Beating the Market - The Final Reckoning

Investment Analysis Clubs Saul’s Investing Discussions
1

(Original post deleted, so I am re-posting. Hopefully I have removed the offending content).

There was some discussion on the board five years ago about whether it was possible / easy / difficult to consistently beat the market.

At some point I suggested that it was easy to beat the market by simply choosing a portfolio of quality businesses and holding for the long term.

After a while I thought that, having made this suggestion, I should back it up.

I came up with a portfolio of $25,000 that would aim to beat the market over a 5 year timeframe (post 21799).

That 5 year period has now elapsed and this post marks the conclusion of the exercise.

To regulars on this board, the idea that it is difficult to beat the market may seem ridiculous. Saul not only beats the market, he thrashes it on a consistent basis. But Saul is very skilled and his approach requires careful analysis and keeping a close watch on your stocks. I believe that there are many ways to beat the market. This portfolio illustrates just one of them.

My last update was in October last year (post 72035).

The portfolio I proposed was as follows:


                               Value at      %            Value at
                               Sept 2016  Change.  25th September 2021

Adobe Systems (ADBE)             962.19    482.26      5,602.45
Amazon (AMZN)                  2,405.40    326.65     10,262.64
Axos Financial (BOFI/AX)       1,006.65    109.43      2,108.23
Broadridge Financials (BR)     1,024.50    165.96      2,724.76
Casey's Gen. Stores (CASY)     1,054.89     68.65      1,779.07
Chipotle (CMG)                   825.46    370.11      3,880.57
Disney (DIS)                   1,017.17    100.58      2,040.24
Facebook (FB)                  1,018.96    178.17      2,834.44
Google (GOOGL)                 1,619.64    251.22      5,688.50
Mastercard (MA)                1,008.20    266.36      3,693.64
Middleby (MIDD)                1,496.28     39.63      2,089.26
Mitek (MITK)                     994.48    140.65      2,393.22
Markel (MKL)                   1,845.04     33.32      2,459.81
Universal Display (OLED)       1,000.96    227.30      3,276.14
Starbucks (SBUX)                 977.04    129.72      2,244.46
Shake Shak (SHAK)                987.00    143.77      2,406.01 
Shopify (SHOP)                   991.76  3,249.40     33,218.01
Transdigm (TDG)                1,724.40    166.43      4,594.32
Tesla (TSLA)                   1,032.50  1,769.30     19,298.77
Under Armour (UA)              1,019.20    -45.03        560.25
Visa (V)                         985.80    190.41      2,862.86

Totals                       $24,997.52    364.12%  $116,017.65

                                  S&P Gain 106.73%

                                Difference 257.39%

Although a 364% five year return is rather humble compared to some of the results reported on this board - I’m quite satisfied. I didn’t have a great start. The portfolio trailed the S&P by 2.17% after one month and then 7.22% after two months. But it has gradually made ground from there to be 257% ahead of the S&P today. This represents a CAGR of 36% compared to the S&P 500 return of 16%.

(In order to track the portfolio performance accurately including dividends etc. I use a CAPS account.)

This is a long term buy and hold portfolio. There were no sales or additions since inception.

My original intention was to keep the portfolio as ‘real money’ in the sense that I would hold long positions in all of the stocks in my own portfolio to at least the value shown. But as I am retired I need to sell stocks for cash periodically, and that aspiration fell by the wayside some time ago.

My intention was to prove a simple point. For an investor with limited time and knowledge by investing in a diverse collection of quality businesses and holding through thick and thin you are almost certain to beat the market, and beat it well. Of course the caveat is how do you define a quality business - the start of a whole new discussion.

If you are curious about any of my picks, send me an email and I will answer as best I can.

Ian

125 Likes
2

Ian, great post which illustrates the Foolish idea that you only need 2-3 super growth businesses to make your investment portfolio succeed, e.g. SHOP and TLSA.

A corollary is a point that is often made around here is to focus on the company, not the stock. Take Shopify for instance. As the business model continued to fire on all cylinders the stock was increasing 2X, 4X and up. It would be easy to think “This stock is too expensive, I’m going to wait until the price falls back a bit.” That would have been a mistake. Say you took the opposite approach. As the stock price doubled, tripled and more you evaluated the company and all the metrics were stellar. You closed your eyes every time the stock doubled in price and purchased more. Your 3,200% gain would be multiples of that.

This is how I approach the likes of Upstart. So what if it has QUADRUPLED since Saul loaded the truck in the 80’s. The reports have only gotten better since then so why would I not buy more?

To get an idea of what this could look like check out SHOP in January 2019 after it was up 4X from September 2016, the date that Ian referenced above, and decide if you would have been happy with this investment.

Vol

32 Likes
3

But in real life I think it is lot harder to pick winners that will SURELY continue to win for 5 years.
For eg Fastly and Zoom were great investments sometime back. But many might not see them as the best places to keep their money anymore.

I think there are no guarantees that “set and forget” strategies for 5 long years would work even for companies like Shopify, Amazon or Starbucks

I think realistically there are only two ways of doing this

  1. either to have a small concentrated portfolio like Saul, closely monitor their performances like they do it on this board, adjust/get out of the positions if the story changes - and try to achieve results somewhat similar to others here

or

  1. invest in a broad based index and forget about your investments - and be satisfied with about 10% return they have been yielding

I’m not sure if there is any other mid way between these two strategies

Regards
John

3 Likes
4

But in real life I think it is lot harder to pick winners that will SURELY continue to win for 5 years.

The whole point of this exercise was to prove you could do it in real life. I called it in advance.

(Not wanting to clutter up Saul’s board with this - the focus of which has changed to concentrate on growth stocks since my original post 5 years ago - but I felt I had to respond to this point. Please address further discussion by email.)

Ian

11 Likes
5

As in this portfolio at first glance the returns of Shopify and Tesla are outstanding I was wondering what the result would be without those two: 175%.

Which btw is in line with the Median of 166% which I think is a more appropriate metric than Average as one or (as is the case here) two lucky outliers can completely distort the picture.

1 Like
6

PLEASE take further conjecture on this thread OFF-BOARD.
Thanks for your cooperation.
Saul

7 Likes