Saturday, January 23, 2010 7 comments ++[ CLICK TO COMMENT ]++

Review of my 2009 performance

As usual, this post will review my investment performance for the year. A bit late this year and I was kind of confused with some calculations but finally wrapped up things.

I did a lot of preliminary research and hunting around in 2009 but ended up doing almost nothing. I actually had zero purchases, if you ignore special situations. I likely missed the greatest buy opportunity in 25 years (since 1974 I'm guessing) but oh well. I feel the market was not cheap and many securities survived only due to government support. My concern last year was not so much that the valuations were sky-high but that they may overshoot to the downside. Even now, I have a feeling that the market will decline or go sideways for a while.

Given how I did almost nothing, I severely underperformed the markets this year. I'm actually satisfied with the performance. Although posting way-below-market returns is not a good sign of investment skill, I am more dissatisfied with losses. I was more dissapointed with my performance in 2007 and 2008, when I actually posted losses—this was especially troubling for someone who professes to be a contrarian-wannabe and who was bearish going into the bust.

Overall Performance

The table below shows my yearly performance. I have historically shown geometric returns but, after some discussion (thanks to readers who responded), I came to the conclusion that I need to track two returns from now on.

One of them should be the geometric return, which approximates what your portfolio would be worth if someone invested $1 on the first day the portfolio was started. The second one is the actual return which includes capital injections and removals at any point in time after the portfolio was started. My thinking right now is that one needs to track the geometric return because that is the proper way to benchmark against an index; and the actual return should also be computed because that is your true return.

I'm still having some difficulties with the real return but I decided to show the Microsoft Money return as well (I use MS Money for my personal finance but it is being discontinued this year so I need to find something else (I'll likely go with Quicken.) I'm still not sure how MS Money calculates its multi-year return.)

Portfolio did worse than what is shown below because I don't count cash in return calculations and I have held fairly high amounts in the last 2 or 3 years. This basically means that the portfolio tends to overstate positive returns and understate losses (my true returns are slightly lower than what is shown in 2009; conversely, my returns were slightly better than the loss listed in 2008.)

The Canadian dollar appreciated approximately 16.39% against the US$ in 2009. My base currency is Canadian dollars. The currency has fluctuated wildly in the last few years and this is a big contributor to losses and gains. However, ignoring some specific macro bets, I invest with the assumption that the currency will remain stable relative to others (or depreciate at roughly the inflation rate of 3% per year agains tangible goods.) The US$, which is where most of my assets are, is down over the last 5 years but I suspect it would be back to the early 2000 level (relative to C$) in 10 or 15 years. The currencies that may see severe permanent changes tend to be developing or undeveloped countries (or others undergoing some political change or war.)

For the year, I ended up with a return of 7.75%. This compares to my main benchmark, the Dow Jones Wilshire Global Total index (DWGT), which posted 20.90% in C$ (37.29% in US$.) The S&P 500 posted a total return of 10.07% in C$ (26.46% in US$.) My local index, the S&P Toronto Stock Exchange Composite index crushed all these with a return of 30.69%.

Not a great result when everyone posted huge numbers last year but I'm not too dissatisfied with it. I'm more of an absolute return investor and I am far more concerned with negative returns. Even the 7.75% figure is not reflective of anything because a big chunk of it was from risk arbitrage and liquidation positions, some of which are still pending.

The poor return last year has made me underperform the DWGT, my main index, over my history. I have an annualized return of 3.95% versus 4.13% for the DWGT. I am significantly behind the S&P TSX Composite given its 7.63% annualized return over 6 years.

My actual return over my history, according to MS Money, is 4.99% (note that this is the total return and not the annualized return.) This is a horrible number but it's not clear to me how how MS Money computes this. There seems to be some issues that I can't solve—as you'll see near the end, my net worth, which is mostly stocks, appears to show a higher return and that number is consistent with my bank statements—but I'm going to ignore it for now given how MS Money is being discontinued. I don't want to waste my time figuring out how MS Money is computing returns, only to switch to Quicken or some other software package in a few months.

Note About My Benchmark

Long time readers may have heard my thoughts on this already but in case you are new, here is a note about my main benchmark. This may help your benchmarking.

I use the Dow Jones Wilshire Global Total index (DWGT) because it is the broadest freely available index I encountered. You can also use the more popular, comparable, MSCI All World Total Return Net index. I went with the Dow Jones because the numbers were more easily avaiable for free (I think MSCI makes them free too but I had a hard time accessing the right numbers in a timely manner; but do note that things may have changed since I last looked 3 or 4 years ago.)

I wanted to pick the most global index because (i) I am willing to invest anywhere in the world, and (ii) I felt my future investments outside Canada and USA were likely to increase as my portfolio grows. DWGT represented 58 countries and 98% of global market capitalization when I first started using the index ( things may have changed slightly since then.)

