Few people ever consider the effects of survivorship bias and taxes on actively managed mutual funds, but this study did.
According to a study in the Journal of Portfolio Management (26, no. 4, 2000) the average actively managed stock based mutual fund lost to the S&P 500 by 3.2% annually, after taxes, over a 20 year study, ending in 1998.
Considering that the S&P 500 index has a turnover ratio of 6.7%, it makes the index incredibly tax efficient, compared to actively managed mutual funds. …read more
Our investment club, despite being actively managed, has roughly the same, long term after tax efficiency that a S&P 500 index would have because our portfolio turnover is exceptionally low. But instead of posting a 3.2% annual deficit to the S&P 500, we’ve given market (and especially the professionals) a thorough beating.
Although I’m cautious, our club is posting results (from June 10, 2009 to June 10, 2010) that have exceeded the S&P 500 by 4.7%. We’ve seen a gain of 20.2% over the past 12 months, while the S&P 500 has gained 15.9%.
| Performance Benchmark | ||||
| 06/11/2009 to 06/11/2010 | ||||
| IRR | PORTFOLIO VALUE | |||
| Maniacle Members of the Mausoleum | 20.2% | 438,081.29 | ||
| Vanguard 500 Index Fund (VFINX) | 15.9% | 421,411.08 | ||
If I could credit our results with one thing, it would be a disciplined value approach. We have the courage to buy great businesses on the cheap, and when they drop in value, we buy more of them.
How will we continue to do well?
We’re not accepting new investors, but for us to continue to do well, our current investors need courage and commitment. Especially when the markets fall, they need to lump money in to the fund.
An investment club receiving funds only when the markets are growing higher is destined to be mediocre at best, and disastrous, in the worst case scenario.
What investment club psychology have I found interesting?
We’ve been operating this club for 11 years now. And we have beaten the S&P 500 by roughly 6% annually with our stock selections (We’ve actually beaten the S&P 500 by roughly 5% annually, overall, because we lost money in a bonehead private venture a few years back). We track all of our investments with Bivio and it does a dollar per dollar comparison between our investment club purchases and hypothetical purchases in the S&P 500.
Beating the market brings with it some interesting behaviours. We have courageous members who have contributed during times of economic duress. But the majority of our members become confident when we have done well. During years when we make very high double digit returns, there’s often a flood of fresh money and confidence. I wish it wasn’t so, but it is. If every member could be committed to being greedy when others are fearful and fearful when others are greedy, we would do a lot better.
What were our favourite stock purchases during the financial meltdown of 2008/2009 and how has our portfolio changed?
Since publishing our holdings nearly three years ago, in the MoneySense article, How we Beat the Market, our holdings have changed very little.
We had Anheuser Busch scooped from under us when Inbev bought them out. But we profited by roughly 60% on the shares—and the shares constituted 8% of our total portfolio.
During the downturn of 2008/2009, we bought Fastenal (FAST), lowered our cost on Simpson Manufacturing (SSD) and we bought United States Gypsum (USG). Those building material businesses were definitely contrarian moves during a time when homebuilding supply companies were definitely out of favour. We also bought more Berkshire Hathaway,(BRKB) more Coca Cola (KO) more Pfizer (PFE)and more of the first world international index (VEA).
Recently, one of our investors moved to Europe and cashed out roughly $55,000, so we sold all of our Fastenal shares at roughly $50 each (we paid $32) and we sold nearly all of our USG shares at $17, after paying an average price of $11 for them.
How did I raise capital to make purchases when the market was down?
I’ll admit it. I prostituted our investment record among my “non investment club friends” to get them excited. Then I suggested that new investors must contribute a minimum of $10,000 for their initial deposit. I did this in 2009. I didn’t have fresh money in time to take advantage of fire sale prices, but I did get some reasonable deals that have proven to beat (short term, anyway) what an equal amount would have made if it was invested in the S&P 500.
What do I regret?
As much as I try, I don’t have the ability to coax large sums of money from our investment club members when stocks are cheap. I beg, and I beg, and I beg, but I wish I was a better begger. Those who seem wired to be greedy when others are fearful do their part to contribute.
