Sorry, everyone. Being currently in the European Time Zone I was asleep for most of this discussion.
Apparently some people didn’t bother to thoroughly read what it was they were discussing and criticizing. It’s all clearly spelled out in the Knowledgebase. Here is the pertinent section:
## My Historical Results
I started keeping track of my results yearly in 1989, because my wife and I had a baby and I wanted to retire in about 7 years (I did). My wife panicked (“You can’t retire! We have a new baby!”), so I decided I had to get serious about investing. In Jan 1993, I increased my record keeping and started keeping track of my results weekly, and not just annually.
You should know that my wife and I and my family have been living off what I make in the stock market since my retirement in 1996. That’s 19 years! I have no pension or other source of income except Social Security.
From 1989 to 2007 I averaged about 32% per year compounded. This produced a rather amazing overall multiplication of my total portfolio, In fact, if you sit down with your calculator and multiply 1 by 1.32 (since I averaged a 32% gain) 19 times, you’ll be amazed too. (It’s the power of compounding). You’ll note that this was not a large multi-bagger on one stock, but on my entire portfolio, the whole works!
32% a year compounded doesn’t mean you make roughly 32% every year. For example, here’s a string of the gains of my entire portfolio for twelve consecutive years starting in 1993. Numbers are percent gain. In other words 21.4% means every $100 turned into $121.40, and 115.5% means every $100 turned into $215.50. Here they are: 21.4%, 15.4%, 43.4%, 29.4%, 17.4%, 4.9%, 115.5%, 19.4%, 46.9%, 19.7%, 124.5%, 16.7%.
I lived through the Internet bubble of 1999-2000. I sold out of amazon, Yahoo, and AOL one day in January or February after Yahoo, as I remember, had gone up $30 to $50 per day for three days in a row. I said to my wife, “They may keep going up, but this is insane. I’ll let someone else have the rest of the ride.” The bubble broke about 3 weeks later. Sometimes selling can be the most important thing you can do. I didn’t get out of the market. I just bought non-internet stocks and was up 19% for the year. Sure I could have held through the decline, and 10 years later amazon came back, even if Yahoo and AOL never did, but why?
I got killed in 2008 like everyone else. Probably worse than someone who was in defensive stocks. It was my first negative year after 19 positive years in a row. I stayed 100% in stocks, selling anything which hadn’t gone down much to buy more of the ones that were down the most.
Finally, I was down so much that even I got scared and started to think of selling out and going into cash. All the talking heads were saying, “Sell! Sell! Sell! Get out! Get 100% in cash!”
I said to my wife, “If everyone is shouting ‘Sell!’ and even I am scared enough to be thinking about selling, there’s no one else left to sell… This must be the bottom.” And it was (Nov 2008).
In 2008, in the big meltdown, I dropped 62.5%, which was pretty terrifying. In 2009 I was up 110.7%. The way percentages work though, after dropping 62.5%, gaining even 110.7% doesn’t get you back to where you started, but I sure felt better.
Annual Results since 2000:
2000: 19.4%
2001: 46.9%
2002: 19.7%
2003: 124.5%
2004: 16.7%
2005: 15.6%
2006: 8.6%
2007: 22.5%
2008: (-62.5%)
2009: 110.7%
2010: 0.3%
At this point I have a little reminiscing: I remember in 2010 there was a lot of talk in the media about the “Lost Decade” for the stock market, which apparently had finished roughly unchanged after 10 years. At this point I was up 570% in those same 10 years, in spite of 2008, so I was wondering what they were talking about.
2011: (-14.5%)
2012: 23.0%
2013: 51.0%
2014: (-9.8%)
2015: 35.0% YTD
We are talking 25 years from 1989 to 2014 and that’s a lot of time for compounding to accumulate. As of the end of 2013, I had a 273-bagger on my entire portfolio. As of the end of 2014, with my 9.8% loss, that had fallen to a 246-bagger. Now, in June 2015 it has risen to over a 300-bagger.
A number of people were very skeptical when I first said I had made 30% per year in ordinary markets. In fact some even implied that I was lying, that even Warren Buffet couldn’t do it. (But he was investing billions of dollars, like piloting a battleship instead of a speedboat. He had to buy whole companies!). And that my policy of selling positions that didn’t pan out was sacrilege, as it was opposed to the hold-forever principles of MF (although I made clear that I always bought with the idea of a long term hold, and only sold when a position didn’t work out, or I lost faith in it).
Well, this is a very ordinary market (the first six months of 2015), not the dot-com craze. The S&P is up about 3% so far this year, which is a fairly ordinary gain, and my portfolio is up 31% as of todays close (up ten times as much as the S&P). Others on this board, following the principles that we have discussed, are up even more. And it hasn’t been magic. I’ve been transparent and given all my positions and their relative size each month, and basically told exactly what I was doing. You’ve followed along with me. It’s real. It takes some work, but you can do it too. I know there will be pullbacks and I may end up the year with more or less gain than I have now, but it can be done!
Stock picking does work (obviously). Especially if you are lucky, as I must have been. Some people say you can’t beat the market in the long run. They are wrong.
And here’s how you calculate returns:
## Calculating Portfolio Returns
I retired in July 1996, so I’ve actually been taking out money to live on ever since, instead of adding money.
Here’s how to calculate your overall returns ignoring cash flow in or out. Say you start the year with $14,000. You want to equate that with 100% and calculate gains and losses from there. So you ask yourself “What number (factor) would I multiply $14,000 by to get 100?”
By simple arithmetic we have 14000 x F = 100
And thus F = 100/14000 = .0071428
Sure enough 14,000 x .0071428 = 100
Now say three weeks later you have $14,740 and you want to see how you are doing, you multiply that number by .0071428 and you get 105.3 (so you are up 5.3%). If you don’t add or subtract money, that factor will work for the whole year.
Now say you add $2300 of fresh money, but you don’t want that to screw up your estimate of how well you are doing.
You add the $2300 to the $14,740 and get $17,040 which is your new balance that you are investing with. That’s your new starting point. It doesn’t affect how you’ve done up to here. You haven’t suddenly done better because you added money. You can’t still multiply by .0071428 because you’d get 121.7 and it would look as if you were up 21.7%, when you are really only up 5.3%.
So you need to change your factor to make it smaller so it will still reflect the 5.3% gain you’ve made so far. You figure: “What would I multiply my new balance ($17,040) by to get 105.3, to reflect my 5.3% gain so far this year?”
F x 17,040 = 105.3
F = 105.3/17,040 = .0061795
And that’s your new factor. If you multiply it by 17,040, sure enough you get 105.3. Now you continue to see how you will do for the rest of the year.
If a little later you are at $18,000, you multiply 18,000 by .0061795 and you get 111.2, so you know that your investing is now up 11.2% for the year.
Same, if you take money out. You don’t want it to look as if you lost money. You calculate a new factor so you start from the same percentage where you were.
On January 1st of the next year, you write down how you did for the year and start over at 100 for the next year.
As far as results without 2008, which some people were speculating about, as I have made clear I averaged 32% per year compounded up to 2007. That included the recession in 1993-94, the bursting of the Internet Bubble in 2000, the 9/11 market drop in 2001, etc.
Then on the other side of 2008, from the beginning of 2009 to today I’m up 335.1%. That’s six and a half years. Let’s call it seven years. That comes out to about 23.5% per year, held back by the year of the Chinese companies, as I described, and by having so much more to manage. Not quite as good as before 2008, but I’ll take it.
I’m not going to post any longer on this subject if I can help it.
Saul
