My Results for the year 2015

My results for the year 2015.

Here’s a little quote from Wall Street Breakfast dated Dec 30.

The Year Stocks Went Nowhere
The U.S. stock market took investors for a wild ride in 2015, but in the end it was a trip to nowhere. Equities began the year with a slow start as investors worried about falling crude prices, flat earnings growth and when the Fed would begin raising rates. By May, stocks were hitting new highs, but the market didn’t stay there for long. Worries about slowing Chinese growth in the summer gave reason for the Fed to pause and for traders to fret, sending U.S. indexes into a correction, although the last few months they’ve marked a return to their initial starting point. Better luck in 2016?

For the year I ended up 16.0%. I certainly considered this an okay year. It would be silly not to be happy with a gain of 16%, but it was not really a satisfactory year, as I really aim to do better than 25%. I had a bit of a headwind though as the overall market pretty much flatlined, and the S&P was down 0.7% for the year. (see article above).

Please don’t work it out that that means I did 23 times better than the index or something like that, because the index was up down 0.7% and I was up and I was up 23 times as much, or any such total nonsense. Think of it like this: If the index was up one one-hundreth of a percent, and and I was up one percent, would you say I did 100 times better because I was up 100 times more than the index was up? Of course not. If you had invested $100 in each, at the end of the year I would have had $101, and the person invested in the index would still have had $100 (plus a penny), so I would have ended the year about 1% ahead, not 100 times better.

In this case, I ended up with $116.0 and the index ended up with $99.3. Now 116 divided by 99.3 equals 1.168, which means I came out 16.8% ahead of the S&P (that’s 17 percent better, not 17 times better). Of course if I could keep coming in 17% better year after year that would compound and add up to a lot.

Please also note that I don’t ordinarily measure against the S&P, or any other index, but since I started this board I post my results against the S&P since the MF uses it as their yardstick. There’s a reason that I don’t measure against indexes. My goal is to make money each year that my family and I will live off. That’s what counts for me. Measuring against the S&P is setting the bar very low, as it’s a mix of 500 large-cap stocks, made up of good stocks, mediocre (average) stocks, and poor stocks. Averaging good, poor and mediocre stocks, you’d expect a mediocre result as compared to selecting 10 or 20 good stocks. I mean, you really should be able to SELECT a small basket of good stocks that will do better than this mixture of five hundred mixed stocks.

Since most of my stocks are what would be called small-cap or mid-cap stocks, and small-caps usually do better than large-caps over time, I thought perhaps it was unfair to compare my results against the S&P, and maybe I should compare against a small-cap index instead. The Russell 2000 is the best small-cap index. Wikipedia says, The Russell 2000 is by far the most common benchmark for mutual funds that identify themselves as “small-cap”…It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares.

Well, it turns out that the Russell 2000 Small Cap Index was down 5.7% in 2015, so I ended up with 116.0 and the index ended up with 94.3. Now 116 divided by 94.3 equals 1.230, which means I did 23.0% better than the Russell.

This was kind of a strange year. A number of my stocks had large drops in value during a general market correction, although the companies the stocks represented continued to do very, very, well. I guess I should be pleased to still be up 16% and be well ahead of the indexes. I hope to do better next year.

Saul

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For the year I ended up 16.0%

Congrats, Saul! You never cease to amaze me.

I barely finished in positive territory this year, and am down nearly 25% from just a few months ago. Yes, I beat the market, but that feels very hollow. What matters is achieving our personal financial goals, and I failed to do that this year.

Karen asked for people’s best or worst decisions in 2015. My biggest mistake in 2015 was a willingness to accept higher P/E’s for companies that had very low 1YPEGs. These were all great companies, but when market sentiment shifted – despite solid performance from the businesses themselves – it left me very exposed. I then amplified my mistake by adding to my positions on the dip at what were still high absolute P/E’s, never imagining how far they’d fall given their business performance.

For 2016 I’ll be focusing on accuracy. I’ve known this has been missing from my portfolio management for a while now (I even posted about it on the Pro boards a couple years back, I think), but it was a lack of accuracy that crushed me in 2015. I’ll be enhancing the 1ypeg.com site to that end over the coming months, adding a few additional tools to help promote accuracy. I’ve already started on them.

