It’s that time again. As WordPress counts, this is post 700 on my blog, though the actual number is more like 80% of that. I take this time to write a post about the blog itself, rather than the things I ordinarily write about.
My blog is a tough one in some ways. I admire many narrowly focused blogs, because they do such a good job at their narrow tasks. Many of them are in my blogroll. I read my blogroll daily; that’s what is in my RSS reader.
But I care about a wide range of topics in economics, finance and investments. Anytime I focus on one narrow area for a time, I get negative e-mail saying that I’m not writing about what he wants to read. Well, I’m sorry. My interests are broad, and you will get a melange when you read me. I felt the same way at RealMoney, because I was one of the few writers that you could not predict what area I would write about next.
The markets have calmed down, and my equity portfolio has done well, but I do not think we are past the troubles yet:
We still have an oversupply of houses.
Investment banks are still overlevered in their swap books.
Commercial property prices are beginning to fall, and that will have negative effects on the equityholders, and those who finance them.
As for my business life, I am busy preparing to pitch my equity management methods to institutional investors. I have been on the other side of the table in my life. Hopefully that will help me meet their needs.
In closing, I want to thank Abnormal Returns, The Big Picture (thanks, Barry), Alea (thanks, jck), FT Alphaville, The Kirk Report, Seeking Alpha, and Newsflashr for their support. I also want to thank the many small blogs that like me and have me on their blogroll. That means something to me; I thank you for your support. I also thank the TSCM/RealMoney fraternity for their support. TSCM has done the world a service by training young financial journalists, and bringing talented investors into writing for the public.
I have a list of thing to write about next, and it is long. If you have opinions about what you want me to cover e-mail me here. I am horrendously behind on my mail, but I read everything that gets written to me.
Again, many thanks for reading me. I appreciate all who take their valuable time to read my blog.
I worked for AIG for three years of my life 1989-1992.? In general, though I learned a ton while working there, I did not like the experience.? As my boss at Provident Mutual said to me, “My greatest doubt about you was that you survived there for three years; it made me wonder about your character.”
That’s probably a bit severe, but turnover was high among employees in the first five years; after that, there were many who would “lifers.”? Turnover would be low after five years.
Now, my stylized history of AIG takes it through the glory days of the 1980s, where return on assets [ROAs] was high, and financial leverage low.? ROA is a much better way to measure insurance company performance than return on equity [ROE].? Earning a spread between assets and liabilities is tough.? Earning an underwriting profit is tough.? Borrowing money to buy back stock is easy.? From the early 90s to the present, AIG became increasingly more levered.? ROE stayed near 15%, but it was less and less ROA, and more and more leverage.
I was never a great fan of my former employer, but I convinced the hedge fund that I worked for to buy some AIG when it was cheap.? We sold around $76, on the day it went into the DJIA.? It hasn’t seen that level since.
When AIG had their big problems, and ejected Greenberg, I wrote a lot at RealMoney about the situation.? The possibilities of accounting manipulation did not surprise me; my own experience there was that we played it to the edge.? AIG has been downgraded by the ratings agencies since then, but because they were big, they delayed the downgrading.? It should have happened years earlier, but Hank intimidated the ratings agencies.
It also does not surprise me that Hank is going after present AIG management regarding their recent disappointing earnings.? What does surprise me is the thought that International Lease Finance wants to go its own way.? When the deal originally was done, there was some skepticism inside AIG, but the word was that the tax benefits made the deal work on its own.??? My skepticism today is that AIG will not want to let go of a successful division.? It doesn’t make sense.
Now, Hank can fight AIG management as much as he wants.? (One, two, three.)? My opinion is that poor Martin Sullivan is not capable of managing such a large enterprise, and that it would be better if AIG were broken up.? (Okay, ILFC, see if you can survive on your own.)? Create a US life company, an international life company, a US P/C insurer, one for the foreign P/C business, and one more company to hold everything else.
