An unauthorized analysis of MF results

Investment Analysis Clubs Saul’s Investing Discussions
#1

I happened yesterday to be looking down the list of MF SA recommendations and happened to notice that back in 2002, David recommended Disney. (As it was well more than 30 days ago…I guess I’m allowed to mention the name of the stock). It was a great recommendation and is now up 5316%. In fact he recommended it again in 2002 (two of his five recommendations for the year), twice more in 2003 (out of another five recommendations) again in 2004, and a final sixth time at the bottom of the great recession in Dec 2008. They all did great.

If we think of this as a portfolio, and each of the six recommendations as a $1 investment (for simplicity), here’s what they are worth now:

1st rec of $1 – up 5316% - now worth $54.20
2nd rec of $1 – up 3271% - now worth $33.70
3rd rec of $1 – up 933% - now worth $10.30
4th rec of $1 – up 709% - now worth $8.10
5th rec of $1 – up 1246% - now worth $13.50
6th rec of $1 – up $543% - now worth $6.40

The whole six recommendations, which cost $6, are now worth $126.20 (an average of $21 each, up 2000% each on average).

How many recommendations did David make in total. I counted them twice and got 100 and 101. Let’s use 100 for simplicity. It won’t change anything if it was 101. His portfolio is up 257% so the way I figure it, his 100 total $1 recommendations are now worth $357, of which $126.20, or 35.4% is Disney. The other 94 recommendations make up $231 or 64.6% (or about two-thirds of a percent each). What’s wrong with this picture?

Well, any new recommendation is only worth $1, and Disney is worth $126, so new recommendation movements up or down influence the David’s Portfolio gain infinitesimally. It’s all about Disney and some other purchases that were made in 2002 to 2004. (Amazon, Activision, Priceline and Netflix) that now make up large parts of the portfolio.

I must be making some error here. Perhaps it’s in this assumption His portfolio is up 257% so the way I figure it, his 100 total $1 recommendations are now worth $357. Maybe they are averaging something instead, but it doesn’t make sense.

But even if this was wrong, the following statement seems correct Well, any new recommendation is only worth $1, and Disney is worth $126, so new recommendation movements up or down influence the David’s Portfolio gain infinitesimally. It’s all about Disney and some other purchases that were made in 2002 to 2004.

So what does that mean for someone who joined after 2004? That since 2004, things haven’t gone nearly as well? That David’s high percentage is a reflection of Disney’s rise from $1.94 to $105.00?

I’d welcome other points of view, as I’m sure that, while part of what I’ve figured seems unquestionably correct, other parts must be wrong.

Puzzled,

Saul

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#2

I should have mentioned that in the real world I can’t imagine anyone letting a single position (Disney) become so much larger (120 times bigger), than his average position. A rational person would have reduced position size on the way up. I sure would have, anyway. That’s the difference, as Anirban said a few posts back, between a list of recommendations and an actual portfolio.

Saul

For FAQ’s and Knowledgebase
please go to Post #5584

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#3

David recommended Disney

Actually, David never recommended Disney. He recommended companies that were acquired by Disney and recommended that Fools that held them take the DIS shares at the time of buyout.

Greg

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#4

Actually, David never recommended Disney. He recommended companies that were acquired by Disney and recommended that Fools that held them take the DIS shares at the time of buyout.

All six of the purchases are listed as Disney, so that’s all I had to go on.

#5

so that’s all I had to go on.

Don;t know how long you’ve been at SA, but DIS buying david picks is a long standing tradition. There might even be wagers on which the mouse will buy next.

Click thisL

http://www.fool.com/quote/1081/nyse/walt-disney/dis

then scroll to the bottom, click on each ‘rec date’ and you will see the original recommendations.

MVL
MVL
Pixar
Pixar
MVL
MVL

Greg

2 Likes
#6

Saul I think the thing that is left out in this analysis is that Stock Advisor is not a portfolio service, it is an idea service. TMF has portfolio services which look at allocations, but SA does not.

I remember reading a post by David that reviewed his record by starting date, he knows that subscribers that start at different times get different returns. I did not have a great start with SA I joined in 2006 but I had a fully invested portfolio, so I read and tried to learn how to use the service well. In late 2006 and 2007 I started buying- a series of dogs! go look. And I was a cranky subscriber, all those posts are there. But the thing is it is all there, nothing is hidden or fudged. Anyone with access to that service can go look up the recs. I applaud that.

I think your point is a few outstanding performers have accounted for the bulk of the outperformance. Fair point. And acknowledged. Anuragupta buys every rec for that reason, you cannot miss a huge winner and get the performance. I have missed a lot of winners so now I really try to buy at least a few shares of recs and add to the ones that perform the best as companies.