On a positive note, I’m pretty happy with how my portfolio is positioned right now for the long run. I own a lot of businesses that I think have a bright future and are now pretty cheap even on an absolute basis, so hopefully additional downside from here will be limited (barring a significant market-wide crash, of course).

Here’s to a much more profitable 2016 and beyond :wink:

Neil

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and am down nearly 25% from just a few months ago

Hi Neil, Well I was up 51.6% some months ago and 116.0 is 76.5% of 151.6 … so I’m down 23.5% from my high too.

I also mentioned that it was a strange year as great companies with very good results took big drops, just because the market was dropping. That does happen though. I agree that high PE puts you at a real disadvantage.

Best,

Saul

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I think it is worth making two points about the S&P500 in relation to Saul’s comments - with which I concur. Logically you should indeed be able to beat the index.

However, the fact is that, after 15 or 20 years, barely a single fund manager is left standing against it and those that are can safely be ascribed to being what random chance would statistically predict.

Secondly, the S&P is never to be missed when it is extraordinarily cheap. My investment, made during the 2008/09 debacle, is now up 24% annualized. (It could have been better; I averaged down to the end but then omitted to change tactics at the bottom from price to time and continue to buy for a while.)

I expect those returns to erode quite seriously due to the very high valuation of the market, either by a dramatic fall in a game-changer or recession, or by flat-lining for a considerable time (this year’s S&P performance is exactly what I expected and continue to expect). However, I still think it will show an easy, hands-off, safe, long-distance return in exceptionally difficult times by the time I cash in my chips for the last time.

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However, the fact is that, after 15 or 20 years, barely a single fund manager is left standing against it and those that are can safely be ascribed to being what random chance would statistically predict.

strelna,

It isn’t very surprising that it’s virtually impossible for fund managers to outperform an index over long periods of time. I’ve seen it mentioned a number of times over the years in Fooldom. Fund managers have several very strong factors working against them that actually means that individual investors have an advantage in comparison. (The same thing may not be true for managers of private funds, by the way.)

For example, many fund investors move their money around on a regular basis, chasing after the latest hot fund. That means that fund managers will suffer from withdrawals after a down market, and fund inflows during good times, meaning that they have to sell low and buy high on a regular basis. Further, many managers are compensated based on the size of their fund rather than on performance, which only indirectly affects them (mostly by incentivizing them to avoid bad years). Those are just a couple of reasons that actively managed funds almost always underperform the market over long periods of time. I don’t have a reference handy, but there are probably many more extensive discussions around these boards.

All of the factors influencing fund managers means that they’ve been forced to artificially change their strategies.

For me, a key lesson to take away from it is to understand where my relative advantage is. Most importantly, I answer only to me. And so I can make whatever decisions that I believe in and don’t need to change them because I’m worried that somebody else will second-guess me.

I think that I’ve written this (what was originally a very long-winded answer before I cut it down) partly as a way of expressing “out loud” that I’m just a little bit concerned that all of the attention and pressure here on Saul could cause him to subconsciously change his style so as to avoid subsequent hassles on these boards. The BOFI posts went into the realm of borderline vitriolic at times.

I for one (I’ve been tracking this board for less than a year) am content with what I find here because I’ve been reading Fool boards for enough years that I understand its intended purpose in context. Somehow it seems that many readers here don’t understand that context and are expecting something very different. I would like to see this board to continue to focus on its intended purpose, avoiding discussions that can lead to distracting politically-oriented diversions (e.g., the macroeconomic theories about the government debt level), or opinions about what additional details Saul should be sharing regarding his own portfolio. There is plenty of room elsewhere in Fooldom and elsewhere for other things. This board is intended for discussions about a particular investing approach, focused mostly on process rather than results (in the sense that “results” means share price) – results should follow from the proper application of a good process.

as always, i am full of carp

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Great job Saul. Thanks for sharing and happy new year!
All the best for continued success in 2016!

