Portfolio Performance Evaluation And Some Thoughts

The first table shows the relative returns of my portfolio, a part of which can be seen here, compared to the S&P total return for the last years. Both returns include dividends.

The second table shows the absolute results and their evolution. I report in Euros because my portfolio has several underlying currencies and it’s the one I’m more used to.

The results for the current year go up to the 31 December, that was the last time I checked my performance.

Year S&P My Portf
2013 32.39% 35.48%
2012 16.00% 18.49%
2011 2.11% 3.72%
2010 15.06% 16.79%
2009 26.46% 160.13%
2008 -37.00% -30.46%
2007 5.49% -5.00%
2006 15.80% 9.28%

Beating the market gives confidence, but what really matters to me are absolute results. Relative results are nice to have and necessary. If I did not have them I would consider putting my money, in equal amounts and periodically, in some good market index funds. Since I manage money full time requiring more than relative results. It’s not enough to say “oh, I did great I just lost 12%, but the market did much worse”. I leave that mentality to the mutual funds. Relative results are a necessary condition but what is additionally important for me are absolute growth and above all preservation of capital. If I lose, I try to lose the minimum, if I win, I strive to win big, in absolute terms. I’m very selective and bet big only when the odds are in my favor. Character plays a big role too, make sure you have it. If I had panicked in 2008 instead of acting with conviction by deploying my cash after opportunities my performance would have been different.

Year Invested
Amount
End
Value
Cash sent/
Cum
Gain/
Cum
2013 €135,859 €184,063 €0/
€57,897
€48,204/
€126,167
2012 €114,656 €135,859 -€1,646/
€57,897
€21,203/
€77,962
2011 €112,127 €116,302 €14,854/
€59,543
€4,176/
€56,759
2010 €83,290 €97,273 -€11,259/
€44,689
€13,983/
€52,584
2009 €36,347 €94,549 -€10,337/
€55,948
€58,202/
€38,601
2008 €67,129 €46,684 €44,199/
€66,286
-€20,444/
-€19,601
2007 €24,136 €22,929 €0/
€22,086
-€1,206/
€843
2006 €22,086 €24,136 €22,086/
€22,086
€2,049/
€2,049

You can see the information above as the evolution of a company. A company with a portfolio of assets, composed of equity and liabilities. The assets that make up the portfolio is the value of all my brokerage accounts.

The portfolio equity are all the accumulated gains and losses on my accounts. The equity or the accumulation of gains and losses is obtained with both realized and unrealized gains and losses, with long and short positions, with or without margin and with multiple currencies. They include gains and losses obtained with dividends; interests; options; stocks; bonds; cfd’s; futures, etc …

Liabilities is the total money sent to my accounts, like a loan to them that needs to be returned.

The equity or accumulated earnings is the accumulation of the yearly portfolio gains or losses. So the increase in equity in a given year can be seen as the portfolio earnings of that year. Equity (or book value) has evolved from 2 thousand euros in 2006, to around €126.17 thousand as of the 31 December of this year, passing through negative equity of almost minus €20 thousand by the end of 2008 and recovering afterwards. The yearly earnings since 2006 up until this year to date have been (in thousand Euros): €2; -€1.2; -€20.4; €58.2; €14; €4.2; €21.2 and €48.20 and their sum is €126.17 which corresponds to the portfolio equity or accumulated earnings. As expected assets-liabilities=equity, since the current portfolio value of €184,063 (assets), minus all the money that I have sent to my brokers adding up to €57,897 (liabilities), is what I have gained. In other words it’s the portfolio equity or it’s accumulated earnings: €126,167.

So you simply may see the performance above as a cash flow of earnings, and of money sent or withdrawn. The assets (portfolio value) are up to now €184,063 and initially they were €22,086. The liabilities are the money I have sent to my brokers in order to invest, which is up to now €57,897 . I like to think of the money I sent to my brokers as liabilities, as if it was a loan I took from myself in order to invest it in stocks and other things, but which should be repaid, money has to come back. Money withdrawn is a reduction of liabilities or equivalently a repayment of debt. The equity is all I have gained each year accumulated (accumulated earnings), or the assets minus the liabilities, which, as expected, coincides and is now €126,167 . The good thing is that assets are now bigger so I need to keep up a good performance so that the returns will also be bigger. Hopefully I can keep on beating the indexes and manage not losing much any single year in absolute terms.

