Performance Report - Second Quarter 2009
This is a report of the portfolio performance in the first half of 2009. The rates of return reflect the overall rate of return on all the funds that I have managed since 1981.
Statistics
Details of the overall portfolio are as follows:
| Portfolio Return-actual | 7.4% (14.8% p.a.) |
| Portfolio January 1, 2009 | $110.90 million |
| Portfolio July 1, 2009 | $123.60 million |
| Investment earnings 2009 | $8.4 million |
| Investment Earnings 1981-2009 | $75.8 million |
Details of the previous years are as follows:
| Year | Rate of Return | Inflation | Real Rate of Return |
| 1981-2 | 15.2% | 6.3% | 8.9% |
| 1983-4 | 12.9 | 3.8 | 9.1 |
| 1985-6 | 16.1 | 2.5 | 13.6 |
| 1987-8 | 13.8 | 4.4 | 9.4 |
| 1989-90 | 5.7 | 5.3 | 0.4 |
| 1991-2 | 12.4 | 3.0 | 9.4 |
| 1993-4 | 7.0 | 2.6 | 4.4 |
| 1995-6 | 14.3 | 2.9 | 11.4 |
| 1997-8 | 2.4 | 1.7 | 0.7 |
| 1999-00 | 6.5 | 3.0 | 3.5 |
| 2001-2 | 8.9 | 2.0 | 6.9 |
| 2003-4 | 17.5 | 2.6 | 14.9 |
| 2005-6 | 10.2 | 2.7 | 7.5 |
| 2007-8 | 1.2 | 2.2 | -1.0 |
| Compound 28 years: | 10.0% | 3.0% | 7.0% |
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Discussion
I condensed our 28 year history into two year blocks of time because our data was becoming unwieldy. The annual data is available in our last annual report on the website. link
The key facts are:
- Our compounded rate of return over the entire period was 10% p.a.
- Our expectation through time was that we would achieve a rate of return that would exceed the rate of inflation by 5% p.a. This would have suggested a compounded rate of 8% p.a. We obviously exceeded our target.
- At the time it seemed our target, to many observers, would be easily attainable. After the Crash of 1987, the technology crash and the current debacle, it no longer seems such an easy target. It is my belief, in fact, that most investment portfolios have made little, if any, headway in the last 10 years and that returns over the last 15 years are remarkably modest.
- Our goal of earning inflation plus 5% p.a. has been an integral part of our planning process. We will be very satisfied if we can achieve similar results over the next 28 years.
I have attached a copy of the performance chart for the whole portfolio over the last 28 years and also a pie chart outlining the structure of the current portfolio.
The performance chart demonstrates several key aspects of the portfolio. It illustrates that we have been able to exceed our targets consistently in both the medium and the longer term. This ability to consistently exceed our planning goals is important and we plan to continue to emphasize the twin goals of the portfolio:
- In the medium and longer term to meet or exceed our goals
- To avoid dramatic, and potentially catastrophic, market declines.
The performance over the last two years far exceeded our expectations and we would expect, at some time in the future, an annual decline in the area of 10% but, and this is very important, the losses would NOT be permanent.
My goal, as always, is to live to fight another day, I take the responsibility of managing your finances very seriously and I thank you for your ongoing trust.
State of the World
It’s important to note that the following comments about the Macroeconomic state of the world do not tend to influence much of the day to day activity with the portfolio, but they do have an influence in the medium and longer term in helping us to assess the overall level of risk in the world. In the last two years, our assessment of the risk factor has changed with bewildering speed and there is a real premium in being in continuous touch with the Macro environment. Even the most experienced of us have learned a lot in the last two years.
My concerns about the financial sector have diminished, but it remains extremely fragile. I suspect we will muddle through and avoid catastrophe, but all the banks and insurance companies have still to endure massive losses from the continuation of the residential real estate debacle and, more significantly, from the unfolding disaster in commercial real estate. I suspect many areas of the country are fairly close to their lows in residential markets, but the collapse in commercial real estate (malls, hotels and office buildings) is only starting to reach the public consciousness. The coming debacle will have powerful negative effects on endowment and insurance portfolios and, of course, on bank balance sheets.
The pie chart (attached) has similarities with the chart provided on January 1st. This is misleading as the six months have been a time of tremendous portfolio activity and the stock portion of the portfolio grew dramatically in the first quarter as prices declined and became considerably undervalued. Since March, the markets gained back what they lost in the first quarter and we sold of many of our equity positions as the risk/reward ratio started to suggest increased caution.
The markets in general, once again, are only moderately attractive although special situations always appear in every type of market. We will retain our cautious approach.
In the economy I suspect things are worse than is being publicly disseminated, but I understand official “cheerleading” as the confidence factor can be a real economic force. I have relatively little faith in official Government statistics, but I do pay attention to data that cannot be manipulated, massaged and otherwise compromised. This data, and an example would be actual tax receipts by State and Federal Governments, paints a fairly gloomy picture. My best case scenario is that the world economy bottoms out in the next 12 months and then makes an agonizingly slow recovery over the next few years.
My gloominess extends to my world view, but not to us and the current and future state of our finances. I suspect, but cannot of course guarantee, that we will continue to survive and prosper.
Best Wishes,
Mike