If you are trying to figure out what benchmark to use, you should aim for what you think represents your portfolio best. Except a few bond situations, I mostly own stocks so my benchmark is a stock-only index. If you have a sizeable allocation to bonds, your benchmark should probably be an index that includes bonds (e.g. an index with 30% bonds + 70% stocks.) If you want something easy to measure, you can pick a passive mutual fund and use that as your benchmark (if you track your performance through your broker's website or something, you may find it easier to pick a passive mutual fund to benchmark than if you tried using some obscure index.)

Performance of Individual Securities

The table below deatils the returns on my individual securities (as usual, in Canadian dollars):

Notable events:
  • Aspen: This was a potential liquidation where I lost money. I made a severe error, one that is a classic newbie mistake. If this were sports, it would be called an unforced error because it was all my fault. I sold my ASPN holding after what I thought was the ex-div date but it turned out to be wrong. Apparently, a company that pays out more than 25% of the assets as a special dividend, which is the case with many liquidations, follows a different ex-div/record date system than the 99% of the regular dividend distributions you may encounter. Although never good to lose money, it is a good learning mistake and I'm glad I made it now rather than 20 years from now, when the portfolio might be much larger.
  • Bell Canada: This was a failed risk arbitrage deal. I expect to take a loss—proposed buyout was cut at bubbly prices a few years ago—but I am satisfied with this. It sucks to lose money but there are bound to be some failures in risk arbitrage. Bell Canada is very low growth but it is stable and I believe its near-5% dividend is sustainable. This is the type of company that you don't mind owning if a merger/takeover falls apart. If you enter a deal with a shoddy company that blows up, you would hate ownign it afterwards; if you invest in a decent company, you have high chance of recouping some of the losses because the underlying business is solid.
  • Comdisco: Major buy last year. I purchased the shares (CDCO) and also the rights (CDCOR). Both of them have similar potential payout and I bought whatever appeared cheaper at a particular point in time. This is a liquidation that has been going on for almost a decade now. I believe it is very close to final termination and I expect to be out by this year. I was hoping it would wind down completely last year but oh well.
  • Guest-Tek: A provider of information technology to the hospitality industry, Guest-Tek, was privatized by insiders at a relatively low price. The fundamentals had deteriorated for years and my mistake was not following it too closely 2 or 3 years ago—could have exited with a gain back then. This is my first mistake and one of my oldest investments.
  • Mathstar: This was a major liquidation I was involved in. I regret not having a bigger stake in it. I was trying to buy more at a reasonable price but never was able to increase my stake. The company appeared to pursue an alternate liquidation path so I sold out with a gain.
  • Puget Energy: Successful risk arbitrage deal. The successful buyout was announced late last year and the returns were split between this year and last (the stock ran up very close to the announcement so some gains accrued last year.)
  • (non-consequential results) Ambac, Takefuji, and Montpelier Re: Ambac continued to suffer losses related to real estate and is almost-insolvent right now. Takefuji's condition continutes to deteriorate and this appears to have been a mistake. Montpelier Re is doing well (grew book value at around 10%) and the stock has largely been flat (in US$ terms) throughout the financial crisis. The posted loss is due to the C$ appreciation and I don't consider it as a loss per se (since I'm bullish on the US$ over longer time frames.) Montpelier Re is largely uncorrelated with the economy and its fate will depend on how it handles mega-catastrophes. The verdict is still out on this compay.

My actual overall return is lower than what is shown above because I don't count cash in those calculations above. As was the case in 2008, my cash level is quite high due to my lack of confidence in going long into anything. I investigated some opportunities last year, such as Sears Roebuck bonds, Expedia (EXPE), Lexmark (LXK), but didn't pull the trigger on anything. We'll see how this year shapes up.

Net Worth

The most important statistic is net worth. After all, at the end of the day, what matter is your overall picture. This measure also gives you a better idea of efficiency in your finances. If you have too much money sitting in your chequing account earning near-0% interest, or if you have too many debt payments sucking money, you'll see it more clearly. Since I don't have any other assets (like a house,) my net worth essentially follows my portfolio.

The chart below plots my actual net worth (teal line) along with some benchmarks I use. All the benchmarks are hypothetical and assume my savings are a fixed positive amount every month (this is quite close to my real life, where I save roughly the same amount each month.) If my savings rate changes radically (say my salary goes up or down) then the incremental savings will have to change in the future too.

My main benchmark is the Dow Jones Global Total stock market index. There is a difference between what is shown here and what is shown in tables earier. Because this chart represents fixed savings contributions each month, everything on this chart is sort of like dollar-cost-averaging. Also, the start point matters. The chart starts from the day I started investing but the picture may be different if you start at different points.

My performance is better than cash but I'm underperforming my hypothetical bond (i.e. return of 5% per year.)

I'm outperforming my main stock index but am below the hypothetical stock line (i.e. 10% return per year.)

The 'cash line' is a straight line while the 'bond line (5%)' and the 'stock line (10%)' are exponential lines. You can easily see this by noticing how all the lines are bunched up early on but there are differing gaps in the latest period. The stock line (10%) is starting to look like an exponential curve while the bond line is still relatively flat. You will see the power of compounding as time moves forward. In another 10 or 20 years, the stock line should have a huge gap above the bond line, which will have a big gap compared to the linear cash line.

