Your 2014 portfolio return

[BG2008]

Corporate actions that obscures financials followed by dividend announcement that made it easier for people to figure out the financials.  Without dividends = no man's land.  With dividend = yield driven investors. 

 

 

38% so far this year in retirement accounts

 

Basic strategy was to concentrate on best ideas.  Most of the ideas had catalysts.  The returns were largely driven by 2 top ideas that were sized rather large.  Had more than 50% of assets stuck in a legacy workout/special situation that didn't generate much return but significantly lowered my cash available for investment earlier during the year.   

 

What were the catalysts in these cases?

[wachtwoord]

30-35% slot when denoted in Euros. The fact that I hate holding cash has had quite the positive influence on that this year ;)

[Patmo]

1) I think of position sizing in relation to the opportunity cost of the diversification. If I have two stock ideas that have similar return profiles, estimated 50% upside over 12 months, for example, buying those two stocks would be better than just one. I gain the diversifying nature of two stocks instead of one, but I haven't added any opportunity cost.  If I had two different stock ideas, the first had an estimated 80% upside over 12 months, the second had an estimated 20% upside over 12 months, my net is a 50% gain if I'm right on both ideas.  If I'm right on both stocks my realized opportunity cost is the difference between a 50% average gain (half of portfolio +20%, half of portfolio +80%) and an 80% gain if I had bought just the stock that gained 80%.  This cost is very real - starting with $100k 12 months ago, I now have $150k instead of $180k.  In other words, I would have physically lost $30k by not allocating the whole portfolio toward the stock that increased 80%. But what about the added risk? The riskier stock is the one I expect to go up 20%, not the one I expect to rise 80%. The reason is because I am buying the 20% returning stock at a 17% discount (the inverse of 1+20%) and the 80% returning stock at a 45% discount (the inverse of 1+80%). You can buy a put for catastrophic individual stock risk, and avoid the extraordinary unseen risk of the opportunity cost.  You can physically lose the $30k in our example and overlook it because your account statements never reflect what you should have had.  When you lose money you already have, you will notice. However, one dollar of opportunity cost is worth the same amount as a dollar currently sitting in your brokerage account.  I think of trimming positions in relation to any new ideas and the taxes as well.  When a stock gets near fair value I get nervous because that means I have more to lose with no expected gains remaining. If I was a couple months from long-term gains I would likely wait, but if a stock was near estimated fair value within say four months after I bought it, I would likely sell it and absorb the short-term tax.  Lost potential gains on your next best undervalued idea factor into the discussion, and how large you estimate the discrepancy to be.  Another way to think of it is how long, on average, will it take me to make up the forfeited capital due to the tax.

 

2) I look for a catalyst yes, but somewhat indirectly, meaning I first focus on estimated compounded return, which forces you to estimate a time frame. For example, an 80% total return over two years, (which is obviously a great nominal result) is a dramatically worse long-term compounded result than 60% per year. The shorter time frame catalysts are desirable for a few reasons. First, I wouldn't call myself good at figuring out what great businesses looks like. The longer I have to hold a stock, the more risk I am taking that a business will deteriorate without recognizing the probability up-front. The so-called catalysts I have had the most success with were financial statement related. People hate companies that are losing money or doing poorly, uncertainty, etc. I'm trying to buy something where the value/earnings are already there, but hazy for the moment. A company spinning off a money-losing business would be a 'hard catalyst', but management closing the segment would have the same effect after the losses were gone.  Catalysts are almost a necessity for me because without one, I would have lots of trouble estimating a compounded return.  They come in different forms though.

 

3)  Yes - paying a couple percent or so for a year of 50% downside protection could be reasonable if you had one idea you liked much more than your other ideas.  The key to the put being relatively cheap is demanding that the stock has lots of upside, otherwise 2-3% is quite expensive.  Meaning your results after buying a bunch of stocks that you thought would rise 15% all with a 3% put premium at a 50% loss strike would probably ruin your results without eliminating much risk.  But buying a stock you think will rise 80% in one year can make up for the cost of the put, and allow you to feel okay about taking on the individual stock risk to offset the risk of opportunity cost.  How much to pay and which strike price to buy is far from an exact science, at least from my standpoint.  For instance if it is January 2009 I wouldn't be that interested in paying the high volatility premiums, but today you might find a cheap put even though multiples are somewhat high.