Hank can complain, but the problems are bigger than the current management team, or Hank, can deal with.? AIG needs to shrink– reduce leverage, focus on underwriting profitability, exit unprofitable lines, as AIG did back in the 80s.? Give up market share, shed employees, become more profitable.? Essentially, they need to undo a lot of what Hank did.? The synergies of the combined enterprise are small, so break up AIG and let new managers focus more intensely on their less diverse enterprises.
To start, let me gather together my conclusions from the prior articles, and add one more:
Get the right industry.
Get a bright management team.
Don?t panic over small setbacks. Buy more.
Rebalance your portfolio regularly to fixed weights.
Dividends matter.
Buy cheap.
Trade away for better opportunities when you find them.
Don?t play with companies that have moderate credit quality during times of economic stress.
Measure credit quality not only by the balance sheet, but by the ability to generate free cash.
Spend more time trying to see whether management teams are competent or not.
Cut losses when your estimate of future profitability drops to levels that no longer justify holding the asset.
Diversify, diversify, diversify!
Okay, take another look at the graph above, and see that my gains are bigger and more frequent then my losses. Nonetheless, I took some significant losses. How could I bear those losses? Diversification. No position has ever been more than 7% of my portfolio, and the normal position is 2.9% in my 35 stock portfolio. I can take some whacks on individual positions if my overall investing is working.
My key question in deciding whether to sell a stock is whether I think its future returns are likely to be less than alternative investments. That is the only good reason to sell a stock, but few investors follow that rule. I may get my estimates of future value wrong, but if I do it consistently, my results should be good.
You can review my eight rules here. From my prior articles, you can see how my rebalancing trades have added value overall, even though on my losing trades, they added to the losses. Value works, Momentum works, and industry rotation works if it is done right.
My focus on accounting integrity, similar to to the work done by Piotorski, helps value investing work by avoiding value traps. I don’t miss every trap, but if I miss enough of them, I end up doing well.
Finally, our minds are not geared to make decisions where the dimensions of the decision are large. My methods compress the dimensions of the decision, and turn the decision into a swap transaction, where you trade something worse for something better.
That’s what I do in investing, and perhaps in the near term, I will gain my first sizable external clients. In closing, here is a list of all of my trades over the past 7.7 years:
I’m going to go in reverse order here. These were my best investments in the Broad Market Portfolio over the past 7.7 years measured by total dollars gained. After this post, I should have one or two more to wrap up the series, to try to explain why I think my methods work, and flesh out the lessons that I have learned. I am a generalist, but if I have a core skill, I think it is being a portfolio manager, especially regarding risk control, though as I have admitted, I have had some real losers.
Drumroll, and here goes:
10) Anglo American plc
When I bought it originally, it was the cheapest of the diversified miners. I wanted some base metal mining exposure, because I felt it was an industry trend that was underdiscounted. The metal prices were ahead of the stock prices. (And, I wish I had never sold Cleveland Cliffs… then again, for many of the names on this post, I wish I had never sold a share, but discipline in risk taking gives you the confidence to take risks.)
The trading of this one was simple — one rebalancing buy in 2006 during a small metals panic, but aside from that, the thesis was perfect, and I kept selling as the price kept rising. As is common for me with big gainers in my taxable account, I gave away the last bit to charity. If you are charitable, giving away appreciated stock is a wonderful way to do it, and the Fidelity Charitable Gift Trust makes it sooooo easy.
9) Ameron International
You ever heard of Ameron International? I’m not sure to this day where I first heard of it. For much of the time that I owned it, it was one of the larger stocks with no analytical coverage. Ameron International is a multinational manufacturer of engineered products and materials for the chemical, industrial, energy, transportation and infrastructure markets.
Anyway, I bought some, and then Chris Edmonds, who at that time wrote for RealMoney, separately picked it for one of his Holiday Portfolios. I e-mailed my hearty assent.
Ameron didn’t do much for the first three years that I owned it, but I kept clipping the dividend, and doing rebalancing trades, while the internal value of the business grew. Finally, some institutional investor(s) realized what a gem this company is, and the price exploded. I gave the final slug to charity. Would that I had held on, but I have had other good stocks since then.
