Anirban's 2013 review

Hi all,

This has been a great year for the market, so understandably most of us have done well. Nonetheless, year end is a good time to ‘take stock’, look at what worked, what didn’t work, and generally review things moving forward. The bonus is that since many other Fools are doing the same, its a great opportunity for me to learn from my fellow Fools!

Benchmarking Methodology

I regularly add funds to my portfolio. This makes simple average YTD calculations somewhat misleading. While I do look at the YTD gains, I also look at the Internal Rate of Return (IRR) and compare my portfolio’s performance with that of a standard ETF.

Some words on the ETF I benchmark against and how I do the comparison. The ETF I compare with is the Rydex Equal-Weight SP500, RSP, which is the same as SPY except that its equal-weight on the SP500 companies instead of being market cap weighed like SPY. RSP has handily beaten SPY since its inception, which intuitively makes sense. After all, the smaller companies in the SP500 can potentially double much faster than the larger companies in the SP500. Further, laggards are thrown out of the index during the quarterly balance so they don’t drag down the performance. I also like comparing with RSP as the companies recommended by Stock Advisor and Rule Breakers are more in the small to mid-cap range, so I think its more relevant than say comparing with SP500.

I use the following methodology. When funds move into my investment account, the RSP model portfolio is assumed to purchase RSP units on that day. So I looked at the hypothetical # of RSP units as of 12/31/2013 and compared it with the hypothetical number of RSP units as of 12/31/2012. I calculate the RSP model portfolio’s average YTD returns as follows:

(RSP value at end of 2013 - RSP value at end of 2012 - funds added during the year)/(RSP value at end of 2012 + funds added during 2013)

Second, I computed the portfolio’s YTD average return using Net Asset Value (NAV) as follows:

(NAV at end of 2013 - portfolio value at end of 2012 - funds added during 2013)/(NAV at end of 2012 + funds added during the year)

Finally, I also compute the portfolio’s Internal Rate of Return (IRR), given the NAV at 12/31/2012, the NAV at 12/31/2013, and the funds added during the year along with the dates the funds were added to the investment account.

Performance Summary

Internal Rate of Return     65.5%
Average Return (YTD)        40.0%
RSP model portfolio (YTD)   20.2%

Overall, the portfolio has beaten the RSP model portfolio by 20 percentage points. Again, I remind myself that it has been a good year for small and mid-cap companies, and the Motley Fool’s Stock Advisor and Rule Breakers newsletters largely recommend mid-cap and small-cap companies. The returns are driven by multi-baggers courtesy of the Motley Fool, including Netflix (up about 6x), WETF, FB, MAKO. and SSYS (all up ~ 2x), with added juice from options. My big losers this year were RAX (down 33%), NUAN (down 30%), and to a lesser extend ISRG (down 13%).

Portfolio Approach and Current Holdings

I currently hold 33 stocks in my portfolio. Initially, I was trying to allocate more funds to “core” holdings (say between 6-8% of funds), comparatively less to “growth” holdings (3-4%), and a much smaller share to speculative ones (say 1-2%). But I always struggled with this notion of core vs growth. Is COH core or growth? (I know some may say its neither … it is a loser!!!) Is MKL core or growth? Is NFLX core or growth? Plus, Stock Advisor’s core list changes every year, so it only added to the confusion. Taking cue from the RSP ETF, I decided to essentially allocate roughly equal percentage of my invested capital to each of my holdings. I say roughly because a position is generally built over time and I add when one of my holdings is a “best buy” in the service.

This year I didn’t do much selling. I sold SDRL when Stock Advisor put it on “hold”. Their debt load always worried me, so I though selling and taking profits made sense. I lost DWA via a covered call. I was more or less happy with that decision. MAKO got bought out by Stryker, and that holding made a good 2x plus for me. I also cut my NFLX exposure twice because it had grown very quickly to become a very large holding; by fluke I had caught the bottom. With the advantage of hindsight, those decisions were not the best. I should have looked at the tail wind behind NFLX (international expansion, rapid cable cutting etc) and not trimmed as much as I trimmed. In fact, I trimmed sometime after David re-recommended it. Now that’s stupid, right!!! Me second guessing David Garner’s picks :frowning: Anyways, the selling aspect is still work-in-progress.

My current holdings as a percentage of the market value of my long stocks (i.e., minus the long calls etc):
AAPL - 5%
SBUX - 5%
SWIR - 4.5%
WETF - 4.5%
SCTY - 4.25% (relatively new position)
WFM - 4.25%
AMBA - 4%
NFLX - 4%
SSYS - 3.8%
ISRG - 3.7%
MELI - 3.6%
CSTE - 3.3%
PNRA - 3.2%
COH - 3.2%
FB - 3.2%
MKL - 3%
CELG - 3%
MTH - 2.7% (part of a covered call position)
NUAN - 2.6%
TSLA - 2.6%
TCS - 2.5% (added Dec’13)
ROIC - 2.5%
LNKD - 2.4%
TXRH - 2.4%
INVN - 2.3%
GTLS - 2.1%
MIDD - 2.1%
PGR - 1.9% (added Dec’13)
BJRI - 1.8%
QGEN - 1.8%
CAMP - 1.6% (added in the new year!)
CLNE - 1.5%
RAX - 1.2%

Put Writing

I joined MFO in Nov 2012. Before I say good things about MFO and put writing etc, I should add that put writing works very well in a bull market, so its no surprise that puts have added juice to the portfolio’s performance. The net premium income from transactions closed in 2013 was about 12% of my portfolio’s capital gains. I thought that was pretty good given I tend to write puts that have a fair bit of downside protection, which reduces the premium received for writing the put. I wasn’t assigned any stock from my written puts, as in most cases the stock stayed above my strike price and in some cases the stock just took off (i.e., it would have been better, much better, to buy the stock!!!). That said, I don’t really regret most of my decisions expect for not buying DDD and trying to get into it via puts.

I will need try to do a more detailed review of my put writing.

If you did stay tuned in through this very long post, feel free to post any suggestions or comments that you may have. Anything particular that catches your attention regarding my holdings? Is there enough diversification? Anything you wouldn’t want to hold and why?

Thanks again for tuning in.

Happy New Year to all.