12.8% IRR over 30 Years

[haha]

I pursue a somewhat different investment strategy than this board's most popular one of allocation and indexing. I believe that investment gains are like profits, a function of insight, not an automatic return to capital.

I started a self directed retirement plan (KEO) in December, 1974. Over the following 7 years, that is until December 1981- I contributed a total of $22,421 to that plan. I then changed my work, and no longer either contibuted to the plan, nor withdrew from it.  I cannot say how much was allocated to equities vs. fixed on average. I know that my equity exposure was at times as low as 25%, at other times as high as 95%. I varied it according to my take on what was available at the time. I think overall, I probably had about 60-75% equity exposure. The key thing is that this account was managed by a type of bottoms up market timing. Since it is a retirement account, I was never able to use margin.

The account now has a balance of $670,000. Using Excel, and plugging in my numbers, that shows me an IRR of 12.8% over this 30 years. I have followed what I believe to be a conservative posture in this account, at least compared to my other taxable and non-taxable accounts.

I don't know what it would be worth if invested in whatever was the closest thing to it in equity exposure and risk, but I think it does at least show that actively managing an investment is not necesarily the losers' game that it is often made out to be. Additionally, although I could not provide figures as I can in this account,  this is not my best result. In other accounts I have taken larger risks-eg. big bets on beaten down sectors, and made larger returns. Warren Buffet it definitely isn't, but IMO it's not too shabby either.

Now I have to go make myself some food. Hasta la vista!

Mikey

 

[Cut-Throat]

Mikey,

I have gotten about 13-14% also over the last 25 years. I think I may have done better by just plunking it down on an index fund and not have gone thru all the gyrations that I did :-/

 

[charlie]

FYI, Vanguard's 500 Index fund has averaged 12.39%
annually since its inception in 1976.

Congratulations to both of you for your success.

Cheers,

Charlie

 

[azanon]

but I think it does at least show that actively managing an investment actively is not necesarily the losers' game that it is often made out to be.

Maybe often here, but I would say the debate is relatively even in the general investment world.

They charge a fee for a reason. The ~ extra 0.8% management fee pays for a real human as opposed to the blind monkey. With active management, you actually have a possibility for higher return under certain market conditions, with indexing you get to be average! Also, humans are better than monkeys at taking defensive positions when that little thing called common sense suggest one should. Humans are also better than monkeys at telling when a given sector may be overvalued and thus the manager rebalances to an undervalued sector (or simply takes profits where it makes sense to).

Truth is, the active management vs indexing is (IMHO) an extremely minor issue when charting out a great ER strategy. Far more important to choose the right asset classes, play good offense and defense (make and save a lot of money), STICK with your plan (dont second guess and shuffle all the time). Yes, there are horrible actively managed funds out there, but I think most prudent folks can avoid them.

Besides my TSP, i chose an active managed large cap growth, mid cap growth, and international fund for the long haul. The growth concept makes more sense to me, so its the one i'm going with and i'm sticking to my plan. Personally, i like knowing i have a chance to just "tear it up" one year with my hot fund manager (Thomas Marsico).

 

[azanon]

Individual stocks really magnify what i'm speaking of above. If you picked, say, 10 stocks.... all you need is just 1 Dell, or 1 microsoft, or 1 best buy..... the others could be absolute, complete losers (all principle lost), and that one stock would make up for all the rest, and then some.

So much potential, and the chance of picking ALL losers? (unless you're selecting penny stocks). It'd have to be pretty low.

 

[wabmester]

Mikey, what was the last big allocation change you made and what caused you to pull the trigger?

I went from about 90% equities to 10% towards the end of 1999, and gradually increased to 25% starting in 2003. Just decreased my real estate exposure from 25% to 15% last month.

I plan to just roll around in my cash until stuff looks worth buying. I expect to see real estate bargains before equity bargains show up. My guess is that financial stocks will be the first to take a hit, followed by everything else as the credit squeeze begins.

Or the Dow could hit 20,000 and I'll just kick myself a lot.

 

[azanon]

I went from about 90% equities to 10% towards the end of 1999, and gradually increased to 25% starting in 2003. Just decreased my real estate exposure from 25% to 15% last month.

Nice move in 99'

I expect to see real estate bargains before equity bargains show up.

How so? Real Estate has been on a roll for the last decade, whereas the stock market crashed from 00'-02'. You already saw equity bargins in Jan 03'. You can still see them, but naturally the luster's a little less than Jan 03'.

 

[unclemick]

I haven't a clue what my IRR was/is since 1966 nor do I particularly care - hindsight being 20-20 - DCA in low cost diversified mutual funds via my 401k got me here. BUT in individual stocks/taxable stuff I had a bad habit over thirty plus years of living large in victory and moping silently in defeat.

In tax deferred - DCA and and 'time in the market' were my allies.

That said - just gotta have some side/putz/hobby money to find that one great stock or putter with dividend compounders. Like fishermen who have a fish mounted in their den - I could have a one share certificate of that one great stock framed and displayed for bragging rights.

 

[cute fuzzy bunny]

I still think Buffett has a monkey.

 

[JOhn Galt]

Hey TH, I am told in Thailand they actually have a thing
called a "monkey buffet". No kidding. Anyway the only
Buffett I follow is Jimmy. Don't think he has a monkey, just a parrot.