I think it is important to measure your performance like above. Viewing your portfolio as if it was a company composed of fractions of other companies and investments of all kinds. Like that you can apply all your knowledge to evaluate how well that “company” (your portfolio) is doing. You can identify it’s equity, liabilities and assets and see it’s evolution. That is what Seth Klarman means by measuring your performance in absolute terms. It is quite informative. As a stock investor, you know how to read financial statements, you will immediately see if you perform good or bad, and honestly decide if it’s worth continuing with what you have done up to now with your investments, or with the ones you manage.

Relative comparisons can be tricky, what matters are absolute returns. Some might think that the S&P total return did a good job by just looking at the past years performance. The fact is that since the 1st January 2006 until the 31st December 2012, just 7 years, it returned 32.66%, which amounts to 4.12%/year. In that same time span I decided when to keep big cash reserves and when to deploy them. The biggest part of the money I sent to my brokers was by the end of 2008 (sent € 44,199 that year), I could have invested more before but decided not to. Sometimes I prefer to explain the performance in practical terms and simply say that in order to invest I have sent €57,897 and that after adding the accumulated earnings it became €184,063. That last statement can often be much more informative than showing portfolios or talking about relative performance.

I think one of the best ways to improve yourself is to fanatically try to have absolute and positive results. First rule should be to avoid losing money, so it doesn’t matter if you did better than this or that if you lost money. If you do insist on benchmarking your performance then the best benchmark is the market itself, for example represented by the standard and poor if you invest in the USA. If you are not able to beat the market it is worthwhile considering to buy periodically a fix amount of a fund that tracks the market well and has small fees, for example buy 200 dollars of the SPY ETF every month at around the same date, as many shares as that amount allows you to, no matter what the price is. By stopping your under-performing trading, you’ll free up your time, have much better results and almost always earn more or lose less than what you would have if you did not stop.

If you do insist on doing you own stock picking, you should be critical, ask yourself basic questions such as:

Do you have enough time ? Are you sleeping Okey ? Do you enjoy it ? Are you improving ? How did you behave in the last years ? Would your stock investments, financed by your hard earned savings, not be doing much better in a market index fund ?

The honest answer will show you if you would not do better by simply buying an index.

Of course there are also some people that even if they mostly lose or under-perform they like it so much that it becomes like a paid hobby for them. I think it’s OK as long as it doesn’t turn into an addiction or as long as they are aware of their bad performance compared to the market and honestly agree with that cost and as long as they don’t spend their wives or kids savings in the process, or worse, their customers money.

As for myself, I periodically monitor my behavior, first look for absolute positive returns, and then compare them with the market. I hate so much losing money that if I would do worse than the market more often than not I would simply start buying some index funds directly in order to improve the performance. It would be sad though because I really enjoy doing this but it would also free time and allow me to try to re learn and see what went wrong.

As you see my results in 2008 and before were bad, even if I beat the S&P in 2008. Until then I did several idiot things because I only started educating myself for investing in the year 2007. Fortunately I had the wisdom, due to my lack of knowledge, to stay mostly cash until then and had little money invested in the stock market when the crash came. The good thing about having cash during that crash is that it provided the opportunity to buy a lot. So that “bad” year eventually proved to be a great one because the seeds for fortune were planted back then. I started buying seriously only by the end of 2008 and continued buying strongly in the 1st quarter of 2009. It required conviction and faith on my company valuations, but most importantly: the capacity to act on my beliefs. I kept buying and I kept losing even more, during several months, gradually deploying a lot of my cash. That conviction and will to act allowed me to build a strong position for the turnaround, cherry picking near the bottom. I remember mentioning to several colleagues that I decided I would put all my savings in the stock market and I was could have made it if it had not turned around so fast, some of the reactions were :

“you’re crazy”

“oh yes it is definitely cheap but I can not do it I just do not dare”

“what if companies stop selling?…”

“google is at 250, but what if nobody clicks on it’s ads anymore? What if online marketing expenses are halved?”

“WFC is in the low 10s, BNI at 60, GE @6, WDC @12, USG @6 with long term call options almost cheap as free, AXP @11 !……
Yes they are cheap but now I should wait to buy, I’ll buy lower …”

All those are the typical excuses, none bought then, maybe now they did though, 2 or 3 times higher… If you find a cheap stock you have to at least buy some of it no matter when you find it.

Guys who behaved very rationally during normal times and who some months before were buying were then paralyzed and completely stopped doing it, some even sold ! Some even had lots of cash on the side. It was a very interesting period to observe the psychological reactions due to extreme fear. After 6 months the recovery came, so 2009 was great, not only percentually, but absolutely, due to the large amounts invested that year and before. 2010 was still quite good both absolutely and relatively. In 2011 I hardly kept up with inflation, but it again provided the opportunity to deploy more money and it is starting to show the results now.