 

4)  I have not become more diversified because of the discussion regarding opportunity cost - I expect to become more diversified when I cannot buy as much of a stock as I would like.

 

5)  I owned IDT in early 2008 at $5/share and held it to an 80% loss. As that was happening, I sold some other stocks at a smaller loss and averaged down to a $2.75/share cost and sold it after a two-year holding period for $14.  That was the only stock I held during the crash.  The first stock I owned was before that, from late 2007 to early 2008 that I sold for a 60% gain - it was a biotech. I consider buying that stock a mistake. Thankfully the result was good.  I moved into financials about a year or so after I sold IDT in 2010.  I bought a few spinoffs in the middle.

 

6)  Anything with 10x potential upside is intriguing.  Short of a market crash environment, I would question the probabilities involved. Meaning 10x in five years is interesting of course, but I would probably whiff. 10x in one or two years I would definitely buy if I could find reasonably priced options to own. I think I am much more likely to be wrong about one five-year prediction instead of the average of five one-year predictions/valuations.  The farther out my analysis goes, the more wrong I become.  This goes back to why I attempt to minimize any business projections, instead buying a stock that appears to be undervalued based on a multiple of today's earnings, or a conservative estimate of next year's less-hazy earnings, rather than a 20-year net present value or something like that.  The catalyst being what will make the earnings more blatantly obvious, which ideally would force the market to revalue the stock.

 

jmp8822,

 

I have tried different things in my retirement accounts in the past few years.  As I get older, I have come to realize that backing the truck up on your best ideas tends to be the easiest and safest way to compound your money at rates that are eye popping (above 25% CAGR).  I have out performed in the last 2 years mostly because I have simply concentrated in my best ideas.  In addition to owning something cheap, both of us seems to share a commonality in that we look for a catalyst or some sort of event that will unfold and reveal to the market that a specific name is cheap.  I would love to hear your thoughts about some questions that I have. 

 

1) How do you think about initial size of an investment?  How do you add/trim position as they grow larger?  Does taxes and the associated short/long term rate play into the equation?

 

2) Do you actively look for a hard catalyst? 

 

3) Do you actively buy puts to hedge out catastrophe risk?  If you do, how do you think about what strike price and % premium that justifies the price? 

 

4) As your assets have grown, have you grown more diversified?  I've had a conversation recently with someone who mentioned that he sized positions much larger earlier on because the absolute dollar amounts were smaller.  As the absolute dollar amounts have grown bigger, he did start to diversify more. 

 

5) Since you were 100% invested, how were you positioned going into and coming out of 2008/2009? 

 

6) Do you own "probabilistic names", intelligent speculation, or whatever you want to call it?  10x upside, 0 downside type of names?  If you do, how do you think about proper sizing within the portfolio?  I am always looking for a LEAP on my favorite ideas that might provide a 10X upside 0 downside return.  Sizing on that could be 5-10% depending on the stock and cost of the option.

 

Would love to hear your thoughts on this. 

 

BG2008

 

Very interesting stuff. The diversification vs. concentration discussion is fascinating, both sides have very compelling arguments. Honestly it seems harder to be more diversified as you need to keep track of more names, and at some point there are only so many materially mispriced stocks. You have to be really skilled to get mind boggling returns, but you also dramatically reduce the chance of your portfolio blowing up. I bet the number of people in the world that can do 40% a year on anything more than 15 stocks can be counted on one hand if at all. The number of people that can do that on 1 stock is without doubt much larger. But also the number of people who went to 0 is exponentially larger as well. One mistake and it's game over. Hell, a mistake is not even necessary, sometimes you make a good decision and the result doesn't follow.

[frommi]

Corporate actions that obscures financials followed by dividend announcement that made it easier for people to figure out the financials.  Without dividends = no man's land.  With dividend = yield driven investors. 

 

Ok, thanks. Was that in the annual/quarterly reports before the announcement or could someone just act on the publication of the information and still get a similar result?

