This past January marked the 7th year in the row that our investment club beat the S&P 500 index.
In the beginning (we began in 1999) we got crushed by the S&P 500 after a slew of tech stocks went south, but we clawed back.
Then a few years later, I spear-headed a bonehead decision to invest in a Vancouver Island based company called Instacash—which was eventually revealed as a Ponzi scheme. It cost us 12% of our total portfolio when the money “vanished”.
But despite our blunders, we’ve still been lucky enough to give the markets a good thrashing. Nearly two years ago, I published “How We Beat the Market” in MoneySense magazine detailing our investment club’s successes and failures.
From the date we started keeping records with bivio, (October 7, 1999) we have beaten the S&P 500 by more than 5% annually—despite doing some very silly things along the way.
Over the past 12 months (March 30, 2009 to March 30, 2010) we’ve gained 53.6%, beating the S&P 500 index by 5.9%
*(using prices from market close for 03/29/2010)
|
IRR |
Portfolio Value |
|
|
Maniacal Members of the Mausoleum |
53.6% |
568,496.70 |
|
Vanguard 500 Index Fund (VFINX) |
47.7% |
549,850.77 |
We were, however, given a good beating by the Vanguard small cap index over the past 12 months:
|
IRR |
Portfolio Value |
|
|
Maniacal Members of the Mausoleum |
53.6% |
568,496.70 |
| Vanguard Small-Cap Growth Index Fund (VISGX) | 68.7% |
615,324.53 |
That said, our three, five and ten year overall performances have all beaten the Vanguard small cap growth index. As an example, here are our results from March 30, 2007 to March 30, 2010.
|
IRR |
Portfolio Value |
|
|
Maniacal Members of the Mausoleum |
9.9% |
568,496.70 |
| Vanguard Small-Cap Growth Index Fund (VISGX) | 4.2% |
510,057.84 |
But we could still get hammered
We’re constantly aware of our fallibility, which is why we don’t want to forget the tech collapse ten years ago, and our “Instacash” ponzi blunder.
Smarter investors than us have failed to beat the market. Beating the S&P 500 over a handful of years isn’t a big deal at all—but beating the market over a lengthy period of time is extremely tough—requiring loads of luck.
Proponents of finding active fund managers to beat the market used to look to Bill Miller as an example. He beat the S&P 500 fifteen years in a row and optimistic head-line drunken investors across the U.S. poured money into his fund. But something called a “reversion to the mean” ensured that Miller was destined to eventually have a year where the S&P 500 actually beat him. And it happened. Not only that, but he had a few bad ones in a row, leading the S&P 500 to overtake Miller. If you had invested with Miller from 1986 until 2009, and if your brother had invested in the S&P 500 index instead, then who do you think would have made more money? Your brother! … more info
And he would have beaten you by more than 1% annually after taxes—because actively managed funds aren’t as tax efficient as broad, low turnover indexes. The after tax element is rarely discussed. But the great fund company, Tweedy Browne, demonstrates their pre-tax and after tax returns as they compare to the returns of the S&P 500. You can read more about Tweedy Browne and my search for an index beating American mutual fund in my post: Can Anyone Find an Index-Beating Mutual Fund? Maybe!“
But have we just been lucky?
My heart says that our market-beating performance is a blend of skill and luck—while my head suggests that luck was the primary component. If you’re interested in our investment strategy, we’ve followed Buffett’s principles, and you can read about them in my 2003 MoneySense magazine article,, “Invest like Warren Buffett” or in my 2005 follow-up article, “World’s Greatest Investor Tells All”
We obviously followed a disciplined approach. But a Chinese lady at a fortune telling Singaporean “Geomancy” once repeated over and over how I was born to be lucky. Hmmm. Mind you, these are serious fortune tellers—not the sort you meet at North American carnivals. They spend ages doing mathematical equations based on your exact time of birth to reveal all sorts of serious things. Maybe she saw the investment club returns.
At times, I faced a couple of dilemmas when pondering directions to lead our club. We had money to invest, and I couldn’t choose between two or three different businesses. I read their annual reports (many years worth, typically) and based my narrowing down to a few companies based solely on what I thought and figured—not based on what the media or any analyst was reporting. Then, if I couldn’t decide between two or three businesses, I went with my gut and selected one to promote to the club.
I can’t tell you how many times that “gut” decision was right. And let’s not be euphemistic about it. A “gut” decision is a lucky decision. One time, I bought Pier 1 Imports at $16, and shortly after, sold it because I had some kind of nauseous feeling about it. If we still owned it, we’d be down about 60% on it. Nobody minded my schizophrenic decision because many of our club members felt that I had my finger on the pulse of the company. Or maybe they knew what the Chinese lady said. I don’t know. …more info
I missed another disaster when I was enamored by Trex, a company that makes artificial decking material (that looks like real wood). I was set to buy it. But nobody in our investment club deposited money that month—which was good. We weren’t able to purchase it, and by the time I changed my mind (it might have been something I ate that morning) the urge had passed. If we bought Trex five years ago, it would have been disastrous. We would have lost half of our proceeds. … more info
With the investment club money (as with my own portfolio) I’d love to beat the market indexes. But the odds are slim, which is why a full 70% of my retirement account is in diversified equity indexes and bond indexes.