As for the rest? They’re just a little too “normal”.
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11 comments
The Passive Income Earner says:
June 14, 2010 at 2:51 am (UTC 8 )
Hi Andrew,
Does BP fit the contrarian investor
. Personally, I am watching but the cascading effect is going to be felt for so long …
Also, how far ahead do you start tracking a stock you want to invest in?
Cheers.
Andrew Hallam says:
June 14, 2010 at 9:24 am (UTC 8 )
Hey Passive Income Earner:
The funny thing about markets and stocks is that they always seem to go to extremes. Bear markets end up revealing ridiculously screaming opportunities at times, and bull markets offer up suicidal prices that can’t be maintained. It’s the same thing with individual stocks during catastrophic news: Exxon Valdez (after the oil spill in 1985); Johnson & Johnson after the 1982 Tylenol nightmare; Merck after the Vioxx scandal; the banking industry last year; Singapore Airlines after the SARS break-out. They all rebounded nicely, so I think you’re right to look at BP. With the cutting dividend, it could offer up more than the 40% share discount it’s currently trading at, relative to its price before the spill.
I’m pretty sure it’s going to drop lower than it ought to (that’s the way stocks always seem to respond to bad news). I won’t be buying any personally though, for me or the investment club. It just has to do with the predictability of earnings and the commodity based price structure. I can’t predict the future prices of commodities, like oil, but I can predict the future price of a can of Coke. For that reason, a company like BP is far beyond my ability to value, so I let the pitch pass. For those with their finger on the pulse of the oil business, historically, I think it could end up offering some comfortable value and stellar future returns. What do you think?
As far as tracking a stock, you’d laugh at how anal I am. Generally, I’ll order (hard copy) at least 5 years worth of annual reports from the business I’m interested in, and I read every word from the back to the front. The juicy stuff is always in the back. For instance, Merck has owed some significant Federal taxes for years, which it talks about in the back pages of its annual report in relatively fine print. At some point, some industrious reporter will dig that up to couple it with future bad news about Merck (reporters love to thematic lump both good and bad news). Anyway, then I take my trusty book by Howard Schilit, on Financial Shenanigans, and I try to figure out where they company is fudging numbers. They all seem to fudge a little bit. But when I find a really honest business, that’s well run and hits all of my other fundamental parameters, then I put a price on that business—a price that I would pay for the entire business. Then I divide that number by the number of outstanding shares, and if the price is at or below the price I’d pay, then I buy the stock. I never worry about whether I think it will go down or up after my purchase. I tend to jump in with both feet and buy based on a business analysis. I also like to buy plenty of shares. And when the price drops further, if the core fundamentals haven’t changed (ie. if Coke doesn’t start selling shrimp) then I buy more.
I just placed an order yesterday (that should go through today) for $57,000 worth of Johnson and Johnson. I bought a small number of shares in 2003 (paying about $40 a share) after a tiny scandal relating to one of its South American plants/subsidiaries fudging its numbers (that division amounted to about 1% of JNJ’s total sales) but I haven’t bought any since then, until now. And every year I read their annual report, from back to front.
Yeah, I’m anal. You can laugh!
The Passive Income Earner says:
June 14, 2010 at 12:54 pm (UTC 8 )
I would call that thorough! And you have the numbers to back you up
Thanks for sharing.
Andrew Hallam says:
June 14, 2010 at 2:16 pm (UTC 8 )
Passive Income Earner:
Thanks—but I’m still not sure it hasn’t been a lot of luck as well.
I keep buying individual stocks because I love the research and the challenge. But relative to the performance of the indexes, I don’t have a lot of confidence that I can continue beating them going forward. The longer I beat the market, the less confident I get.
Maybe that skepticism is a healthy thing. I don’t know.
Thanks for the encouragement though.
Cheers,
Andrew
DIY Investor says:
June 14, 2010 at 6:41 pm (UTC 8 )
I think that your skepticism is a healthy thing and I, for one, expect that you will continue to beat the market. I’m impressed with the homework that you do. A lot of people say they use Buffett’s approach but they don’t do anywhere close to the homework he and his partner do.