[BG2008]

Yeah, the dividend announcement was very much explicitly conveyed in the Qs, conference calls, investor presentation etc.  You just have to piece all the information together. 

 

Corporate actions that obscures financials followed by dividend announcement that made it easier for people to figure out the financials.  Without dividends = no man's land.  With dividend = yield driven investors. 

 

Ok, thanks. Was that in the annual/quarterly reports before the announcement or could someone just act on the publication of the information and still get a similar result?

[fishwithwings]

22% no leverage, 10% cash, 50+ positions.  If anyone has experience investing successfully using a concentrated positions, please send me a pm... I can't fathom investing my net-worth in 3-6 positions.

[augustabound]

An article in today's Journal about best and worst investing mistakes and the Dan Loeb one made me think about the ultra concentrated discussion above.

http://www.wsj.com/articles/the-best-and-worst-investments-they-ever-made-1419609594

(You can still get in through Google's back door by searching The Best (and Worst) Investments They Ever Made if you don't subscribe to wsj.com)

 

Worst (investment): It happened while I was in college and trading stocks in my spare time. I had made $120,000 and proceeded to invest all of it in an idea I was particularly passionate about: Puritan-Bennett, a medical-respirator manufacturer. The company suffered massive losses after its products were associated with several deaths. In the years it took to remake my lost profits, I had a lot of time to absorb the important lesson of not overconcentrating positions.

 

The Jim Cramer's experience on averaging down, just below Loeb is also a good read.

 

[BG2008]

I think we can all learn from each other regarding a diversified versus concentrated method to riches.  Over the years, I've learned that when you really really understand an investment, it's best to back up the truck and really own it.  If you run a fund, there are limitations on what your max position size is.  Obviously, your LPs may not appreciate you taking a 50% position in a name (if it can be hedged at 3% OTM for 2% premium, then it's likely okay).  Your position size with LPs are pretty much pre-agreed upon.  I think that there's a place in a diversified portfolio for a couple concentrated position and there's a place in a concentrated portfolio for a few diversified positions.

 

Over the years, I've gravitated towards concentrated positions.  Here are a key checklist items I use for concentrated positions. 

 

1. Do I really understand the company?  This means O&G, Tech, Financials, growth companies, etc are automatically weeded out.  Any company that has a weak balance sheet, commodities exposures (miners, O&G), etc are weeded out within the first 5 minutes.  Companies that have tail risk, i.e. Awilco Drilling's rig explosion risk, regulatory risk etc are out.  Personally, BAC, AIG etc are out for me.  Simply because I, personally, can't figure these companies out. 

 

2. Is there a clear catalyst?  If not, the investment needs to be cheaper than a 30 cent dollar with intrinsic value growing.  Most of the time, the investments needs to be simple enough so that the next investor will understand it within 5 minutes.  If it's too complex, then the price may not re-rate. 

 

3. Either you are perfectly okay getting in bed with management team or there is an activist presence that will enforced proper behavior.  This absolutely cannot be under appreciated.  Often time, I wait till after management have pissed off every shareholder and an activist have filed a 13 D. 

 

4. Complexity of the situation - There is only 1 variable in the outcome and it's very easy to gauge.  If you need 3-4 things to go right for you to make money, it's probably hard to achieve.  If you just need to get 1 variable right, it's a lot easier. 

 

5. Would you buy more if the price were to drop by 20% tomorrow?  If the answer is yes because it's so cheap and safe, then you're onto something.  If the answer is no or depends, then you probably shouldn't take a 50% position on the name. 

 

There are other items to check on the checklist, but I feel like if you get these 5 right,  you've cover the bulk of the items. 

 

However, I have also notice that sometimes, it's good to have 1-3% positions when you've come across something that you can't dot all the i's and cross all the t's.  For example, I was made aware of Kreisler Manufacturing at $10.50 per share.  It was pretty close to a cashflow positive net net and we had an activist in AB Value watching over the company.  I also knew that these small defense/aerospace manufacturers tend to be cashcows because no one wants their planes to fall out of the skies due to parts failure.  But I couldn't bring myself to size this at a >5% because management will never return my call.  I meant to go visit the company, but they simply won't talk to me.  The price moved up pretty quickly after I bought and I only owned a 1% position.  There is a place in a concentrated portfolio to quickly allocate 1-3% to a name like KRSL upon a quick smell test. 