You need a few good ideas backed up by a lot of conviction (cash), I basically had good results because I really started deploying my cash in 2008 starting 2008 with 20-25% of my cash invested and by the end of the first quarter of 2009 I was heavily invested.

Most of my gains were in four areas:

1) USG strike 7.5 leaf call options went up at least like 8 times (from 1.3 to more than 10), an 8k investment multiplied. Buffett bought convertible debt there, I invested in options before he did that.

2) WDC more than doubled and I had a big position there.

3) BNI went up a lot thanks to adding it near the low and Buffett ended buying the whole company. I invested there quite much (up to 30% of my portfolio), I followed him in an investment that made lots of sense in the only stock he was heavily buying during those times and that almost no one was paying attention to. I was basically convinced the stock had reached bottom, if trains stopped carrying commodities, then everyone, in the stock market or not would be screwed. When I bought I noticed, in the SEC fillings, that Buffett was even selling puts on it in order to heavily accumulate it during the fall. He finally decided to buy the while company in 2009. It was a fast and huge gain.

4) Lots of little investments that doubled like: CF, ETN, ROK, CEF, TRLG…

Concentrate in what you know, but beware of extreme concentration, that’s also not good, but a few companies should do the trick. Keep in mind that your 10th idea is nearly not as good as your 1st ones and diversifying introduces the risk of buying things you do not know enough, its like a substitute for ignorance which can prove costly. If you invest 1 or 2% positions in several things you do not know enough about you might end up losing some and just a few 1-2% losses add up and are quite hard to recover. I had 1-2% losses due to a lack of study, fooled by over-diversifying, I must have stupidly thought that just because of diversification I was safe. Due to that I specifically had permanent losses in Freddy Mac and Washington Mutual, that money was lost, bye bye, forever. But now I hope I learned that lesson and I am sure of what companies could have troubles and which not and I hedge or sell if possible in case I see that could happen (for example with USG).

Try to apply basic statistics to convince yourself that randomly diversifying in 10 or 15 stocks does almost as well as diversifying in 100 stocks. i.e. the 90 additional stocks hardly eliminate the systematic risk from the market. Consider also that it’s much easier to learn deeply about 10 stocks than about 100. If someone tells me he has 100 stocks I tend to think that he will have a hard time beating the market. I also tend to think that he has little knowledge about many of them or that he passes an unhealthy amount of time keeping up to date. Time that could be more profitably used elsewhere or even to find new opportunities.

I myself find that I’ll be soon reaching the point of having more companies than I like. Even though I have accumulated them over the years and in any given normal year I don’t buy more than 3 or 4 new ones after a deep study. I have not sold more lately because when I study if I should sell my smaller investments or even the bigger ones, I find good reasons to keep holding them and I feel comfortable with them. The other reason is because I still have quite a lot of cash. If I had no more cash or if I had little I would most probably sell the companies with less prospects of price increases. But if the portfolio keeps growing I’ll probably sell some good companies in exchange of even better ones or in order to free some of my time. I know that adding more companies will stress me too much in order to keep up to date. At a certain point what I can gain by selling could be more than the benefits of over diversifying which tend to bring ignorance and the risk of ignorance is big. That point depends on every person but for me, I feel that with just a few more stocks I’ll probably start more seriously to think about selling others.

Important: SIT TIGHT and let the profits run, let the stocks reach fair value before you sell, don’t just sell because you gained 10-15% fast, lots of money has been lost because of selling soon. Remember that the market has no idea when you bought and your selling should not depend on when you bought, it should only depend on your company valuation.

Play defense, focus on where you could lose, make sure, that you are not fully invested, keep always a cash cousin for unforeseen scenarios, and try to only invest in great companies that will not die in a recession or prolonged hardships. Buy or add, hopefully when they are cheap, don’t diversify too much and concentrate where you know. Only invest fully when you’re sure things are cheap and unload only if they are obviously not or the company fundamentals changed negatively. In looking at a transaction, the single most important question seems to be, What have I got to lose? Only when it seems that risks can be controlled or minimized does the second question come up: How much can I make? Remember that the possibilities of unsatisfactory results from an investment are to be found internally in the performance of the underlying business and the resources in the business, not externally in the market prices at which a company’s stock might trade.

