Your 10yr Annualized Returns - Study of the high returners

[TBW]

5 high returners generously responded to my request for information about how they achieved their returns.  I have tried my best to synthesize their responses.  I learned a lot from this and I hope you all do to.

 

Average 10yr return 32.4%, (high 52%, low 25%)

 

-all were non-professionals during most of this period.  One of the individuals has since started a fund

-all 5 generated all their returns from stock investing

-most, but not all, were fully invested in the stock market

-returns came largely from midcap stocks or large cap (financials)

-leverage was not used at all in 3 cases and sparingly in 2.  When leverage was used it was primarily through leaps or some margin.

 

I was surprised how similar their stories were.  I expected a broad range of approaches to large returns.  The primary way these investors achieved such high returns was from concentration.  Some concentrated to as little as 4 stocks, some in the 10 range.  The major theme, was find something within your circle of competence, at very cheap levels, and go big.  They key here is finding something really cheap and then you can take more confidence in your valuation and ride out the volatility you will inevitably face.  Obviously this strategy is a double edged sword - you have to be right about both the company and your valuation. 

 

All investors seemed to be very patient with low turnover. 

 

These people are all following the preachings of Munger, be patient, buy what you understand, swing big at the fat pitches, and hold. 

 

I was also surprised that their approaches were fairly steady.  I had expected returns to be largely driven by concentration in one outsized winner.  However, only two of them told me about one position having an outsized impact on their returns.  Without these positions they still said they achieved returns well over 20%.  This tells me that the approach is the key takeaway, insist on a very large value discrepancy,  and be patient for these opportunities.  There style was not so much about trying to hit one big home run.

 

All the investors had different valuation preferences.  Some focused on longer term earnings power, some looked at EV/EBITDA, others Book value and ROE.  All looked for deep value though.  Sometimes that was a very beaten up stock in a beaten up sector, sometimes it was looking to buy compounders opportunistically, and other times it was a combination of both.

 

The investor’s style was, typically, look to see if large corrections, in parts of the market they understood, created some obvious opportunities.  Large parts of their gains were from financials after the GFC.  They picked stocks in companies they were confident would survive, at really cheap levels, went big and rarely sold.  Examples of this would be FFH in 2006, BAC since the crisis, O&G companies in the last year etc. 

 

This is a good personal reminder for me.  Most everyone could recognize the long-term value in BAC (if they survived), lots of people bought (like I did), but almost all of us likely bought too little and sold too soon (like I did).

 

Other interesting aspects is these people all really enjoy reading and learning about investing.  Despite large returns their lifestyles haven’t changed much and all spend roughly the same or more time studying companies/investing.

 

I asked them all if they thought they could achieve similar returns in the next 10 years.  They had mixed views on this.  Some were reasonably confident they could always find decent opportunities and could achieve similar returns.  Others were confident that their rational approach would allow them to continue to beat the market, however we are in a lower return environment and past high returns may not be as easily replicated.

 

I want to thank the contributors again for their time and knowledge.  It was a lot of fun learning their stories.  If anyone else wants to contribute please do.  If anyone has any further questions please let me know.

[KJP]

 

-leverage was not used at all in 3 cases and sparingly in 2.  When leverage was used it was primarily through leaps or some margin.

 

 

Thanks for sharing what you learned. 

 

When you say "leverage was not used," I assume you mean at the personal portfolio level.  But was leverage "used" in the sense that they invested in levered equities?  Putting aside the financials for a moment, were the companies these people invested in significantly levered?  And were the financial investments through warrants or common stock? 

[TBW]

Good questions.

 

Yes I mean on the personal portfolio leverage there was little leverage used. 

 

Other than financials, most of them avoided companies with lots of leverage.  Since these investors were very concentrated they tended to avoid companies that had chances of being a 0. 

 

You can argue that since they did invest heavily in financials on a portfolio basis there was a lot of leverage involved with these returns.

 

Some of the financials may have been invested in warrants, but I think mostly in common stock.  Don't know fully the details on this though.

[AzCactus]

5 high returners generously responded to my request for information about how they achieved their returns.  I have tried my best to synthesize their responses.  I learned a lot from this and I hope you all do to.