How about you? Have you beaten the markets over a lengthy period of time? And if you have, do you feel that you can keep it up?
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8 comments
Tico Oms says:
March 31, 2010 at 8:01 pm (UTC 8 )
Name some profitable companies that don’t add value to society. And I mean ones that might even make society worse or are parasitical on the activities of value-adding companies but that don’t add any real value of their own.
Secondly, would you ever be willing to invest in them, and if so, under what circumstances?
Financial Cents says:
April 1, 2010 at 7:48 am (UTC 8 )
Good post Andrew! I wish you and your investment club much success in beating the market! About your “gut” instinct though, I would tend to trust that more often that not…I don’t know what it is…but it seems to come in handy as it has both warned me and benefited me many times (financial investments and otherwise). Cheers!
Andrew Hallam says:
April 1, 2010 at 12:45 pm (UTC 8 )
Financial Cents,
Thanks for posting the comment.
Malcolm Gladwell’s book, Blink, would support what you’re saying. If I recall, he suggested that quick, gut instincts often end up correct. Maybe that’s the case. I guess the biggest risk in finance is overconfidence–or even confidence. It’s unlike most endeavours, isn’t it?
Andrew Hallam says:
April 1, 2010 at 12:52 pm (UTC 8 )
Tico, I’d suggest the American Vanguard Corp (AVD)
I just don’t think chemical fertilizers have any place on people’s food. We don’t need them, they cause cancer and birth defects in their search for profits.
But I believe in capitalism, and in 50 years, this company will be about as viable, in its current state, as a typewriter manufacturer–as people catch on and boycott non organic foods.
Financial Cents says:
April 2, 2010 at 10:36 am (UTC 8 )
@Andrew Hallam
I might read that book….I’ve seen it, heard about it, but haven’t read it. Cheers Andrew!
Andrew Hallam says:
April 2, 2010 at 5:08 pm (UTC 8 )
Financial Cents,
I don’t know if you’ve read any of Gladwell’s stuff before, but it’s addictive. He delves into some bizarre and interesting “coincidences”.
I recall him writing, in Blink, about a guy who would watch tennis players serving on television (or live) and before they served, he would have an uncanny instinct to call whether they would fault or not, the moment they tossed the ball into the air. He talked about the power of a “gut feeling”–like the one you described in investing.
The Rat says:
April 5, 2010 at 11:32 am (UTC 8 )
Excellent thread once again. I liked reading the close calls such as the Trex and Pier 1 decisions; it’s amazing how easily a split decision can affect the bottom line and how one’s gut can replace the mouth and do the talking.
Before the market meltdown started, I had implemented a leveraging strategy of my own. Things started to smell really bad and my gut told me to get the hell out while the going is still within the tolerable range. I never got out unscathed, but I learned tremendously from the experience. My fist instinct was, “never again”…but time and experience changes things in my view. A new leverage investment strategy would be totally different today in comparison to what I tried implementing before, and it was my gut that kinda guided me through the journey.
What I like about this post is how you compare the investment club’s performance with the S&P 500 and small cap indexes. It really highlights how the indexes offer the long-term consistency for investors. Consistent steps and the turtle still beats the hare.
Great stuff Andrew.
Andrew Hallam says:
April 5, 2010 at 4:11 pm (UTC 8 )
Thanks Rat,
I try to be accountable with my own money by comparing it to a blended index of stocks and bond indexes. I have about 30% of my stock market money in individual equities, as I’ve mentioned, and if the total returns of those equities aren’t keeping pace with a world index, then I might as well be buying the ticker VT (global capitalization index)or a combination of Canadian, U.S. and International indexes instead of common stocks. I also think there’s a price to pay for enjoying any kind of entertainment, but I think most people should put a price on what they’re paying to enjoy themselves. For example, if someone has a $100,000 account, and they lose by 1.5% a year, on average, to the indexes, then over a 20 year period, their thrills have cost them about $160,000 over 20 years. For some people, it might be worth the cost. But it would be prudent–I think– for every active investor to view it that way and determine whether or not it’s worth it to buy actively managed funds or individual stocks. Small performance lags can make big differences when compounded over time. And besides, if you’re beating the market indexes, that compounding difference can work for you, not against you.
Thanks for your thorough and insightful comments Rat. I like the way you think.
Andrew