 

Other names that pass the smell tests are names like Straight Path Communication, Volcano Corp, etc.  These names are harder to figure out.  How much was Straight Path's IP litigation assets and spectrum worth?  Hard to tell, but it seems a lot more than the $60mm market cap that it was trading at initially.  More importantly, the management team utilized a low SG&A burn approach to monetize the IP and spectrum assets.  They can finance 5-7 years of cash burn with the $14mm of cash on their balance sheet.  Volcano Corp was a 60% gross margin medical device company and an activist had written a lengthy letter telling the company to sell itself.  The company has also alienated all its shareholders in the last few years via its poor capital allocation.  At the time of purchase, Volcano was trading at roughly 15X-20 OCF.  The issue here is that I don't know much about intravascular ultrasound or fractional flow reserve.  But I do know that medical device companies with 60% gross margin can usually be bought by larger competitors and the SG&A cost can be rationalized creating a ton of value for the acquirer. 

 

If you run a concentrated portfolio, I've learned that it's wise to allocate a small position, 1-3% to names like KRSL, STRP, and VOLC despite not fully grasping the business quality and risk of the company.  From 30,000 feet, the risk/rewards are so compelling that it pretty much justify a 1-3% positions upon a few hours of research and accepting the fact that you're not going to figure everything out.  Buy the small position and move on to hunt your elephant.

 

I would love to hear other people's thoughts on these topics.  I would especially like to hear how people manage to stay on top of 20+ names.  If you run a strategy of 10 positions at 10% each, I would love to hear the reasoning and how you stay on top of news/filings, etc.       

 

 

 

 

 

22% no leverage, 10% cash, 50+ positions.  If anyone has experience investing successfully using a concentrated positions, please send me a pm... I can't fathom investing my net-worth in 3-6 positions.

[merkhet]

The problem with diversified vs. concentrated discussions is that there is often no discussion of the base rate. My guess, since I have no robust data set on the matter, is that the base rate of blowing up is lower on the diversified side than the concentrated side. (I mean, mathematically, that almost has to be the case -- and this is coming from someone who feels the most comfortable owning between 4 to 8 stocks at a time.)

 

Mauboussin talks about this in his book "The Success Equation." Expected individual success is basically the base rate plus or minus a fudge factor for individual ability. The fudge factor on this forum is probably high across the board. The fudge factor for certain individual posters is probably significant deviations above the regular population.

 

It all comes down to figuring out your personal fudge factor, which incorporates things like your understanding of your investments (as BG2008 correctly pointed out), etc.

[merkhet]

I'd like to once again caution against envy on this thread, because I feel like I can see it building up even over the interwebs.

 

I went searching for the returns thread last year, and I found two interesting things. The first one is the comparison year over year.

 

Amount                -- 2014 -- 2013

less than 10%      -- 37.9% -- 9.2%

b/t 10% & 25%    -- 42.4% -- 22.2%

b/t 25% & 40%    -- 13.05% -- 35.8%

b/t 40% & 60%    -- 3.95% -- 17.1%

b/t 60% & 100%    -- 2.3%  -- 9.2%

greater than 100% -- 0.6% -- 6.5%

 

The second one is that the first post that came up when I made a search for the 2013 returns happened to reference an extremely good post by Kraven. (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-returns-in-2013/msg149602/)

 

Just following up a bit on Uccmal's very good post, the problem with these kinds of threads is that they inspire greed and envy.  That's a deadly combination.  It makes people do things they might not ordinarily do.  As Oddball posted the other day with a link to the Bogleheads board, average people don't have anywhere near the returns that even the "poor performers" on this board have achieved.  There are people lamenting 20% and 30% returns like their world has come to an end and they might as well hang up their investing spikes forever. 