 

Average 10yr return 32.4%, (high 52%, low 25%)

 

-all were non-professionals during most of this period.  One of the individuals has since started a fund

-all 5 generated all their returns from stock investing

-most, but not all, were fully invested in the stock market

-returns came largely from midcap stocks or large cap (financials)

-leverage was not used at all in 3 cases and sparingly in 2.  When leverage was used it was primarily through leaps or some margin.

 

I was surprised how similar their stories were.  I expected a broad range of approaches to large returns.  The primary way these investors achieved such high returns was from concentration.  Some concentrated to as little as 4 stocks, some in the 10 range.  The major theme, was find something within your circle of competence, at very cheap levels, and go big.  They key here is finding something really cheap and then you can take more confidence in your valuation and ride out the volatility you will inevitably face.  Obviously this strategy is a double edged sword - you have to be right about both the company and your valuation. 

 

All investors seemed to be very patient with low turnover. 

 

These people are all following the preachings of Munger, be patient, buy what you understand, swing big at the fat pitches, and hold. 

 

I was also surprised that their approaches were fairly steady.  I had expected returns to be largely driven by concentration in one outsized winner.  However, only two of them told me about one position having an outsized impact on their returns.  Without these positions they still said they achieved returns well over 20%.  This tells me that the approach is the key takeaway, insist on a very large value discrepancy,  and be patient for these opportunities.  There style was not so much about trying to hit one big home run.

 

All the investors had different valuation preferences.  Some focused on longer term earnings power, some looked at EV/EBITDA, others Book value and ROE.  All looked for deep value though.  Sometimes that was a very beaten up stock in a beaten up sector, sometimes it was looking to buy compounders opportunistically, and other times it was a combination of both.

 

The investor’s style was, typically, look to see if large corrections, in parts of the market they understood, created some obvious opportunities.  Large parts of their gains were from financials after the GFC.  They picked stocks in companies they were confident would survive, at really cheap levels, went big and rarely sold.  Examples of this would be FFH in 2006, BAC since the crisis, O&G companies in the last year etc. 

 

This is a good personal reminder for me.  Most everyone could recognize the long-term value in BAC (if they survived), lots of people bought (like I did), but almost all of us likely bought too little and sold too soon (like I did).

 

Other interesting aspects is these people all really enjoy reading and learning about investing.  Despite large returns their lifestyles haven’t changed much and all spend roughly the same or more time studying companies/investing.

 

I asked them all if they thought they could achieve similar returns in the next 10 years.  They had mixed views on this.  Some were reasonably confident they could always find decent opportunities and could achieve similar returns.  Others were confident that their rational approach would allow them to continue to beat the market, however we are in a lower return environment and past high returns may not be as easily replicated.

 

I want to thank the contributors again for their time and knowledge.  It was a lot of fun learning their stories.  If anyone else wants to contribute please do.  If anyone has any further questions please let me know.

 

Thanks for doing this research.  Very much appreciated :)

[DocSnowball]

+1

Appreciate it so much!

[rolling]

Thank you for your work

 

They picked stocks in companies they were confident would survive, at really cheap levels, went big and rarely sold. 

Basically it comes down to this. Most of us know it, Buffett and Munger keep repeating that but we just fail.

 

My problem is in the "rarely sold" and I don't seem to learn... My turnover is becoming crazy high (I've sold 128% of the value of my current portfolio in the last 2,5 months)... Does anyone know the cure?

 

edit: the value would be 164% of current portfolio if I increase the time range to 4,5 months

[TBW]

Its my pleasure. Really enjoyed gathering this info. Still time if others want to contribute.

[wachtwoord]

Its my pleasure. Really enjoyed gathering this info. Still time if others want to contribute.

 

Thanks for this. Just out of curiosity, did you find your "high returners" on this forum or somewhere else?

[petec]

I wonder what survivorship bias there is, especially regarding concentration.  To put it another way, I wonder how many people there are out there who invested everything in 4 stocks and got it wrong!

 

 

[KJP]

I wonder what survivorship bias there is, especially regarding concentration.  To put it another way, I wonder how many people there are out there who invested everything in 4 stocks and got it wrong!