All that sounds simple, it’s harder doing it because some of it is hard wired genetically. It has a lot to do with your character, but also with your knowledge of course. If you really know where you invest you should not get paralyzed if it falls 50%, it should be a reason to add more, provided that you had a cash cousin of course. Look at great investors like Seth Klarman, Robert Rodriguez or simply Warren Buffett, they always keep lots of cash, not for the sake of it but for the possibility of deploying it in “bad” times. They seldom leverage. It makes sense, you cannot go broke if you keep cash, on the contrary, you specially use it when nobody has it, or when the crowd is too afraid of using it because their leverage or over-investment and temporary losses left them wounded and paralyzed ! The point is that if you’re good enough you do not need leverage, the fun is making money, if you make a 100% you get the same fun almost that if you make 150% being leveraged, but being leverage you’re taking a huge risk: you’re implicitly assuming that the market will not crash enough to wipe you out, or you recognize it but do not care, which is even worse. Leverage is irrational, it’s tempting and devilish, it’s like a pact with Satan, it’s not worth it, it’s the only thing that introduces the possibility of going broke, and even if you don’t, if the market turns strongly south your possibility to deploy cash is gone, you gave it away for leverage ! Why give away the great chances in life for a little more gain by giving up your cash when you will most need it and at the same time introducing the possibility of going broke, is there anything worse than “game over” ? Avoid that scenario by simply not using leverage. Remember that any historical performance great score multiplied by 0 is always 0, yearly averages do not count anymore when a 0 comes around. Never put yourself in a position you will regret under any scenario! Also beware of investing in companies that use leverage like financials or heavily indebted companies, investing in someone who is leveraged is like being leveraged oneself.

That said you should never lower your guard and your job should be to identify and eliminate risk, by risk I do not mean volatility or beta, which could be your friend actually by providing good entry points (remember Mr Market?). By risk I mean the possibility of permanent capital loss. The same 2008/2009 scenario could repeat itself, if it does and you have enough cash it should become an opportunity to deploy it, and as long as you correctly think that the companies you are invested with are cheap and good you should do OK after a while. You should focus more on the companies themselves than on the market who anyways, I believe, is almost impossible to predict. In 2007 the reason I was not invested is not because I thought the market would crash, it was simply because I was too busy educating myself in the art of investing and I could not find almost anything good and cheap. On the other hand, in 2008/2009 the reason I invested a lot was not because I thought the market would recover soon, but because I found lots of good and cheap companies. Another good thing now, for those who fear a crash, is that fear itself is still very present and it is rare to have big market collapses starting from there, generally huge crashes start from quite an optimistic and over leveraged market.

Anyways this last years were great to build self confidence and were more than anything the results of lots of reading and learning. I do not think there is a “magic formula” for investment success—the understanding of a business—has to grow out of experience, insight and maturity of judgment. It can at most be accelerated through a lot of practice and permanent deep study. Outstanding involvement only can bring outstanding performance. I read the Intelligent Investor in the beginning of 2007, and several other books afterwards, before that I was absolutely mediocre or hardly invested at all due to my bad results, those bad results gave me the will to give up and either buy a market index and forget about stock picking, or either to educate myself by learning from the masters!… That’s when Buffett’s letters and his recommendations came on the scene: all the investing framework you need to know, he said, is in the books of Graham & Fischer. Amazon delivered them fast, and I read them even faster, several times. Since back then, now at least I beat the S&P and I am not thinking about buying an etf that follows the market anymore :).

To lighten up the subject I offer you this beautiful lyrics from one of my favorite songs by Kenny Rogers:

“You’ve got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
Know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done”

Cheers !
jrv

PD: List of other interesting books to read here

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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16 Responses to Portfolio Performance Evaluation And Some Thoughts

  1. nick says:

    almost tripled your fund in 2009, that’s very good.

  2. jrv says:

    Yep, I thank Buffett, he taught me “how to fish”, he’s the equivalent to investing as Jesus is to the Christian religion, we’re lucky to be born, while he was alive, in an age of easy communications.

  3. Aly says:

    Thank you for this. Great reading.

    Time to look at Graham and Fisher.

    When did you buy your first stock?

  4. jrv says:

    Thanks Aly, in 1998, e-stocks, technology, Dell, Maxtor… did good at first and thought I was “special” but lost most of it when the e-bubble popped, I basically had no idea about investing, just looked at stupid charts…. fortunately I did not have much to lose, but it did mean a lot! Freaked me out of stocks for some years after that. So I saved and hoarded some cash and invested a bit in real state and in finding a good wife: the best investment possible :). I only made a came back with small amounts in 2006, and with lots of education in the subject, by the crash in 2008 I was quite well capitalized and educated and took the chance… What about you?