 

So what will happen?  It's the same thing here as in the threads on leveraging up with options.  People will look at those who got gaudy returns and try to emulate them.  The thing is that the people who got these returns are very smart, very experienced and very good at what they do.  It's not the kind a thing a novice is going to just pop in and do.  Yet, that is what many will try.  The problem is that when the music stops the experienced will grab a seat while the novices will be left dancing for a few minutes until they realize the music hasn't been playing for a while. 

 

Know thyself.  Figure out what you are good at and what is comfortable for you.

 

I'm a novice at this pursuit so thanks for the perspective. I think any year in which you do not lose your capital's purchasing power cannot be thought of as "bad" ... as for good - this is more subjective. I find that I sometimes enjoy the mental game far more than the actual returns! I think Gio is the same in this way ;)

 

I wonder how many people in the middle brackets tried to chase the >100% bracket and ended up in the <10% bracket.

[innerscorecard]

I really don't think the data warrants that conclusion at all. The much simpler explanation would just be the returns of the broad market in 2013 as compared to this year. In aggregate, this board's return should reflect the broad market's return. The bigger this board gets in terms of membership, the more it should resemble the broad market.

[merkhet]

I get your point, and it would be hard to disaggregate the factors for a variety of reasons. Again, I will point out two things though:

 

(1) At the time of my post, there were 40 fewer votes for 2014 than 2013, so I dont know that much of this can be attributed to the board getting bigger. Though, we don't know how many people are repeat voters, etc.

 

(2) There was a 6.5% swing towards underperforming the market between the two years and about 6.6% more people bunched towards the market this year.

 

I would feel pretty confident in saying at least one person (and probably more) swung for the fences and whiffed, and I would be pretty confident (though slightly less so than the previous statement) that envy stoked by last year's results thread played a part in that person's performance.

[krazeenyc]

18%

 

Significantly under both my 5 and 10 yr CAGR.  But I'm pretty happy with it.  As my money has grown my conservatism has grown as well. 

I was more concentrated in the past -- but still fairly concentrated. This year I was concentrated in cash with a greater than 50% cash position for the last 3rd of the year.

 

I think one thing to note about the successful (over a long period of time) very concentrated vs diversified successful investor is that a lot of it is based on personality and skill set. 

 

Lucky to avoid the O&G collapse this year. 

[BG2008]

To a certain extent, I do think that return stats do create envy and all the unintended consequence of driving others to take on more risk.

 

On the other hand, understanding Eric, Packer, and other's out performance forces me to investigated why did they outperformed?  Can we improve upon their strategy? Would they do anything different.  I think Eric's extreme concentration has been very enlightening.  Although, I would probably buy some put protection whenever I decide to put >80% of my networth into an idea.  Packer has consistently outperformed by finding leveraged situations.  It's almost like he's participating in public LBOs without paying a take private premium.  He rinses and repeats.  Both Eric and Packer have found a methodology to compound at an crazy rate.  If you are a student of value investing, you have to ask yourself why were they able to get to where they did without blowing up.  Admittedly, I probably won't size my positions as large as Eric. 

 

Buffet also said if he had less than $1mm or $10mm, he can guarantee that he can return 50%?  This naturally cause me to be curious and want to reverse engineer that CAGR rate.  Why would Buffet make such a bold statement like that when he is known to under promise and over deliver?  Take one of Munger's quotes, "invert, always invert".  Let's dig into that a bit.  Buffet, allegedly was compounding at 60% prior to launching his fund.  Why?

 

I've also have the luxury of getting to know people on this board and off it who have achieve 50+% CAGR for 5+ years where each trade was "life changing" for them.  When evaluating their strategies, I don't think their risk under taking approached the level of "running through a firework factor with lit matches."  I think their risk under taking was closer to "I may lose 20-30% of my networth if everything that could go wrong did go wrong by have 2-3 ultra concentrated positions.  But that probability was likely low because of how compelling their investments were." 

 

No one here would question Joel Greenblatt's wisdom.  He compounded at 40% per year in a fund that had several hundred millions of assets.  He was before his time and held 6-8 positions that specialized in spinoffs and specials situations.  If Greenblatt had not written his book, I think we all should've still investigated spinoffs and special situation.

 

Happy holidays to all.  Again, would appreciates thoughts on the diversified versus concentrated approach and your thought process about position sizing etc.   