 

I suspect very high, but it's also very hard to track down the failures and interview them.

[TBW]

All the high returners were people from this board.

 

Certainly there is a survivorship bias.  Concentration is a double edged sword.  I think what separated these people is they seemed to be patient and concentrate when there was a real no-brainer type of investment (altho one could argue that without Fed actions perhaps BAC would have had more trouble, more dilution, default risk etc.).  I think concentration when done very selectively and not very often (like once every 5 to 10yrs) is a good strategy.

 

You raise a good point.  In an expensive market like the one we are in I think concentration could be very dangerous.

[Guest longinvestor]

Also, why the secrecy? 25 to 52% over 10 years which included 2007-08 is one for the headlines. Especially since little leverage and using concentration and buy-and-hold.

[Spekulatius]

The way the Op stated his survey, it was geared towards those that made a high return to begin with, so it mswould t certainly skewed.

There is nothing inherently  better about choosing few stocks vs many, other than allowing for results deviating from the norm, both positive and negative. I suspect that if you had done a survey for those that achieved very negative results over the same timeframe, you would also have found many with concentrated  investments as well, except those exhibited less skill and perhaps less luck as well.

[KCLarkin]

I wonder what survivorship bias there is, especially regarding concentration.  To put it another way, I wonder how many people there are out there who invested everything in 4 stocks and got it wrong!

 

By definition, survivorship bias drives those returns. For each person with a 10 year record that much higher than average, there must be several with below average records.

 

40% of all stocks lose money over their lifetime. A vast majority underperform the benchmarks over their lifetime. The index returns are driven by a very small sliver of winners:

http://awealthofcommonsense.com/2016/05/the-sp-500-is-the-worlds-largest-momentum-strategy/

 

So, the question is, do you have the capability to pick winners? If yes, then concentrate.

[DocSnowball]

Maybe a survey of those with fewer than 5 or 10 investments will answer this? Would love to know.

I'm in the less than 5 group, but the reason is my circle of competence is small and I don't want to touch anything outside that. Good thing, bad thing, we'll see!

[Cigarbutt]

I really admire people who are successful and humble. Rare combination though.

We often underestimate the impact of luck.

This is hindsight bias at work. Retrospectively, it may be easy to attribute your results to skill when really there was a confluence of circumstances.

Having said that, long term good results are likely related to a superior approach.

Hearing about the study done here, a parallel can be made to the book Free Capital. People from various backgrounds using different approaches can obtain good long term results. There seem to be common denominators though. 

[rkbabang]

Thank you for your work

 

They picked stocks in companies they were confident would survive, at really cheap levels, went big and rarely sold. 

Basically it comes down to this. Most of us know it, Buffett and Munger keep repeating that but we just fail.

 

My problem is in the "rarely sold" and I don't seem to learn... My turnover is becoming crazy high (I've sold 128% of the value of my current portfolio in the last 2,5 months)... Does anyone know the cure?

 

edit: the value would be 164% of current portfolio if I increase the time range to 4,5 months

 

 

I agree. While I don't trade nearly as much as you, I have very few "bought the wrong stock" mistakes.  Almost all of my mistakes were of the "sold way too early" variety.  With the market so high right now I am itching to sell a lot of my positions to raise cash and I am afraid I'll regret it, as I always have before.

 

 

[randomep]

 

You didn't address the biggest question on my mind. How much capital did these guys start with.  30% in 10yrs is 14x.  So ...... starting with just $200k is going to be $3M.  It can tell us a lot about their mentality towards concentration.......

[Liberty]

Thanks for sharing, TBW.

[Paarslaars]

 

You didn't address the biggest question on my mind. How much capital did these guys start with.  30% in 10yrs is 14x.  So ...... starting with just $200k is going to be $3M.  It can tell us a lot about their mentality towards concentration.......

 

Is "just $200k" typical for investors here to start with? I started as soon as I had my first 10k saved.

[clutch]

Agreed with others on survivorship bias. Although this is valuable characterization of a potentially successful strategy, we cannot be sure of the probability of success given using this strategy.

 

I suppose you could use Bayes theorem to estimate the probability. I will just use the CoFB population in my estimations.