1 Like
#7

A few winners is all you need to be successful…

I think David G deserves more credit than he gets…

look back at the original Fool Portfolio started in August 1994…

Led by David G. and Jeff Fisher, in front view, they managed to turn 50k into almost a million by 2000…

after shutting that down, he opened Stock Advisor…

and in public view, has handily outperformed the S&P…His goals were to beat the market, otherwise one could dollar cost average into a low cost index fund…

I don’t think David’s results are an abnormality…

He was able to identify AOL, AMZN, SBUX, AMZN during their early growth stages…

another point to consider is that if they see a stock they like (NFLX) they will pound the table to get your attention…NFLX has been recommended 5 times, put on both David and Tom’s core stocks, and has been named a best buy multiple times…those who got in have been well-rewarded…

12 Likes
#8

A good article written by himself, David Gardner:

a quick read, but explains how his investment philosophy is shaped…

http://www.fool.com/investing/general/2008/02/01/the-greates…

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#9

Darrellquock,

You are right, Good article at above link. Being an X day trader I can certainly relate.

Thanks
Shakerag

#10

Saul,

This is my first time on your board. Wish I had seen it sooner but I just discovered it after reading a post by ivish on the SA board. I read a few posts from you and seems like we have very similar investing philosophies and styles. I started investing in stocks in late 1990 fresh out of college and have been at it since.

In regards to your analysis of MF results and the influence of Disney, I had the same exact analysis 3 days ago on the SA board and calculated SA 1,3, 5, 10, and since inception returns vs. S&P 500 and then again calculated same things after removing Disney, Netflix, and Priceline from the rec list. We have had a lengthy discussion over the SA board about this here:

http://discussion.fool.com/1081/sas-1-3-and-5-year-performance-3…

cheers,

Mehran

#11

Saul, This is my first time on your board. Wish I had seen it sooner…In regards to your analysis of MF results and the influence of Disney, I had the same exact analysis 3 days ago on the SA board and calculated SA 1,3, 5, 10, and since inception returns vs. S&P 500 and then again calculated same things after removing Disney, Netflix, and Priceline from the rec list. We have had a lengthy discussion over the SA board about this here: http://discussion.fool.com/1081/sas-1-3-and-5-year-performance-3…… cheers,Mehran

Hi Mehran,

I read your post over there and you really hit a hornets nest. All the true believers really defend the MF method. Why don’t you repost your analysis here on this thread?

I came to the same conclusion you did, by the way, although I didn’t post it in my first post on this thread. Without Disney, and buying it 5 times in 2002 to 2004, overall results of MF SA were VERY mediocre over the rest of the years of the newsletter. And no rational person, who started in the beginning, would have let Disney take over at least one-third of his portfolio anyway.

By the way, if you are new on the board, you should read the FAQ/KnowledgeBase, which Neil kindly keeps up to date, and is currently at post #5584. It’s crammed full of useful ideas and thoughts.

Saul

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#12

Interesting discussion guys,
Has anyone though of taking the 10 worst picks out of the totals and look. I agree with your thought process, Saul, that it is not likely that anyone would let Disney get that big. But it also seems unfair to just take the top ten picks out of the process. The fact that it is still beating the S&P without its top ten picks could actually be considered impressive. You have eliminated Pixar, MVL, NFLX, and PCLN out, which were all multiple picks over time. If you took the biggest losers out of the process would you again get a good return?

As far as the long term results, it does seem that as long as Disney continues to do well, thier results will do well. Kind of like Buffet touting his abilities. It is completely accurate but it doesn’t really get at whether he is doing a good job any more. (Which I am sure he is) It would be tough for him to really hurt his long term record. Perhaps TMF should be putting out some type of shorter term results. I recognize that the allotted time to perform is required but some type of 5 year review of the picks from 5 years earlier would be very interesting.

Actually I think that is how the Hubert newsletter review is done in some manner. I don’t believe they allow older picks to drive results.

Randy

#13

But it also seems unfair to just take the top ten picks out of the process.

Randy,

My point was that just taking Disney out of the process makes it an entirely different picture. I never said anything about taking the top ten out. That David’s high percentage is a reflection of Disney’s rise from $1.94 to $105.00? It loses a third of its value, and very few people were around as subscribers to buy it between 2002 and 2004.

Best,

Saul

#14

But you didn’t take Disney out. You took out Pixar and marvel which turned into Disney. At least 4 picks. The parallel analysis took out PCLN and Netflix as well. About 6 More picks. So if you want to just take the 4 worst picks for your analysis maybe that is okay. My only point was similar to what I have seen written about the market in general. If you take out the ten best days of the year, the return is reduced substantially. Itwas just a thought that if you remove the best picks, it is only fair to remove the worst as well. Not sure at all if it will affect anything…

Randy

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#15

I read your post over there and you really hit a hornets nest. All the true believers really defend the MF method. Why don’t you repost your analysis here on this thread?

If you have an SA subscription, it is best to just go to the link below and read all the subsequent discussion:

http://discussion.fool.com/1081/sas-1-3-and-5-year-performance-3…

Here is what I wrote for those who do not have SA:

I am sure this has been asked before and I don’t remember ever seeing an official response for TMF. Why are newsletter performance numbers vs. S&P are only since the inception of the newsletters? Why not report 1, 3, 5, and 10 year performance numbers?

Using the recommendations score sheet, I calculated SA’s performance vs. S&P as of 2/23/15 for team David only and here is what I get. Hopefully my calculations are correct but please correct me if you have also done such calculations.