8 ) SPX Corp
SPX Corp is a diversified industrial corporation that fell on hard times. I looked at it as a turnaround, with global growth as a tailwind that would eventually drive the stock up. In the fall of 2004, I felt pretty dumb about my purchases, but I persevered, thinking that there was value to be unlocked through intelligent management.
Many companies that I own have significant declines for no good economic reason. SPX was one of them. It is difficult to tell apart those that will disappoint versus those that will persevere, but my experience is that more of mine persevere than fail.
Again, another company that in hindsight it would have been better not to sell, but it was outside my valuation boundaries, and as I would say along with Lord Rothschild, “I always sell too soon.”
7) Helmerich & Payne
I still own Helmerich & Payne, and have sold once more in May. As the oil price kept going higher, I looked for related entities that had not gone crazy and would benefit from the higher prices. HP was one of them. (And, as I wanted to say to my pal Cody Willard — “Hey, Cody, I own HP, but it’s the right HP.”)
Contract drilling is a great place to be, when oil prices are so high. During the rise in energy prices, I moved more of my exposure into services, because even if oil would not be found, still those that were aiding the attempt to find it would get paid.
6) Cemex SA
Cemex is the company that I have held the longest. I have long been a fan of the cement industry, because it is the cheap way to facilitate global growth, and catch up on delayed infrastructure investment in the US. My first article for RealMoney was on the cement industry, and I owned three companies in it at that time, a massive overweight that paid off.
It was not a popular idea to buy Cemex when I did. They had problems with derivatives and mis-hedging in recent memory, but the stock was cheap enough that I thought it was worth the risk. For the next year it got cheaper, and I bought more. Most investors would have assumed that they had gotten it wrong, and bailed out. That’s not my way.
As you can see, though the price of Cemex rose, it rose in a volatile way, and my rebalancing discipline captured a lot of extra value in the process. I still own Cemex, and still think that it is cheap, and that management is pretty bright. I’m getting close to another rebalancing sale. This is a gift that keeps on giving.
5) Valero Energy
I own Valero today, but I sold out of it in entirety in 2005. I also owned Premcor during the best part of the run, and through the acquisition by Valero. At the end, I sold some and gave the rest away. If I added Valero and Premcor together, they would be my #1 gainer.
When I bought Valero, I felt that refining was in short supply, and would get rewarded. I don’t expect to be right that fast, but it is gratifying when it happens.
Now, after Hurricane Katrina, I felt that the price rises were overdone for refining stocks, so I sold, and gave the rest away.
4) Lyondell Chemical
Lyondell was an idea that I grabbed from that grand old man, John Neff. He is a humble guy, so you won’t hear him tooting his horn. My idea was that they owned half of a refinery with Citgo, and the rest of their business I was getting for the price of the refinery.
As it was, Venezuela needed cash because of the self-aggrandizing goals of Chavez, and they sold their half of the refinery cheaply to Lyondell. There was some confusion in the process and the rating agencies had their doubts, but Lyondell managed it well, until selling out to Basell, a Russian company. I gave the remainder away to charity.
3) Conoco Phillips
I have owned Conoco for a long time. It is my second longest holding, and it has rewarded me well. It looked cheap when I bought it, and on an earnings basis, it doesn’t look much different now. I have had a few rebalancing buys, but on the whole, the mix of exploration and refining has done admirably.
2) Plum Creek Timber
There is a small complexity in this investment. When Plum Creek bought The Timber Company [TGP], I swapped my holdings of Plum Creek for the Timber Company. When the deal closed, I had more Plum Creek shares. Even after that, to mid-2002, I bought more Plum Creek, making it a triple-weight in my portfolio. I felt that timber assets were undervalued, and I was happy to clip dividends while the market caught up with me.
In late 2004, I began the process of scaling out of the position, moving from a triple weight to a double, single, and then zero weight. I like the management of Plum Creek, but there are price levels that I can’t pay, and I must sell.