[BG2008]

I second the philosophy that personality and skill set plays a big role in choosing concentrated versus diversified.  I may also add that if you invest part time versus as a day job also plays a big role. 

 

18%

 

Significantly under both my 5 and 10 yr CAGR.  But I'm pretty happy with it.  As my money has grown my conservatism has grown as well. 

I was more concentrated in the past -- but still fairly concentrated. This year I was concentrated in cash with a greater than 50% cash position for the last 3rd of the year.

 

I think one thing to note about the successful (over a long period of time) very concentrated vs diversified successful investor is that a lot of it is based on personality and skill set. 

 

Lucky to avoid the O&G collapse this year.

[innerscorecard]

It could be that some people are waiting for the year to actually end and don't want to first deliver a preliminary result which may be materially changed, as I foolishly did.

 

There's also the talent factor. People without some threshold of investment skill (some of which may not be learnable) shouldn't be investing their own money. For them to swing for the fences and try to do what Eric or Packer do is suicide. They should be indexing, even if they like the idea of being a value investor. I'd love the idea of being a touring musician, but I have no musical talent, even though I've spent a lot of time in my life trying to improve musically. I'm now happy just listening to music and performing a few songs with my spouse at home. Many people should do the same for investing. That's why even though the Boglehead dogma is founded on an untruth (the markets are efficient), the lie is a good one to believe in for almost all people, including myself, probably.

[yadayada]

I think if you boil it down, packer never seems interested in stocks that trade at >5x earnings or FCF multiples. He is only interested in stocks that trade cheap right now.

 

You buy something when it trades at a cheap multiple, that is worth much more right now, not 3 years from now. And usually the cheapness has to be kind of non obvious, or it is simply a pessimistic market that prices everything down.  Or it is lack of liquidity. And the discount has to be very big. Often i see threads here of things trading at like 10-15x earnings. That is only going to give you massive outperformance if it grows really fast, and it has a really solid moat (so maybe google or something). Or if some special siuation type event reveals true earnings power 2-3x as much.

 

It seems like 10-15x is the magic multiple number. If you buy far below that, when it is priced cheaply for no good reason, you make great returns. If you are right a lot, and it goes from like 4x to 12x, and you sell it, that is a 200% return. If that rerating happens in a bit less then 3 years on average, that is a 50% IRR. If you always buy stuff at close to 10-15x multiples, you will likely not outperform much unless it grows like 30-40% or margins expand. And you find those things by looking at hated or ignored area's.

 

If I read about buffetts early days, he bought obscure stuff at really really low earnings multiples. Sometimes less then 1x earnings. And I notice that he focussed quite a bit on catalysts (graham too). No wonder he did those returns buying at those huge discounts! I always see statements here like 'better buy a great business for an ok price then an ok business for a great price'. But that is only really the optimal method if you dont spend a lot of time on investing or if you have billions of dollars to invest. Buffett only adopted this mantra after he became too big for those obscure cheap companies.

 

Why was BAC interesting? It was trading at 3-4x earnings. And it was somewhat conceiled (if you spend only 2 minutes on the financials) and it would be revealed within the next few years what it's true earnings powers was. Often see that those multiples are ignored a lot on this board and everywhere else. Because in the end that is what drives return, 3-4x multiple returns to a 11-12x multiple = 200% worth more right now and not 5 or 10 years from now.

 

Im not v experienced though, but this is what I make of it when I study these high return guys.

[actuary]

Always enjoyable to see discussions of concentration - the Eric path vs the Kraven path as someone mentioned.

 

My attitude is the following. If I fail to achieve adequate risk-adjusted returns in a concentrated portfolio of 3-10 names, am I going to do so with 30+? Probably not. And, as I think ScottHall said, that would be a really bitter pill to swallow in terms of effort and emotional investment. It is the difference between starting with superinvestor holdings and understanding just a few names really well versus massive amounts of screening, reading, discipline, and a bigger belief in my personal alpha-generating abilities (assuming I can find greater number of mispriced securities).

 

If I'm going to actively manage anything, I'd rather go ahead and do it. Think about the "punch card" and accept that it is a game of patience and volatility. Focus on finding a few fat pitches and then really swinging at them. Or, at least, that would be the goal. Mastering the art of that.