  5. The Borg says:

    Excellent article!!

    Not leveraging, and having cash when things are on sale at a huge discount to take advantage of the situation is the absolute key.

    So what’s on sale now? I know some US real estate is.

    What else?

    What about shorting XIV? – volatility is so low.

    What about shorting SHLD? – Financial smoke and mirrors is proping up this dying retailer.

    Your comments?

    The Borg

  6. jrv says:

    Hi The Borg,

    Here is what I think about shorting XIV or anything related to volatility: http://investing.kuchita.com/2011/08/21/vxx-data-since-vix-futures-avilable-march-2003/#comment-10477.

    I have not been looking into SHLD, but I do love an English retailer: Tesco. I have been buying quite some shares of it lately, as soon as I have time I will post about it, I already wrote about it in Gurufocus. At current levels I would buy, and I will maybe keep on adding a bit more or much more. Note that I have not updated my portfolio to reflect my current Tesco position, which is now among my top 5 holdings.

    Cheers!
    jrv

  7. jrv says:

    Wrote about Tesco some months ago, basically we have the same situation as then, and just a marginal higher price (plus dividends in the pocket :)):

    Tesco Plc: An Undervalued Retailer

    Cheers!
    JRV

  8. armando valdes says:

    Tx,Jose to share this with as.Very educational.
    I´d like your advice on brokers.
    I currently are trying interactive brokers with good results and feeling.
    Do you recommend another to be more “diversified” as I´m very disappointed with spanish brokers?

    Thank you again…….. made my day sweet.

  9. Brad says:

    Thanks for writing about your results and reasons for investing. It helps to keep me motivated in my own investing………… Good Life, Brad

  10. jrv says:

    Hola Armando,

    Creo que hablas espanol tambien :). Mi recomendacion como broker es Interactive. Es barato, seguro y tiene mucha clientela. Su dueno parece un tipo bastante inteligente. Ademas tiene cobertura muy amplia, tanto internacional como de alternativas de instrumentos de inversion.

    Tienes alguna recomendacion para invertir en Espana? Por ahora me interesa CAF, la de trenes, la conoces ?

    Mejores deseos !
    jrv

  11. jrv says:

    Thanks Brad,

    I’m glad you liked it. Feel free to let me know what your best investment idea is the next time you buy something. I’m always glad to share ideas with fellow investors.

    Best wishes !
    jrv

  12. armando valdes says:

    Hi Jose:I´m actually from Oviedo.Spanish stuff that I hold is Ferrovial (near intrinsic value),Duro Felguera (nice engineering group with 80% of internationals new projects ) and Telefonica ( I lose like 40% and see as a “semi”value trap ).
    When (if) the spanish debt is on sale again ,don´t miss Mapfre (solid insurer with 30-50% international exposure) that can give you like 12% when the 10y spanish bond was at 7%.
    Do you recommend just a broker ..just IB?….any remote posibility of going belly up (specially for overseas customers).
    Tx. & enjoy your commets (help me to diversify out of brk-b,that I loaded up too much)

  13. armando valdes says:

    CAF….una gran compañia bien gestionada pero esta 2-3 años plana pues depende mucho de la obra pública,que como sabrás está congelada en España.Se está internacionalizando pero no si los fabricantes emergentes por un lado y su necesidad de financiar proyectos por otro está minando su modelo de negocio.
    Para un inversor en Euros(como es mi caso) el estar en acciones americanas nos hace la vida más facil, pues las correciones bursátiles se contrarrestan con la subida del dolar y por otra parte si el Euro explota (posibilidad real),antes IMHO creo que veremos el euro cambiarse a paridad con el dolar.

  14. jrv says:

    Hola Armando ! Solo recomendaria Interactive Brokers. Aparte de eso tengo dos brokers mas, pero son pesimos en relacion a IB. Los uso solo a veces para diversificar. No conozco mas.

    Gracias por tus recomendaciones !

  15. armando valdes says:

    INTC:
    The big quest. with intel is ..can it survive in case the PC is history?……Can intel make money out of the cellular world.
    I´m a big fan of 2015 ATM calls on intel……can be a home runner…WHATS CAN GO WRONG HERE?

  16. jrv says:

    Hi Armando,

    I also like the 2015 Intel ATM calls. Intel I think will survive Ok but will probably lose a lot of business. That’s why if I ever load big it will be at cheap levels.

Comments are closed.