Your 10yr Annualized Returns - Study of the high returners

[villainx]

Yet to be asked, was the portfolio all long, or there were some shorts in there too?  Was there hedging? 

 

I am exclusively long.  I don't understand shorting.  And I otherwise - own personal biases here - would feel weird shorting.

[villainx]

Also was it surveyed what was their down (if any) years like?

 

Interesting thread regardless.  Thanks.

[TBW]

To answer your questions.  Portfolio's were all long only (I think, nothing was mentioned about shorts).

 

One of them may have hedged, but that seemed like a trivial detail to their returns.

 

I don't know much about the down years for most participants.  The highest returner had some truly massive swings with his portfolio being down substantially a few times during the period of monster returns.

 

[Eigenvaluator]

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.

 

I enjoyed this viewpoint. In assuming P(X) = P(X|S) P(S) + P(X|~S) P(~S) = 0.3, we are suggesting P(X|~S) = 1/4, approximately. That is one out of four people who does not make the 20% hurdle concentrates.

 

[John Hjorth]

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.

 

I deliberately evaded that dimension in my reply to paarslaars on 22nd March this year, despite I understood that dimension also in the post from paarslaars.

 

All on this board started out somewhere, doing their very best from the very first day to get the snowball rolling, based on some kind of initial capital, whatever size.

 

There are topics and posts about "synthetic portfolios" laying around a few places on this board [actually I'm a bit puzzled about that]. It's about putting some of your hard earned to work - not "paper-money". There are shades of your own personality, that you will never get to know about, if you don't do it. Mr. Taleb is calling it "Skin in the game".

[Keemochi]

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...

 

Where in the world does he find properties with those kinds of rental yields??

[bci23]

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...

 

Where in the world does he find properties with those kinds of rental yields??

 

Probably very unsexy areas. Somewhere like Detroit (and surrounding suburbs), Kentucky, West Virginia, rural Texas.

[villainx]

With going 10 years back, there were tons of real estate bargains in the first half of the decade span.  Especially as RE market worked through desperate buyers and foreclosures.  Making those same gains in RE would be harder now.

 

I discussed with some friends about the NY market.  They liked a particular place in Brooklyn, and said it was unique.  Except it wasn't, every neighborhood in NY area (including NJ) so rapid recovered to new all time highsin the last five years.  What I attribute to luck - which could have been realized in almost any NY neighborhood, they attribute to foresight in seeing potential in a particular neighborhood. 

 

If the game is RE, it'll be interesting what kind of returns can happen going forward.