This is an excerpt of an email I received this week of an apology letter from the Everlasting Portfolio, explaining that their terrible results are the price we have to pay to have access to (hoped for) great long term results. I was shocked! (I removed the names of any stocks referred to so as to not compromise confidentiality).
This week was tough for the Everlasting Portfolio. ABC shares fell 23% on Tuesday. DEF declined 13% the same day. GHI dropped 19% yesterday. For the whole portfolio, April tied for the worst relative performance against the S&P 500 since the EP launched in 2012. Ouch. No one particularly enjoys weeks like this. In a perfect world we would only own stocks that went up day after day, week after week. But that world doesn’t exist. And it will never exist…
Investors pay a big price for comfort and clarity, and get paid a big price for discomfort and uncertainty. That is as close to an iron law in investing as it gets. Investments that offer stable, guaranteed returns – savings accounts, CDs, short-term Treasuries – also guarantee almost no returns . That’s the cost you’ll pay for assurance. The message here is that by giving up secure results, you have to pay with poor results. (see next paragraph).
The price we pay – the cost of admission – for high long-term returns is chaotic short-term returns. Most investors aren’t willing to pay that price, which is why opportunity is available for those who are. Even with a brutal week, the Everlasting Portfolio has outperformed the S&P 500 by 17 percentage points since inception.
Do you realize how incredibly bad this is! Inception was in 2012! And they are happy they beat the S&P by 17 points since 2012. That’s what one pays huge fees for? We’ve beaten the S&P by more than that so far just since Jan 1st this year! No fees! We were up 1.6% this “worst week.” No fees! And anyone reading this board could have followed our principles (and even some of our stocks if they chose, as I post my positions every month), and had approximately similar results. I think the problem is the buy and hold for 5 years, no matter, what in the rules of the everlasting portfolio. I suspect a rational person might have exited some of those positions if they weren’t forced by the rules to keep them.
Saul
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Here’s the good news (from my perspective). TNF got me to trust my own judgment with stock picking. They got me to focus on the underlying business rather than the stock’s market performance. As a Supernova subscriber (for 2 years) I made more good investments than bad ones, however, I did not buy every recommendation, I did not hold every losing position. I found this board.
Now for the not so good news. It’s been a bit painful to shed a lot of my holdings, even the ones that have performed poorly. Why? Buy and hold mentality. The mistaken notion that i haven’t really lost any money until I lock it in by selling at a loss. So long as I hold onto the future promise that these investments will someday provide great returns I’m doing OK.
This is false. If the stock goes below my purchase price, I’ve lost money. If the stock underperforms the general market, I’ve lost money. If the stock underperforms my other holdings with a similar risk profile that are doing much better and are not overweight in my portfolio, I’ve lost money. That doesn’t automatically make it a bad investment. There are many reasons for a stock’s price to behave in erratic fashion. But, hold for five years irrespective of everything else is preposterous. This dictum (along with the exorbitant fee structure) is why I could not be enticed to join foolish Everlasting Portfolio.
There are other things about TMF that are annoying (like the risk measurement that includes automatic negative answers, if every company gets the same answer, what’s the point of the question?). The CAPS game. And so on . . .
But the thing that at first appealed most to me is now the thing I find the most damaging investment advice. The “buy and hold” dictum. It’s fine to buy with the intention of holding, but it’s stupid (but oddly comforting) to do so blindly. If you always can maintain faith in the long-term outcome, you never get too uncomfortable with losing positions.
But, I get it. TMF is a business. The brothers have built the entire business on this mantra. There’s no turning back.
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" If the stock underperforms the general market, I’ve lost money" No, as long as the price goes up (plus any dividends) you have made money. Compared to “general market” maybe not , but that “general market” can be measured several ways. So maybe you haven’t made as much. But those returns should be valued by the amount of risk involved in each.
As you say paper loses are real. You can prove this by trying to borrow using them as collateral. Buy and hold works fine for broad indices as long as you are young enough to have time on your side. And no Russia 1918 happens. ( probably not a true Black Swan event). This does not hold=true for individual stocks which are dependent on unique factors beyond the general economy .
One other point- the DJI and SP 500 are both actually actively managed indices. They just change slowly as stocks are dropped or added.
I like the combined selling strategy of Peter Lynch and Philip Fisher. Fisher says, in effect, “Give your stocks a chance” meaning, don’t sell then just because they drop in price, hold for a reasonable amount of time for the stock to show its stuff. Lynch says to sell when the story changes.