SA’s Performance vs S&P 500
1-year: +8.18%
2-year: +6.72%
3-year: -3.92%
4-year: -12.76%
5-year: +2.85%
6-year: +1.28% (this is since the bottom in 2009, after the 2008 crash)
10-year: +42.43%
Since Inception (13 years) 192%

My biggest surprise is that SA picks have lost to S&P 500 if you look at 3 and 4 year performance, and beaten S&P by less than 3% for the past 5 years. We have been in an unprecedented bull market for the past 5 years and I was expecting to see better results for this period considering that the picks are generally not conservative. The large 10 and 13 years out performance of 42% and 192% can be attributed to mainly 3 stocks of Disney, Priceline and Netflix.

It is interesting to see what happens if you remove Disney from the picks. Without Disney, 10-year out performance vs. S&P drops to 39.38% and 13-year (since inception) out performance vs. S&P drops to 132% from 192%. and if you remove Priceline and Netflix, the overall out performance vs. S&P drops to 32% from 192%. With DIS, PCLN, and NFLX removed, the 10 year out performance vs. S&P drops to 7% from 42%.

3 Likes
#16

Randy
You said it also seems unfair to just take the top ten picks out of the process.

I responded that my point was that just taking one stock, Disney, out of the process makes the MF SA results an entirely different picture. I had never said anything about removing the top ten picks. What I said was that David’s high return is a reflection of Disney’s rise from $1.94 to $105.00 on six very early picks. Without Disney the results lose a third of their value. And I pointed out that very few people were around as subscribers between 2002 and 2004 to buy the SA recommendation of (stocks that were acquired by) Disney when they could have gotten in so low.

Then you said But you didn’t take Disney out. You took out Pixar and Marvel which [were acquired by} Disney. At least 4 picks.

Randy, think about what you are saying. The fact that David’s large position in Disney came about because Disney acquired Pixar and Marvel, instead of David buying shares in Disney itself, doesn’t change IN THE LEAST the fact that David’s high percentage return is a reflection of Disney’s rise from $1.94 to $105.00. What counts is that David got credit for 6 purchases in Disney, which thus became a hugely oversized position, and which did very well, so that whether new recommendations do well or poorly doesn’t matter. The only thing that matters is how well or poorly Disney does, and it has kept going up.

David can’t help that his “portfolio” has gotten so unbalanced, and neither can I, but that’s the way it is.

Then what Mehran did, independently on another board, which he linked to, was discover that Team Davids results for the past 5 years were flat with the S&P (without even removing anything). And that if you removed Disney, even the results from inception 13 years ago lost a third (which is the same thing that I just pointed out).

Best

Saul

#17

Has anyone though of taking the 10 worst picks out of the totals and look. I agree with your thought process, Saul, that it is not likely that anyone would let Disney get that big. But it also seems unfair to just take the top ten picks out of the process. The fact that it is still beating the S&P without its top ten picks could actually be considered impressive. You have eliminated Pixar, MVL, NFLX, and PCLN out

Randy,

TMFTortoise on the SA board actually replied to my post and analysis and brought up the same exact thing, removing the worst losers and see what the results are. Here is my response:

I agree with you here. I should have removed the 3 worst performers alongside the 3 best performers of team David. But my exercise of removing the few best performers was only meant to show how one or 2 great stocks held for long term can affect your portfolio. Also, removing the worst losers does not affect the results by much as the biggest losers cumulative loss compared to S&P500 is no more than 200% where as the biggest gainer like Disney has a cumulative gain of over 11,000%. 11,000% divided by 156 picks has a much large effect on the overall performance than 200%/156.

If you invested $1 in the best pick DIS on June 7, 2002 (Marvell or Pixar when picked) it would have been $53.69 today. If on the same day you put one dollar in another pick and it happened to be the worst pick and went to zero, you total loss contribution to the overall performance is no more than $1. That is the difference.

Mehran

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#18

Of course, one of the problems about using the S&P as a benchmark is that it is far from a stable reference point. Yes, it does nicely over the long term, but performance in any given year may be much higher or lower. Thus, one could compare CDs to the S&P 500 and there would be years in which the CDs would have done better (24 years of the last 87 with returns < 0). And, yet, there is no question that putting one’s money in the S&P was a better long term investment in terms of return than putting it in CDs.

While it is certainly worth seeing the importance of Disney in the mix, given that some of that represents picks of other companies then acquired by Disney does seem to make it a bit unfair to treat it as if it were a single pick.

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#19

David’s high return is a reflection of Disney’s rise from $1.94 to $105.00 on six very early picks

When was Disney ever $1.94 a share in 2002? I see a low of $14.65 on 8/9/02, but nothing anywhere near $1.94 unless he bought the stock in the autumn of 1985. I must be missing something here.

#20

When was Disney ever $1.94 a share in 2002? I see a low of $14.65 on 8/9/02, but nothing anywhere near $1.94 unless he bought the stock in the autumn of 1985. I must be missing something here.

Nevermind, I understand now. You guys are talking about the recommendations for Marvel or Pixar, two companies acquired by Disney. My mistake.