 

But that is too much risk for life and for a family. My "base rate" or "prior" must be that passive investing wins on a risk-adjusted basis. Then you have the emotional benefits: all you need to do is consider a wide range of possible scenarios, save enough, stick to the plan, and you will get there. You drastically reduce the risk of failure and "blaming yourself."

 

So we run the Monte Carlo and make sure that we are doing enough passive investing to cover a comfortable retirement in the tail. Only beyond that do I really have an appetite to make active bets.

 

After two consecutive years of >80%, our actively managed assets are going to finish 2014 with an IRR around -20%. We use a lot of concentration with this money. Correct bets on BAC, AIG, MSFT we not enough to offset a large stake in Fannie/Freddie preferred and various failures of timing, especially with respect to SHLD and OUTR. One thing that surprised me a lot in 2014 but wasn't a huge driver of return was the difference in performance between domestic and international tobacco. Also, we did a decent job side-stepping energy value traps but picked up some exposure recently.

 

I wish we'd waited until after the Lamberth decision to pick up the GSE exposure, but at least it gave us an opportunity to acquire more. But most of what we have was purchased mid-2013. I'm willing to wait years if it takes the Supreme Court to vacate the third amendment of the PSPAs.

 

Overall, it was an excellent year for us. Subpar returns on a blended basis, but our net worth still rose healthily. Wife and I both continued to grow our skill sets, gain new responsibilities at work, increase earned income. Our child is the best in the world and growing up so quickly. We are still young, and life seems full of possibilities and pleasures.

 

Long post, but it's great to have a public forum to hold yourself accountable. Good luck to all in 2015.

[KCLarkin]

I am saving my post until Jan 1. But I agree that there is a real danger of readers developing envy based on some of the outliers in this thread. I almost succumbed to this temptation last year. If you didn't do greater than 15% this year remember a few things:

- In any normal distribution, there will be people who get 50%+ returns from luck alone

- Most people who are listing 40%+ returns are using (possibly dangerous) amounts of leverage

- In a world of 2% interest rates, compounding at 10-12% is phenomenal

 

I frequently see posters dismissing people like Yacktman because they only outperform by 2 or 3%. Keep your expectations reasonable and you will be happier and safer.

[merkhet]

To a certain extent, I do think that return stats do create envy and all the unintended consequence of driving others to take on more risk.

 

On the other hand, understanding Eric, Packer, and other's out performance forces me to investigated why did they outperformed?

 

100% agree. I think that we have stumbled on to a pretty good compromise -- post results while having a few of us consistently whispering to the board "memento mori." (http://en.wikipedia.org/wiki/Roman_triumph)

[Patmo]

I think if you boil it down, packer never seems interested in stocks that trade at >5x earnings or FCF multiples. He is only interested in stocks that trade cheap right now.

 

You buy something when it trades at a cheap multiple, that is worth much more right now, not 3 years from now. And usually the cheapness has to be kind of non obvious, or it is simply a pessimistic market that prices everything down.  Or it is lack of liquidity. And the discount has to be very big. Often i see threads here of things trading at like 10-15x earnings. That is only going to give you massive outperformance if it grows really fast, and it has a really solid moat (so maybe google or something). Or if some special siuation type event reveals true earnings power 2-3x as much.

 

It seems like 10-15x is the magic multiple number. If you buy far below that, when it is priced cheaply for no good reason, you make great returns. If you are right a lot, and it goes from like 4x to 12x, and you sell it, that is a 200% return. If that rerating happens in a bit less then 3 years on average, that is a 50% IRR. If you always buy stuff at close to 10-15x multiples, you will likely not outperform much unless it grows like 30-40% or margins expand. And you find those things by looking at hated or ignored area's.

 

If I read about buffetts early days, he bought obscure stuff at really really low earnings multiples. Sometimes less then 1x earnings. And I notice that he focussed quite a bit on catalysts (graham too). No wonder he did those returns buying at those huge discounts! I always see statements here like 'better buy a great business for an ok price then an ok business for a great price'. But that is only really the optimal method if you dont spend a lot of time on investing or if you have billions of dollars to invest. Buffett only adopted this mantra after he became too big for those obscure cheap companies.