As an example, I bought PFIE on November 24 at $3.405. Soon after it started to drop. Saul commented that they had spent money on expansion at the wrong time – true enough, but, IMO, the story had not changed. It was worth holding. I tracked the price as well as the price of crude and did not add until I felt that a bottom had set in. That was April 24, when I bought twice the shares at less than half the price, $1.53. My new cost basis is $2.157.
http://softwaretimes.com/pics/pfie-05-02-2015.gif
On the other hand, XPO’s story has changed for the worse with the French deal, IMO. If the market continues liking it, my covered calls are likely to be assigned and I’ll be happy to have made a small profit. Had it not been for the calls, I would have considered selling outright.
Having a good exit strategy is certainly of great importance. It was my missing piece during the tech bubble.
Denny Schlesinger
Yeah, well I suppose you’re right, maybe I overstated my case. But I was trying to make the point that “paper losses” are in fact losses. A point with which you apparently agree with.
Denny,
I consider you to be one of the sharper knives in this drawer and I agree with your basic premise. If you re-read my post you will notice I said, even in the face of a real “paper” loss, That doesn’t automatically make it a bad investment. So, I tried to assert the caveat that a loss does not mean one should immediately push the (very annoying) “Sell! Sell! Sell!” button. Bur we should take notice rather than simply chanting the mantra “buy and hold . . .buy and hold . . .buy and hold . . .”
Now that two folks have gone out of their way to specifically address my comment, I guess what I was really trying to communicate is that an investment is an activity, not a rule-bound event.
This is my primary objection to the entire thesis that forms the foundation of the Everlasting Portfolio. I also think the fees are kind of high, but maybe not, I don’t have a basis of comparison, so maybe the fees are competitive. And I understand the notion of going contrary to the grain of high churn mutual funds, which I think describes almost all of them.
But the rule (not a goal, but a rule that governs investment decisions and actions) that states anything purchased will be held for a minimum of five years is a terrible rule. It first guarantees that you will be stuck with some turkeys which cannot be culled. Second, it discourages taking on some measured risk for fear of being stuck with an investment that sours.
This is worse than French labor laws.
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The problem with Supernova is the buy and hold strategy. Giant winners turn into losers ie DDD, MTZ and SSYS. The recent rec of LL has me scratching my head. There are so many better stocks in the SN universe why pick one and hope all the bad news is incorrect. Holding onto losers forever is another strategy I dislike ie P, XONE, WPRT, NUAN. Finally, never taking profits means passing up better opportunities. This board has stocks that are thoroughly vetted, decent PEs and 1year PEG. A stock does not have to have an outrageous PE to be attractive. It certainly allows me to sleep better at night.I still follow SN Odyssey, P1 and P2 and have bought many of the stocks but I dump losers much quicker.Selling big winners is ok too although this year I have too much income I will need to hold my winners until next year because of tax rate and ACA tax.Rambling, sorry!
Fool On,
Htownrich
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“The CAPs game”.
Odd that I should be defending CAPS, but… What I have been recently using CAPS for are a couple of things. One is to document my opinion on recommendations from the various services, at least for those that are interesting enough to me to do at least some DD. I don’t follow any of the real money portfolios although I have access to four. In the “pitch” I can make at least some reasoning for thumbs up or thumbs down, buying or not buying. I have also participated a bit in the investment analysis threads and documented by up/down opinion on those.
I have found that I have stocks in my portfolio that are just that, stocks, not companies so that I have found myself asking (myself), “why do I own this?” How does it fit my investing goals? A lot of these come from my odyssey through MF offerings as I had trial One subscription and I do need to trim and tidy up and I will probably use CAPs to record those sales and document the reasons for the sale selection. A lot of Fools are better organized with recording their investment thesi but I will never be accused of being a neat freak so CAPs gives me a ready-made organizer.
This thread makes me want to post about buy-and-hold, score keeping vs. S&P, and active investing vs. following real money portfolios but I will desist and reign in the impulse.
Good investing to all,
KC
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“anything purchased will be held for a minimum of five years is a terrible rule.” I certainly agree with that, it is way too arbitrary. Why not hold everything for 4 years, 3 , months and 11 days?
There are times to plan to hold a stock for 5 or 6 or 7 years, especially if it is early in the TALC , but always dependent on the underlying story not changing. The early days of AAPL, MSFT for instances. Selling too soon can be as much a mistake as selling too late.
Most of my stocks holdings do not involve this long a time. This aging bull market may survive another 5 years intact, but the odds are against it. Meaning that most stocks that you buy now will be a lot cheaper sometimes in the next 5 years.
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"this year I have too much income "
If it is really a burden I would be happy to take some of it off your hands… 
Yes. From my perspective, this free board has more value than any MF service to which I could subscribe. Thanks to everyone who contributes.
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