On the skepticism point, one of the worst things that can happen to people is they come into the market and they make money right away and they think it’s easy. To me the market has always been a bit like mother nature – it’s important to have respect for it because it can turn at any time.
If you underperform going forward it will only be because investors throw so much money at you and the size effect takes over!
Andrew Hallam says:
June 14, 2010 at 7:10 pm (UTC 8 )
DIY Investor:
Ahhh too much money? Now that makes me smile.
With my personal investment account, my international money is all with Vanguard’s first world international ETF (VEA) and my bond money is with a Canadian short term government bond index (XSB-T) so in reality, I have more money in indexes than in individual equities.
And I have a healthy respect for the market….absolutely. For you to think that I might continue to beat the market with my individual equities is more faith than I deserve. But I am flattered by the thought.
Kenneth Fisher refers to the market as “the ultimate humiliator”—and I believe that.
One thing does strike me as odd though. Given the risks associated with buying individual equities, I’m really surprised how few people really crunch the current numbers after learning a bit of accounting, look historically at the business–how it earns money etc. And then topping that off with a bit of scuttlebutt. One of my favorite businesses (at the right price, of course) is Simpson Manufacturing (SSD). I used to wander onto construction sites and ask one question: “You’re building the best house you can. What construction brackets do you use?” The answer always came back the same: Simpson Strong Tie.
Anyway, I digressed there, but it does amaze me how willy nilly people (and really smart people) will part with their money on a hunch or a hot tip, of based on something they read. Yikes!
Financial Cents says:
June 15, 2010 at 1:39 am (UTC 8 )
Hey Andrew,
No laughing, just smiling! Where on earth do you find the time to review (front to back) every detail of an organization’s annual reports for the last 5 years!? You’re kidding right?
What else is impressive – your order for $57,000 worth of JNJ. What a great time to buy as they recover from their recent FDA audit observations. Buy JNJ when they’ve been kicked.
Thanks for contributing to my blog by the way.
What, you don’t have financial goals? I almost fell off my chair when I read that one!
Cheers!
Andrew Hallam says:
June 15, 2010 at 2:17 am (UTC 8 )
OK, after writing it, I realized how ridiculous it was to suggest that I don’t set financial goals. I guess it just becomes so ingrained that it doesn’t feel like goal setting.
I might spend about 3-4 hours with each annual report each year, marking it up with my own pen. But if you think about it, that’s not much of a time committment, considering the cash committment we often make to the companies we buy, and the time it takes to earn that money, after taxes and living expenses.
My JNJ order goes through today. I haven’t checked to see what I paid. I was hoping the markets would slip again so I’d get an even better deal. But like you, I think it will be a price I can look back on, 20 years from now, and say, “yeah, that was OK”
Thanks!
Andrew
Andrew Hallam says:
June 15, 2010 at 2:25 am (UTC 8 )
Financial Cents,
Here’s the JNJ filled order below, and the bonds I sold to make the trade. I think I got a decent price for JNJ.
JNJ JOHNSON & JOHNSON
20100612000000662 US Buy 900 Market Cash 900 USD 58.480 FILL 12-06-2010
06:14:38 PM Buy | Sell
XSB ISHARES DEX S/T BOND
20100612000000661 CA Sell 2,000 Market Cash 2,000 CAD 28.900 FILL 12-06-2010
06:12:29 PM Buy | Sell
Order details are moved to History page after the market close.
Financial Cents says:
June 16, 2010 at 7:09 am (UTC 8 )
Great stuff Andrew! I hold 150 shares of JNJ myself. After we complete our 2010 financial goals, a new goal for 2011 might be adding to our JNJ position
Andrew Hallam says:
June 19, 2010 at 5:25 pm (UTC 8 )
Financial Cents:
I remember when you bought those shares. I called you “crazy” at the time, didn’t I?
OK, I’m kidding! Email doesn’t convey tone very well does it.
Hopefully, the markets will get hammered badly sometime soon, so we can both add to our JNJ positions.
Cheers,
Andrew