic cycle dependent? I would think either measuring the performance from an inception point at a high in the economic cycle would give a misleading results. Small caps get hammered hard at the start of a recession usually - they do in the UK. I would think that would be the time to buy into an ETF.

JLodie,

“it’s great that he’s being brave and whatnot”

I did not say that JLodie.
I said this:

“I think Bear shows courage and refreshing transparency in his willingness to tell the flat-out truth about his portfolio.”

Frank.

I am not sure where 20% comes from. Over any serious investing timescale, say 20 years, the number of mutual fund managers beating the index for their investors (after all fees) is extremely low. One? It used to be Bill Miller but then he crashed and burned.

There was a wonderful book I read once, I think it was called ‘The Great Mutual Fund Trap’ which went into the statistics about how the outcome of successful managers after 20 years was exactly what random chance would predict! You could count them on the fingers of one hand.

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I am not sure where 20% comes from

http://www.cheatsheet.com/business/why-you-cant-beat-warren-…

https://en.m.wikipedia.org/wiki/Peter_Lynch

http://csinvesting.org/2012/03/18/great-investor-series-shel…

According to this link which I found quickly Buffett only made a miserable 19.7%

But I’ve seen it quoted at over 20% elsewhere.

Ian

I am not sure where 20% comes from.

Initially from Pareto’s observation of the distribution of land in Italy. Later observers noticed the same distribution in other countries. Since then the power law distribution has been seen in many natural and human phenomena such as earthquakes and prices.

Denny Schlesinger