1) Companhia de Saneamento Basico do Estado de Sao Paulo — SABESP
What a company; this was an idea from Cramer (yes). I have long believed the thesis that potable water is scarce, and that companies that facilitate fresh water will be rewarded. SABESP is one of the few companies that was cheap enough to buy in 2005, and remains so today. Demand for water remains high, particularly in Sao Paulo, Brazil. I have sold many times, but not bought because there haven’t been any pullbacks; what a happy problem to have.
So, there are my top ten. They are a mix of:
Get the right industry.
Get a bright management team.
Don’t panic over small setbacks. Buy more.
It is worth noting that the top 11 companies that I have owned covered all of my losses. The gains have been bigger than my losses by a wide margin , and I have had three gains for every loss. In my next post or two, I will wrap up this series, and try to explain underlying ideas that helped me do so well.
Finishing off the average 10, the slightly better 5…
Deltic Timber
Deltic Timber was an idea that I gleaned from Jim Grant.? They have a lot of timberland in the Southern US, a decent amount of which is next to Little Rock, Arkansas.? The land near Little Rock, once developed, could be quite valuable in a bull market for residential real estate.? I ended up selling because I lost confidence in the residential housing market.
Honda Motors
I still own Honda.? Does the world need cars?? Does the world need small cars?? Yes!? Is Honda cheaply valued?? Yes.? Can they beat the cost levels of Ford, GM, and Chrysler?? Yes.? I like Toyota as well, and have owned it in the past.? I have owned American auto part manufacturers, but never the automakers themselves; their credit quality is too low.
Mueller Industries
This is a case where I found a cheap industrial, bought it, and waited.? The price rose, and I concluded that I had cheaper opportunities, so I sold.? Also, their raw materials prices were going to rise…
American Power Conversion
American Power Conversion was a cheap tech stock with products that are difficult to obsolete.? Eventually I had cheaper investments to buy, and I sold.? This is another example of how the rebalancing discipline can turn a flat stock into extra profits.
Australia & New Zealand Banking
This seemed to be a cheap, well-run foreign bank so I bought some.? As with many of my average investments, I sold it to fund other more promising investments.
Summary of Part II
Rebalance your portfolio regularly to fixed weights.
Dividends matter.
Buy cheap.
Trade away for better opportunities when you find them.
It is important in investing to have something to compare investments against.? Make them compete against each other for your dollars, and be rigorous about it.? Don’t invest because “That sounds like a good idea,” rather, is it better than what you currently have?? Keep improving the quality of your portfolio, in terms of cheapness, quality, and future prospects.
Okay, same drill as my pieces for my worst losses, but this time I chose the ten most average investments of mine in terms of dollars earned. Remember, one of my key disciplines is rebalancing.
Honeywell
Honeywell was short and simple. I felt it was out of favor, and I bought some. Six months later, I had cheaper stocks to buy, so Honeywell was gone.
Stone Energy
Stone Energy was a weird one. As you will note, the initial purchase and final sale prices aren’t that much different. Interim trading made a difference to the total return.
The stock popped after hurricane Katrina, and sagged quickly thereafter on an audit of proven reserves that came up light. The rebalancing discipline was a big help here.
Dow Chemical
Dow Chemical has two stories. First, dividends are valuable. Second, rebalancing adds value. Dow was a cheap stock that did not get respect, but I still made decent money off of its gyrations, and dividends.
Universal American Financial Corporation
This one is too early to tell. I still own it. Sometimes investments make significant money out of the gate. That is not often, in my experience. This is a little individual and group healthcare company that has gotten smashed over the merger integration. That is a relatively stable business, but small healthcare players have been harmed in the past. Insider buying here is a plus.
Aspen Insurance Holdings
Aspen was a relatively cheap reinsurer. I bought some and sold a chunk into a runup, and sold the rest as I concluded that I had better places to put money.
Summary of Part I
Rebalance your portfolio regularly to fixed weights.
Dividends matter.
Buy cheap.
