Performance Report - February 8
This is a report of the portfolio performance in the first five weeks of 2010. 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 | -0.9% |
|---|---|
| Portfolio January 1, 2010 | $134.7 million |
| Portfolio February 8, 2010 | $133.8 million |
| Investment earnings 2010 | -$1.2 million |
| Investment Earnings 1981-2010 | $82.5 million |
The annual performance data is shown on the next page and it lists the annual returns of the entire portfolio over the last 29 years.
The main goal in managing your funds is to earn a rate of return that exceeds the annual rate of inflation by 5% p.a. It is equally important that we achieve this goal with a minimum of volatility (i.e avoiding universally bad years like 2008) because bad years have two important effects:
- They tend to ruin a record of many years of compounded growth.
- They tend to semi-permanently and negatively affect investor behavior.
It is very important to remember that we will have negative years and that this is a normal part of the process.
We are very pleased to have met, and exceeded, our targets over both the medium and longer term throughout the entire period of our management.
Details of the individual years are as follows:
Year |
Rate of Return |
Inflation |
Real Rate of Return |
|---|---|---|---|
1981 |
15.0% |
8.9% |
6.1% |
1982 |
15.4 |
3.8 |
11.6 |
1983 |
16.0 |
3.8 |
12.2 |
1984 |
9.8 |
3.9 |
5.9 |
1985 |
18.3 |
3.8 |
14.5 |
1986 |
13.8 |
1.1 |
12.7 |
1987 |
9.7 |
4.4 |
5.3 |
1988 |
18.0 |
4.4 |
13.6 |
1989 |
10.7 |
4.6 |
6.1 |
1990 |
0.7 |
6.1 |
-5.4 |
1991 |
14.9 |
3.1 |
11.8 |
1992 |
10.0 |
2.9 |
6.9 |
1993 |
13.7 |
2.6 |
11.1 |
1994 |
0.3 |
2.7 |
-2.4 |
1995 |
13.2 |
2.5 |
10.3 |
1996 |
15.5 |
3.3 |
12.2 |
1997 |
6.9 |
1.7 |
5.2 |
1998 |
-4.5 |
1.6 |
-6.1 |
1999 |
-2.3 |
2.2 |
-4.5 |
2000 |
15.3 |
3.4 |
11.9 |
2001 |
18.4 |
2.8 |
15.6 |
2002 |
-0.6 |
1.6 |
-2.2 |
2003 |
25.2 |
2.3 |
22.9 |
2004 |
9.9 |
2.7 |
7.2 |
2005 |
8.7 |
3.5 |
5.2 |
2006 |
11.7 |
3.2 |
8.5 |
2007 |
6.2 |
2.8 |
3.4 |
2008 |
-5.1 |
3.8 |
-8.9 |
2009 |
14.3 |
1.7 |
12.6 |
29 Year Avg. |
10.3% |
3.3% |
7.0% |
Discussion
The key facts are:
Our compounded rate of return over the entire period was 10.3% p.a. Inflation over the period was compounded at 3.3% p.a. This produced a real rate of return of 7% p.a. Our financial planning summaries are based on achieving, in the long run, a real rate of return of 5% p.a.
Our target rates of return may have seemed relatively modest but, in fact, the history of the last 100 years suggests that they are really quite difficult to attain over the longer term. It certainly hasn’t helped market participants that the last decade in real terms was the worst decade in recorded history (stunningly it was worst than the decade of the 1930’s).
As you can see from the chart below the portfolio has changed significantly in the last five weeks as some of our huge cash horde has been invested in a number of different categories. The world is still awash with drama and the years ahead are fraught with potential difficulties, but some assets are now offering a decent risk/reward opportunity to a value investor with a longer time horizon (i.e. our portfolio). At the height of the financial crisis it was hard to value anything but now, as the situation has changed form acute to chronic, it is possible to look ahead although I must emphasize it is a very cautious view of the future. I am still prepared for all kinds of economic mayhem and some investments (bonds being a prime example) look wildly overpriced using a longer term view although they may be satisfactory in the short term.
- The stock and Oil positions are dominated by large corporations with strong financial positions, a long history of strong dividends and a modest price in relation to their earnings. They tend to be in defensive industries and they yield, in the aggregate, 5.5% in annual dividends. In some ways they act as proxies for bonds but with a better yield and they have protection against inflation as they are comprised of real businesses with real assets. They are our traditional “bread and butter” value holdings.
- The real estate position is primarily land in Florida at a maximum of 40% of boom prices. It is a reasonable discount and the land is now attractively priced. I will buy more if, and as, the stock prices decline.
- I have added heavily to the gold position as prices have declined. The value here is in the gold miners and in silver rather than in physical gold.
- I continue to add to the category of distressed investments as the markets continue to react in the post crash environment. This category is, essentially, a hedge fund equivalent that we have created “in house” with all of the positive characteristics of a hedge fund but without the ridiculous fees. Apart from the cash component this should be the least volatile part of our portfolio.
- In the short term we have no idea how the portfolio will perform and we will tend to buy additional amounts of a purchase if it falls in price. In the longer run we are beginning to get excited about the combination of quality stocks at cheap prices and a slightly less dangerous world.
The portfolio is currently invested in the following fashion:
January 1, 2010 |
February 8,2010 |
|
|---|---|---|
| Stock | 14% |
26% |
| Oil | 0 |
6 |
| Real Estate | 0.5 |
2 |
| Gold | 4.5 |
6 |
| VR Bonds | 3 |
3 |
| Bonds | 0 |
0 |
| Distress Inv.* | 10.5 |
12 |
| Foreign Cash | 3 |
2 |
| Cash | 64.5 |
43 |
| TOTAL | 100% |
100% |
Some Good News
As we mentioned in previous reports, we have been upset about the different cost structures available at Fidelity, and others, for clients with more than, and less than, $1 million. We are very pleased to say that, as of March 10th, all commissions are now going to be at the low rate of $7.95 per trade (with some exceptions for large $ or share trades). This is going to be a large annual saving for many of you and details of the change will be coming in a separate letter. It will require you to receive your trade confirmations and statements by email, but this is something that most of you, at least as far as confirmations are concerned, already do.
Summary
I expect a year of continuing troubles and travail. I spend all of my time managing the portfolio and carefully guiding it through an increasingly turbulent world. I take this responsibility very seriously and I thank you for the trust you have placed in myself and, of course, in Nancy. Critical work is also performed in the background by Cindy and Alex.