 

Let S = success (say 10-year annualized return > 20%), X = a particular strategy.

We want to compute the probability of success given the strategy, so P(S|X).

 

P(S|X) = P(X|S)*P(S) / P(X)

 

Since OP has found a pretty common strategy among successful investors, we could estimate P(X|S) to be pretty high, let's say 90% or 0.90 (this can be interpreted as the probability that a successful investor has used the particular strategy).

 

Now, what would be P(S), probability of the success? Based on the Jurgis' poll, it was 17%. Obviously, in reality this number would be much lower because not all CoFB members who has 10 year history has voted...Let's say P(S) = 0.10.

 

Given that this is a value investing forum and we have more people who tend to run concentrated portfolios, I'd estimate that the probability of people here using the particular strategy is pretty high. Let's give a conservative estimate, P(X) = 0.30.

 

P(S|X) = (0.90)*(0.10)/(0.30) = 0.30

 

So even if an investor followed the particular strategy, the probability of the success is still only 30%! And in reality I'd expect this number to be much lower if we took proper sampling of the population.

 

[John Hjorth]

 

You didn't address the biggest question on my mind. How much capital did these guys start with.  30% in 10yrs is 14x.  So ...... starting with just $200k is going to be $3M.  It can tell us a lot about their mentality towards concentration.......

 

Is "just $200k" typical for investors here to start with? I started as soon as I had my first 10k saved.

 

Paarslaars,

 

Perhaps you are mixing up the starting point in time for reference period for performance measurement in the relevant topic with "point in time when started up investing" here, ref. how randomep phrased his post. Those two separate points in time are most likely not identical.

[Jurgis]

Agreed with others on survivorship bias. Although this is valuable characterization of a potentially successful strategy, we cannot be sure of the probability of success given using this strategy.

 

I suppose you could use Bayes theorem to estimate the probability. I will just use the CoFB population in my estimations.

 

Let S = success (say 10-year annualized return > 20%), X = a particular strategy.

We want to compute the probability of success given the strategy, so P(S|X).

 

P(S|X) = P(X|S)*P(S) / P(X)

 

Since OP has found a pretty common strategy among successful investors, we could estimate P(X|S) to be pretty high, let's say 90% or 0.90 (this can be interpreted as the probability that a successful investor has used the particular strategy).

 

Now, what would be P(S), probability of the success? Based on the Jurgis' poll, it was 17%. Obviously, in reality this number would be much lower because not all CoFB members who has 10 year history has voted...Let's say P(S) = 0.10.

 

Given that this is a value investing forum and we have more people who tend to run concentrated portfolios, I'd estimate that the probability of people here using the particular strategy is pretty high. Let's give a conservative estimate, P(X) = 0.30.

 

P(S|X) = (0.90)*(0.10)/(0.30) = 0.30

 

So even if an investor followed the particular strategy, the probability of the success is still only 30%! And in reality I'd expect this number to be much lower if we took proper sampling of the population.

 

OMG, some Bayes rule love here.  8)

[TBW]

I have a new entry from someone, from the forum, that just crushed it in real estate.  IRR north of 60% over a 10yr period.  While it is a different asset class I think there still are many similarities with our other high performers.

 

In this case the investor identified really cheap assets.  He used a clever approach, and a tonne of leverage to buy these assets as quickly as possible on a small amount of initial capital.  Doing all the work himself he was able to conserve as much cashflows as possible that he could then reinvest.

 

Much like the other stories, this investor is extremely patient and only buys a very small portion of the deals he does deep due diligence on.  Then he swings massively.

 

So, path to great returns is still identify something very cheap, swing large, and hold.  In this case, the willingness to get your hands dirty and do all the work yourself was a tremendous part of the success.

 

To those that are thinking the leverage here must have been huge.  It was, however the mortgage payments are covered 3x by rent.  That is already more conservative than anyone buying a house in Ontario these days...

[villainx]

Is "just $200k" typical for investors here to start with? I started as soon as I had my first 10k saved.

 

10K?!?  In a separate thread, someone advocated your portfolio obliteration!  Just kidding, and I hope I didn't overstated the someone's response, which I more or less agreed with.

 

I started small too.