If done consistently, these principles will raise your overall return, and reduce overall risk. Pretty good performance from a bunch of average stocks.
I sympathize with Bill Miller; no one likes to have a losing streak. That said, by my calculations, he is now behind the S&P 500 over the last ten years.
I want to offer a simple explanation as to why Bill Miller has done so poorly recently. First, he has bought growth companies — companies where the valuation is critically dependent on future earnings growth. Think of Amazon (a success) or Yahoo (a failure). Second, he avoided cyclical companies that benefit from global economic growth, that is, energy and basic materials.
Bill Miller did well in the era where he used simpler valuation metrics, before he moved onto metrics that demanded more from future growth of earnings. Since that time, he has underperformed, and deservedly so. He has neglected the core idea of value investing, which is the margin of safety. By buying companies that will get crushed if growth targets are not met, he has invited his own troubles.
And, for someone who prizes deep thinking, I’m afraid he missed the forest for the trees. (Tsst… MM is a bright guy, I like reading him, but what does he really add?) Better to spend a little time looking at the world, and adjust the investing accordingly, than to insist that a bunch of US-centric growth companies will outperform. Cyclical growth is real growth in this environment.
I hope Bill Miller turns it around because many friends of mine are part of the Baltimore money management community. As Legg Mason shrinks, so do opportunities here. But to turn it around, it means a return to down and dirty value investing, and an eye toward analyzing what sectors will do best from a global context.
In some ways, this one was pure slop on my part.? In September 2005, I thought the setback in Dana’s auto parts business was temporary, and bought a little more.? After the second dose of bad news, I looked at the statements afresh and kicked myself.? How could I have missed the growing negative divergence between earnings and cash flow?? I waited a few days for a rally, and sold.? As it was, Dana filed for Chapter 11 in March 2006.? This could have been a lot worse for me.
How much can you lose on a $7 stock? Seven dollars. Dana (DCN:NYSE) just filed for bankruptcy, and trading is temporarily suspended. I think the common will get wiped out, so any long trades here are purely speculative. Unsecured debt is trading in the high $60s, so they look like they are the new owners of the company (but that’s just a guess).
Don’t be afraid to take losses, if you know the situation is worse than the current price would indicate.
The common was wiped out when Dana recently emerged from bankruptcy in February of this year.? PXRE made out better, merging with Argonaut.
National Atlantic Holdings
I’ve written more than my share on NAHC, and for the good of my readers, probably too much.? Perhaps this one might be a good example of taking time to accumulate a position.? My average cost is $6.67, which means that if the deal goes through at $6.25, this isn’t one of my ten largest losses.? Tentatively, though, I plan on filing for appraisal rights if the deal goes through.
Consider the 1Q08 earnings conference call on Monday:
Operator:
And we have a follow up from David Merkel with Finacorp Securities.
<Q – David Merkel>: Hi.? Sorry to trouble you, one follow up. It’s basically the questions I asked on the last call.? Your loss reserves, there’s nothing there in terms of future development that should have been reflected in the first quarter that isn’t there in the statements, and your bonds are stated at their fair market value to the best of your knowledge.? You’ve got a high-quality portfolio there.
<A – Frank Prudente>: Yes we do, David.? This is Frank Prudente. I’ll take the second part of your question first if you don’t mind.? Our portfolio remains to be very conservative and very high quality.? With the implementation of the new accounting standard we’re at Level 2 two for all of our available for sale securities.? So we continue to feel very comfortable about our investment portfolio.? And as Bruce alluded to earlier, we do a comprehensive actuarial analysis every quarter which is further validated by the review performed by our external auditors each and every quarter.? And what I can tell you is we base our estimates of loss and loss adjustment expense reserves based on all of the most relevant data we have available to us for each and every financial statement close process.
<Q – David Merkel>: Thanks, Frank. I appreciate that. Take care.