 

Why was BAC interesting? It was trading at 3-4x earnings. And it was somewhat conceiled (if you spend only 2 minutes on the financials) and it would be revealed within the next few years what it's true earnings powers was. Often see that those multiples are ignored a lot on this board and everywhere else. Because in the end that is what drives return, 3-4x multiple returns to a 11-12x multiple = 200% worth more right now and not 5 or 10 years from now.

 

Im not v experienced though, but this is what I make of it when I study these high return guys.

 

Very much agreed, that is the essence of value investing.

[Crip1]

Micro: I normally tend to be pretty close to the top of the bell curve, plus or minus a little in any given year, and this year is no exception. So far, the top of the bell curve is >10% and <15% and I am at 16%. At this point, 55.5% of the respondents had returns below 15% and 44.5% were at or above that mark. Altius, EXCO and BYD were my biggest losers for the year but my relatively small positions in each saw to it that, in aggregate, they reduced my overall returns by 2%, so, I would still have been in the same bucket had I avoided those “mistakes”.

Macro: I enjoy this thread every year. The reason is that to clearly displays my observation from years ago that Value Investors tend to be a humble lot, willing and able to admit their errors as they are their triumphs. One will rarely, if ever, hear the CNBC-esque-“I destroyed the market because I am a total bad-a**!!!”. One will hear “I thought that this was an easy decision and it worked out for me” or “I thought this was an easy decision but I did not see this or that impacting…”. Investing is like sports in that brilliance is not quite as important as avoiding mistakes. Because of this, I tend to buy and sell less frequently than others and have not used leverage at all. This will see to it that my returns will not be at the top, or the bottom, of the range for this group. And, I’m increasingly comfortable with that because…

Personal: I’m 51 and have the goal of achieving semi-retirement by 60. The definition of semi-retirement is where the decision of where to work and what to do will be driven less by income and more by other factors, primarily lack of stress, short commute, the ability to come home and NOT think about work or to go on vacation and not feel the need to work a couple of hours every day. Arithmetically, this is quite possible but as the investment portfolio has increased, losses hurt more. Back 15 years ago, if I would have a negative 5% annual return, the amount I would add to my savings would offset that and my overall net worth would remain the same. Now, if I have a negative 2% annual return, even though I am adding more to my savings in dollar terms, my overall net worth would decline. This compels one to be much more loss adverse. As part of this group, I figure that if I can achieve annual returns equal to the mean, then the “Semi-retirement at 60” goal should be achieved.

Thanks to everyone for their commentary…

-Crip

[yadayada]

To a certain extent, I do think that return stats do create envy and all the unintended consequence of driving others to take on more risk.

 

On the other hand, understanding Eric, Packer, and other's out performance forces me to investigated why did they outperformed?

 

100% agree. I think that we have stumbled on to a pretty good compromise -- post results while having a few of us consistently whispering to the board "memento mori." (http://en.wikipedia.org/wiki/Roman_triumph)

It seems short term results over 1 year are completely meaningless. Even 7 year returns can easily be a lot of luck. And it is only an inspiration to know that it is possible when i see long term killer results. Because if no one was doing it, I wouldnt think I could do it ':) . So seeing  alot of members scoring 20% returns or higher gives me some confidence.

[no_free_lunch]

About +10%.  Really pretty brutal.  When you strip out currency gains, probably about +4%.   

 

I was up +18% in June and went to 50% cash.  Since then the markets are basically flat but the remaining stocks in my portfoolio just got killed.  Obviously I made some serious mistakes with what I held in the back half of the year.  What is particularly frustrating, and completely my fault of course, is the degree to which I was leverage to commodities despite in general having no particular interest in commodities.  I just kept finding bargains in this one sector, or in other sectors dependent on commodities, and ended up with huge exposure.

 

Hopefully next year will be a better year.

[EliG]

About +10%.  Really pretty brutal.

 

+10% pretty brutal??? I wonder what kind of adjective do you reserve for a year like 2008. What would you call being down 20-30%?