Beating the Market

Investment Analysis Clubs Saul’s Investing Discussions
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There was some discussion on the board two 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).

My last update was in March (post 39200).

The portfolio I proposed was as follows:


                            Value at      %       Value at
                            Sept 2016   Change.   Sept 2018

Adobe Systems (ADBE)         962.19     147.02     2,376.80
Amazon (AMZN)              2,405.40     141.25     5,803.03
Bank of Internet (BOFI)    1,006.65      58.61	   1,596.65
Broadridge Financials (BR) 1,024.50     101.95     2,068.98
Casey's Gen. Stores (CASY) 1,054.89	 11.54     1,176.62
Chipotle (CMG)               825.46      12.88       931.78
Disney (DIS)               1,017.17      25.80     1,279.60
Facebook (FB)              1,018.96	 29.87     1,323.32
Google (GOOGL)             1,619.64      45.66     2,359.17
Mastercard (MA)            1,008.20     122.54     2,243.65
Middleby (MIDD)            1,496.28       3.86     1,554.04
Mitek (MITK)                 994.48     -10.22       892.84
Markel (MKL)               1,845.04      30.33     2,404.64
Universal Display (OLED)   1,000.96     107.14     2,073.39
Starbucks (SBUX)             977.04       8.76     1,062.63
Shake Shak (SHAK)            987.00	 66.21     1,640.49
Shopify (SHOP)               991.76	276.11     3,730.11
Transdigm (TDG)            1,724.40	 51.15     2,606.43
Tesla (TSLA)               1,032.50      45.12     1,498.36
Under Armour (UA)          1,019.20     -47.22       537.93
Visa (V)                     985.80      84.06     1,814.46

Totals                   $24,997.52      63.92%  $40,974.92

S&P Gain                                 35.35%

Difference                               28.57%

Although a 64% two year return is rather humble compared to some of the results reported on this board - I’m quite satisfied. Especially so, because 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 29% ahead of the S&P today.

(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. I have not made any sales or additions since inception and it is unlikely that I will do so in the foreseeable future unless something extraordinary happens.

The portfolio is ‘real money’ in the sense that I do hold long positions in all of the stocks in my own portfolio to at least the value shown. But my holdings are not in the same proportion as in the example portfolio. I have much heavier weightings for BOFI and TSLA, for example. Some of my positions are held through options.

I also hold many stocks and options positions that are not in the portfolio, and as a result my own personal performance has been much better than this example portfolio (although not as good as Saul and many of you here).

However, 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, please feel free to fire away and I will answer as best I can.

I will post another update in 6 months.

Ian

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Some of my positions are held through options.

That invalidates the comparison. Options are leveraged and the S&P is not, it’s cash. Also, for the long term you have to replace the options that expire, not so the S&P 500. Being levered, options have a different risk/reward profile than stocks bought with cash.

Please recalculate excluding the option positions.

Denny Schlesinger

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Denny,

I think the portfolio example is all stock. He was making a point that his portfolio differs from the example in weightings, he owns options, etc

So for the sake of comparison, I believe it is valid.

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I think the portfolio example is all stock. He was making a point that his portfolio differs from the example in weightings, he owns options, etc

So for the sake of comparison, I believe it is valid.

That is exactly right.

The example portfolio is a very simple stock only with no buys and sells.

The returns on the stock portfolio are taken directly from CAPS (see http://caps.fool.com/player/digigrator.aspx).

Ian

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The example portfolio is a very simple stock only with no buys and sells.

The returns on the stock portfolio are taken directly from CAPS (see http://caps.fool.com/player/digigrator.aspx).

It’s valid then. Thanks.

I’ve noticed over the years that some industry sectors perform better than others, the top three are high tech, healthcare, and finance. That’s reflected in the “tech heavy” NASDAQ beating the S&P 500. Finance, well represented in your portfolio, is mostly NYSE hence not NASDAQ. Two year charts, COMP vs. SPX.

http://softwaretimes.com/pics/spx-comp-09-25-2018.gif

Denny Schlesinger

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The true abilities of a general are unknown unless he has successfully conducted a difficult fighting retreat as part of the campaign.

15 years is a reasonable test of ability in the market and 20 better. I am not sure that there are any mutual fund managers currently extant who qualify vs. the S&P500 in fund investor terms, i.e. after fees etc. although pure chance, the random distribution of coin-flippers, normally supplies one or two offering themselves up for admiration.

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15 years is a reasonable test of ability in the market and 20 better. I am not sure that there are any mutual fund managers currently extant who qualify vs. the S&P500 in fund investor terms,

There are several, in fact. And not at all hard to find.

Fidelity Contrafund is an easy example. You can look up the 20 but over 15 years he’s outperformed by 230 basis points a year over the S+P, a massive amount.

FLPSX, run by Joel Tillinghast, "The fund gained 13.7% annualized from Joel Tillinghast’s 1989 start through May 2018, one of the most impressive showings in the industry. During that time, the fund beat its prospectus benchmark, the Russell 2000 Index, by 3.8 percentage points annualized and the Russell Midcap Index (to which it’s more correlated) by 2.3 percentage points.

During the same period, the fund exhibited lower volatility and better downside performance than relevant benchmarks and the average mid-value and mid-blend fund (its current and former category, respectively) despite an above-average foreign-equity stake. The fund posted smaller declines than peers in 2008, 2011, and 2015, for instance."

That’s 89% more money than the Midcap Index, after fees.

And both managers oversee $Tens of Billions in these funds, a far cry from ‘lucky coin-flippers’ over 3 decades.

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Contrafund - “It’s been a top large-growth offering under Will Danoff, who has managed it since September 1990. During his tenure through January 2018, the fund has gained 13.7% annualized to the S&P 500’s 10.6%,”

So, 310 basis points of outperformance a year through this January, since then he’s beating the market by an additional 675 bps.

Not bad for 28 years, eh?

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The true abilities of a general are unknown unless he has successfully conducted a difficult fighting retreat as part of the campaign.

Probably true!

John
Private First Class
Battle of the Dip(s)

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Will continue on ‘Philosophy’ board in deference to the rules

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