What that may mean to the court is that twice after the announcement of the merger, they publicly stated that their most variable assets and liabilities were correctly and conservatively stated on their balance sheet.? That means anyone receiving much less than book is not getting fair compensation.? This one is not over yet; I may get out of this one with a gain.? :(? (Dreamer…)
My failure here was not carefully evaluating the management team, and rely on my usual benchmark that a short-tail P&C company earning money, and trading below book is a good deal.
Vishay Intertechnology
I am still invested in Vishay.? It earns money, generates free cash flow, debt is being reduced, and the balance sheet looks decent.? The sorts of electronic components that they make will be difficult to make obsolete.? I still like the name; I don’t think this one will be a loss for me in the end.
Tellabs
Tellabs looked cheap and got cheaper.? Almost every small tech company was getting thrown out; valuations reached record low levels by the end of third quarter 2002.? Tellabs had disappointment after disappointment, and I concluded that if it couldn’t earn money, the book value was overstated.? I sold, and bought stocks that I thought have more promise.
That said, my rebalancing discipline allowed me to reduce the overall losses from this volatile stock.? I didn’t lose nearly as much as a buy-and-hold investor would have.
Deutsche Bank
This was a failure to integrate my overall markets view, and allowing short-term valuation issues to dominate my decision.? I thought the investment banks wouldn’t do well, but I thought Deutsche Bank might escape the troubles.? Well, I was wrong.? European institutions mimicked Wall Street to a higher degree than most would have expected.
My last buy was a rebalancing buy, but as results came in from other European banks, I ended up selling Deutsche Bank, and RBS as well.? Time will tell how smart that was… the investment banks of our world are tied together through counterparty exposure — to a degree, they succeed and fail as a group… that’s why the Fed bailed out Bear Stearns.
Summary of Part II
I’ll repeat what I said in part one, and add a little.
Don?t play with companies that have moderate credit quality during times of economic stress.
Measure credit quality not only by the balance sheet, but by the ability to generate free cash.
Spend more time trying to see whether management teams are competent or not.
Cut losses when your estimate of future profitability drops to levels that no longer justify holding the asset.
The next two articles in this series will be about investments that went right.? They should come soon.
I’ve been debating in my mind how I would write this piece. In the end, I just decided that I would tell it plain. Part of investing is losing money. There is a connection between willingness to lose money in the short run, and ability to make money in the long run. My experience has been that if you don’t take the risk of losing significant money, you don’t make significant money. Another way of saying it is that if you don’t blow one up every now and then, you’re not taking enough risk.
With that introduction, let me present my 10 worst losses since starting this strategy 7.7 years ago, beginning with the worst, and moving to progressively lesser losses. These ten losses comprise 55% of the total dollar value of losses since I started this strategy.
Deerfield Capital
What can I say?? My original thesis was that Deerfield was a mortgage REIT that did it right.? In spite of my negative real estate views, I did not think that the risk would extend all of the way to prime mortgage and Alt-A (no stated income) collateral.? Alas, my training as an actuary should have told me to avoid companies dependent on market confidence to maintain financing.? As the repo haircuts rose, free assets diminished, aand they had to collapse their balance sheet.? My main mistake was thinking that repo haircuts couldn’t get that high.? I was wrong. I finally sold when I thought the likelihood of insolvency was significant.
YRC Worldwide
I got in this one too early.? My industry models sometimes flash “cheap” when things will get cheaper.? Sometimes I have the sense to remember that.? This time I didn’t.? YRC has more debt than I would like, but it has a huge amount of upside when the economy turns.? Waiting for that turn could be fatal, but I continue to do so.? One other note: for the remainder of this piece — where my graphs say exit, it does not mean sale. For companies that I still owned at 4/30/2008, I market them down as “exited” because that is where my calculations end.
The jury is out on this one.? As with all of my investments, I try to analyze a company versus its likely future prospects.? I don’t care a lot about the past, I just try to analyze current price versus future prospects.? My estimate of future value warrants continued inclusion in the portfolio.