The longer I underperform 10% per year, and the bigger the portfolio gets, the greater the difficulty in beating that hypothetical 10% line. Overall, performance has been dissapointing but because I'm a concentrated investor, I'm not too worried. I can easily catch up or lose badly in a short period of time.

Biggest Mistake of the Year

Some may suggest that my biggest mistake of the year was not buying stocks early in the year but I'm not so sure. I felt that the stock market was not cheap enough, even after the crash early last year, to blindly bet long. My biggest mistake, though, lies elsewhere.

I think my worst move of the year was not buying junk bonds early in the year (especially the Sears Holdings bonds.) Although it was difficult for small investors like me to buy bonds (they were illiquid and required large transaction sizes to make commissions reasonable), I should have tried much harder to capitalize on them.

Unlike stocks, low quality corporate bonds did seem cheap late last year and early this year. There was still some question marks about how good they really were (spreads to Treasuries were very large (on par with the Great Depression spreads) but raw yields weren't very high (didn't even surpass the yields in the 90's)) and that kept me cautious.

The bond market is also a bit safer and I'm really going to regret the opportunity to lock in 15% to 20% yields for the next 5 to 20 years.

To Improve

I keep repeating this every year but I need to improve my cash management. It was a truly horrible year with high cash holdings earning 0% interest for almost the whole year. Need to think of a way to handle these situations in the future. I was thinking of buying short-term govt bonds or GIC (these are called CDs in USA) but never decided on them.

My portfolio isn't big enough yet for it to matter but I need to factor in taxes into my decision-making. So far, I'm kind of ignorant of taxes for the most apart (apart from trying to buy Canadian dividend-paying companies if possible.)


7 Response to Review of my 2009 performance

Jae Jun
January 24, 2010 at 2:26 AM

You still did a good job. Besides there are far too many people who "think" they know their return off the top of their head and when they actually calculate it, they overestimate by double digits.

At least you know your strengths and weaknesses.

January 24, 2010 at 7:16 PM

Yeah... not so good but I'm improving, I think...

Doctor Stock
January 24, 2010 at 8:53 PM

You don't have to sacrifice potential gains by protecting your risk... you can manage both using some timing strategies and disciplined trading.  Nevertheless, I agree overall it is better to preserve capital than lose it.

January 25, 2010 at 6:44 PM

The fact that you actually calculate your returns gives you a huge advantage over most small investors.

I get the impression that many investors are comfortable justifying away each major loss as a 'unique one-time event', while claiming full credit for their successes.  I also think that many people have no concept of what a large loss can do to their geometric returns (ie it takes a 50% gain to recover from a 33% loss).

As Ben Graham said, "investment is most intelligent when it is most businesslike", and what could be more businesslike than charts and graphs?  ;)

January 26, 2010 at 3:30 AM

I'm not cut out for timing. I try to do that with my macro bets but my long-term "contrarian" or "value-investing-style" positions aren't like that. I feel that, as you move closer to timing, you are entering a different game--one where professionals play. If one is good to play with those guys, it's fine; but I'm not cut out for it.

There are a lot of people whom I notice on message boards, comments on news sites, or some famous blogs, who appear to be timing-oriented but I suspect most of them have lost a fortune by now. Some got burned badly by the collapse; others probably got killed with the massive rally last year. A lot of these people, when they lose, don't admit defeat and appear to come up with conspiracy theories like "Goldman front-running them" (as if they ever had a chance) or how the FedRes is manipulating their positions.

Anyway, go with what works... I can see some people are good with timing...

January 26, 2010 at 3:38 AM

hehe... business-like huh? :)

MrParkerBohn: "<span>The fact that you actually calculate your returns gives you a huge advantage over most small investors."</span>
<span>Yep... calculating returns is very important. Otherwise, it's like playing sports without keeping score :-P  I notice what you alluded to, and see many ignoring the scorecard or not having a good sense of it.</span>
<span>I also think it is important that all of us pay as much attention to our personal finances. I haven't talked much about it but I'll probably write up somethig on it. If you are trying your hardest with investing but are wasting money on personal expeses, it sort of sucks away a lot of your gains.</span>
<span>MrParkerBohn: "I get the impression that many investors are comfortable justifying away each major loss as a 'unique one-time event', while claiming full credit for their successes.  I also think that many people have no concept of what a large loss can do to their geometric returns (ie it takes a 50% gain to recover from a 33% loss). "</span>
<span>Yeah, people do that. In fact the worst thing is when people blame someone else--like Goldman Sachs, or the Federal Reserve, or even the US government for all their mistakes.</span>
<span>Tell me about those geometric returns! Soooo hard to make up any sizeable loss. This is especially painful if one's portfolio is growing--a 20% loss now is worse than a 50% loss a few years ago for me (in dollar terms.)</span>

February 4, 2010 at 8:34 PM

Suggestion for cash....Vanguard EFT for ST US gov bonds ticker BSV...very liquid, low interest rate risk, better yield than cash.

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