I think it is worth making two points about the S&P500 in relation to Saul’s comments - with which I concur. Logically you should indeed be able to beat the index.

However, the fact is that, after 15 or 20 years, barely a single fund manager is left standing against it and those that are can safely be ascribed to being what random chance would statistically predict.

Hi Streina, the below comments are from the Knowledgebase, and are just my opinions, but I think they are valid.

You can beat any mutual fund over the long run. Since they are investing many millions, if not billions of dollars, they can only invest in very large established companies, and hope to find a pricing anomaly.

I don’t know of any fund manager or hedge manager with a run like mine. It went through a number of recessions and lasted 19 years until I finally had a down year in 2008. But again, if a fund manager does real well for a year or two, not only does his fund get larger because of capital gains, his fund get flooded, swamped, with inflows of dollars and he can’t duplicate what he did when the fund was small.

Also they have lots of people looking over their shoulders for quarterly results (are they equaling their benchmark each quarter?). It makes it hard to get good results, I’m sure.

The average hedge fund gained 6.5% one year, when the S&P 500 gained almost 30%, and the best hedge fund manager was congratulated because he gained 25%. It shows how hard it is when you are investing billions of dollars. We can beat any mutual or hedge fund on a consistent basis, largely because they are too big to invest in most of our type stocks.

Also hedge funds invest in futures and currencies, which are zero sum games. When one fund wins, another loses and the sum comes to zero.

Best,

Saul

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However, the fact is that, after 15 or 20 years, barely a single fund manager is left standing against it

Think about it this way. If you are managing a hedge fund with $20 billion you are having to invest 1000 times to 500,000 times as much as each of us in investing. You are totally locked out of most stock market investments. It means that if one of us was to buy 1000 shares of a stock, the fund manager would have to buy a million shares to 500 million shares of the same stock to get an equivalent position. That’s shares! not dollars! It’s impossible. He has to invest in entire sectors. He can’t possibly invest enough money in a small company to make a difference in his portfolio results, even if he could get in and out of his position without totally moving the market. Of course fund managers can’t beat the market! The better they do for a year or two, the more they are burdened with investing the third year. It’s a no-win proposition.

Saul

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Thanks to all that I’ve learned on Saul’s board, Stock Advisor, and Pro - I’m up 12% for 2015. Looking forward to 2016!

TracyK

Saul, your points about mutual funds are all absolutely true but unfortunately even small funds also fail to beat their index over a realistic investment timescale once survivorship bias is accounted for!

You have to be damn good to beat the index over a realistic investment timescale. Astonishing, but true.

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For example, you would find plenty of closed-end funds (‘investment trusts’) in the UK with caps. of 20m - 200m. I would cheerfully bet a nice assortment of ETFs against a similar number of any of them for the next 20 years!

Hi streina,

I just thought of another consideration with funds which probably beats all the other ones I mentioned. When the markets are way down and all the talking heads are (incorrectly) saying “Be safe. Get into cash!”, the funds get massive withdrawals and have to liquidate a lot at the bottom, where they should be buying. Even if the managers are aware that they should be buying at the bottom there isn’t much that they can do as their customers are pulling funds out. How can funds beat individual investors with that kind of hassle?

Saul

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By being closed-end. Simple. Unfortunately, that does not seem to help!

I just thought of another consideration with funds which probably beats all the other ones I mentioned. When the markets are way down and all the talking heads are (incorrectly) saying “Be safe. Get into cash!”, the funds get massive withdrawals and have to liquidate a lot at the bottom, where they should be buying. Even if the managers are aware that they should be buying at the bottom there isn’t much that they can do as their customers are pulling funds out. How can funds beat individual investors with that kind of hassle?

I should have mentioned that at the tops, when stocks are greatly over valued, investors are pouring money in, but most mutual funds have rules that they have to stay at least 95% in stocks, so they have to invest that excess money in overvalued stocks, even if the manager realizes that he or she shouldn’t. Man! If we can’t beat mutual funds we should just give up!

Saul

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Totally agree, assuming enough cash is available. The private investor now has all the research advantages formerly ‘owned’ by brokers and all the joys of independence.