Dynegy
Catch a falling knife?? When there is fraud, I give other investors a pass.? As for me, I should have known better.? Cash flow was light relative to earnings — not a good sign.? Another warning sign ignored: avoid managements that are self-absorbed.? Dynegy and their investment banks had to kick in to fund a settlement.? (Note: it is only worth going through the settlement process when a deep third pocket gets tagged.? Most fraud cases are broke, and only the lawyers do well.)
I’m afraid that friends influenced me here; a number of people in my investment department owned Dynegy, and when I bought, e comment was “Welcome to the Dark Side.”? Dark? — better to say red ink. I can’t prevent being taken in by fraud, but I can minimize it if I focus on companies with strong cash generation.? It’s hard to fake free cash flow.
Jones Apparel Group
Again, my industry models flashed “Cheap” too soon.? Everything depends on whether Jones can turn their operating businesses around.? I think they have a chance, and given the recent sale of one of their subsidiaries, there is enough cash.? That said, I tend to worry when debt levels verge on high, and the debt maturities are near.? There is a new CEO, who was the old CFO.? At present, I still think there is value here, but I will take my loss before the end of 2008 if earnings results don’t turn.
Cable & Wireless plc
One of my ways of trying to make money is to buy strongly capitalized companies in an industry that is having troubles.? Well, the strength of C&W’s balance sheet was overstated; there was a bit of a fraud issue there.? And, I should have listened to Cody Willard, who e-mailed me before we really knew me, and said something to the effect of, “Yeah, they have a balance sheet, but no good businesses.? Can’t make money with that.”
Part I Summary
Every loss is stupid in hindsight.? We all get tempted to say “woulda, coulda, shoulda.”? But the same principles that led to my losses also led to my greatest gains.? Two articles from now in this series, I’ll go over those.? But it is best to lead with failure… we learn far more from our failures than our successes.? What are my lessons here?
Don’t play with companies that have moderate credit quality during times of economic stress.
Measure credit quality not only by the balance sheet, but by the ability to generate free cash.
Spend more time trying to see whether management teams are competent or not.
I’ll see if I can’t do better on these concepts in the future.
If you ask me what is more fundamental to me — am I an economist or and an investor? I will tell you that I am an investor. At present for my work I am putting together a pitch book for my company detailing my value investing for potential clients. In the process of doing that, I decided to analyze all of my investments over the past 7+ years, in an effort to find some stories that are representative of my money management methods (both good and bad).
In order to get those stories, I had to download and clean all of my transactions over the past 7+ years, and then calculate the internal rate of return on each stock that I bought over the period. I still haven’t written the stories, and would appreciate advice from readers as to which stocks to use.
As I did my analysis, I learned a few things:
Over the 7+ years, I have owned 186 stocks.
Slightly more than 75% of my investments have been profitable.
My average holding period has been 503 days.
I have hit some home runs, and hit into triple plays.
My top 11 gains pay for all of my losers.
My cumulative profits comprise more than two-thirds of my assets.
Holding Period
Now, on this graph, the days are averages, so zero represents 0-50 days, 100 represents 50-150 days, etc. As you can see, I occasionally trade (though usually not intentionally) , but most of the time I invest.
Internal Rates of Return
What is an internal rate of return [IRR]? It is the constant rate one earns on an investment from start to finish. It is a way of averaging out all of the cash flows, and annualizing the result, so that it can be compared against other investments. Here is a histogram of the internal rates of return on my investments:
But, IRRs can be misleading. A small gain/loss in a short period of time can result in large absolute IRRs. That’s why I decided to create the imperfect concept of the pseudo-cumulative return. Suppose you earned the IRR over the full length of the investment? What would the cumulative return be?
Now, those who have followed me for a while know that my rebalancing discipline forces me to buy or sell after large moves. The pseudo-cumulative return usually overstates my return, because I sold on the way up, and bought on the way down.
The above graph, tough as it is to interpret, gives a reasonable idea of how my investments have worked. Most of my investments last for a few years, some more, some less. I have tended to make money pretty regularly, but I have had some real stinkers. I’ll pick up on that theme in my next post on Monday.