I am jealous of all these high returns, but they were
produced over the long term. I no longer have a
"long term". I am happy to just not be working,
without dumpster diving and combing the roadsides
for aluminum cans. As long as I don't have to go back
to work and we can live comfortably I can accept low but sure returns. Many people act like they are going to live forever. I take the opposite view which can really help you focus on what is important.

John Galt

 

[azanon]

Seems like I saw you mention you had quite a bit in real estate right John? Personally, I wouldnt consider that low risk at all. No, i'm not implying real estate is a bad investment; on the contrary its a great choice (or at least it has been since 00'). But low risk? nah.

 

[wabmester]

How so?  Real Estate has been on a roll for the last decade, whereas the stock market crashed from 00'-02'.  You already saw equity bargins in Jan 03'.  You can still see them, but naturally the luster's a little less than Jan 03'.

I meant that going forward, the real estate bubble should pop first, and that will precipitate an equity correction.

Some real estate sectors might do OK, like commercial properties in areas that are seeing increasing demand. But I'm planning to buy residential property in Orange County or San Diego, and those places are setup for a fall by several metrics.

 

[azanon]

Ahh i agree yeah. Looks like that "pop" is in process now (seeing a double peak, the second peak slightly less than the first, lower volume). Hopefully if there's a stock market correction it wont be too bad :-/, we've already had one recent nasty lashing.

 

[Nords]

"Winning the Loser's Game" vs

"How I Trade For A Living" by Gary Smith. (Not the media Smith, but a solo trader who semi-retired this year.)

Ellis points out that very few tennis players actually "win" their matches by making a killing shot. Instead, the vast majority of players keep the ball in play, avoiding mistakes, until their opponent makes the mistake. That's the definition of a "loser's game", not a game for losers.

The vast majority of investors are incapable of doing anything more than amateur tennis. Pros like you can make winning shots, Mikey, but I think that big investment gains are a function of the HARD WORK leading up to the insight.

So I'm not surprised to find that I'm a better investor now, in retirement with the time to learn & practice, than during my working years. Buffett says that investing is one of the few activities where our performance can actually improve with experience (age).

Our lifetime number (since 1986) is 11.2%. That includes money markets and a host of other wacked-out investments that surely seemed like a good idea at the time. I wonder how much of that skill consisted of plunking a bunch of money into a fund and then being locked into a submarine for three months, unable to read the stock market news or to change my mind. Nicolas Darvas might have had the best idea.

The first chapter of "How I Trade For A Living" can help you decide if that's the life you want!

 

[unclemick]

Nords

I don't know about submarines - but a lot of my best investments were the ones I totally ignored after I bought them.

Still actively trade - rule of 72 - if a stock doesn't double (reinvested divs included) in 7 -10 yrs. - I dump it and move on.

 

[wabmester]

Re: "Winning the Loser's Game" vs

"How I Trade For A Living" by Gary Smith.

I haven't read it, but I'm automatically suspicious of anybody who wants to tell you how smart an investor they were from 1985-1999. *Everybody* was a genius during that period. How they did before then and since then is a better metric, IMHO.

 

[nfs]

If you picked, say, 10 stocks.... all you need is just 1 Dell, or 1 microsoft, or 1 best buy..... the others could be absolute, complete losers (all principle lost), and that one stock would make up for all the rest, and then some.

So much potential, and the chance of picking ALL losers? (unless you're selecting penny stocks). It'd have to be pretty low.

7000 publicly traded issuers in the country and you think the chance of picking at least one spectacular winner is all that good?

Next time you're betting, I'll take some of the other side.

 

[unclemick]

Ahem er

Go to Bernstein's Efficient Frontier website - type in - the 15 stock diversification myth - on his search engine - read and then, and then ignore his conclusion - and take the opposite side of his bet - ?? 1 in 6 ??

 

[cute fuzzy bunny]

Hey, if it wasnt for active traders buying and selling individual issues, there'd be no extra benefits for we index holders.

 

[Nords]

Read the book, Wab.

I understand your scepticism, but if you're only going to read one book on "how to be a trader" then this should be the one. It's not a typical trader's book and it doesn't merit the criticism until AFTER it's been read.

Gary still posts his trades occasionally on FundVision and in the book he discusses his record all the way back to the '60s. It's quite clear that he's no genius-- just a hard-working guy with a lot of guts. He pulls no punches on the trading industry and he explains exactly how he got from the '60s to 2004. After two bear markets I think he's earned his retirement.

Aside from its glimpse into a real trader's daily routine, one of the book's better values is its discussion of flawless indicators that suddenly stop working for no discernable reason.

 

[unclemick]

My one and only was that hoary old tome - The Battle For Investment Survival by G. M. Loeb. I was too wet behind the ears to understand it. Took my broker's advice back in those days and DCA'd into mutual funds. Trading strikes me as very hard work - ?? but if understanding the principles helps you become a better value investor - well that perhaps is a good thing. Talking about my major investment - balanced index is like watching grass grow - Talking about hobby stocks is another matter - provided everybody understands the amount of talk is inversely related to the amounts invested.

 

[haha]

Mikey, what was the last big allocation change you made and what caused you to pull the trigger?

Hi Wabmester,

Basically, I look upon cash as my natural resting place, and invest in long duration securities, either stocks or bonds, only when they seem to be compelling bargains. I usually then keep them until thay are overpriced in my opinion, or maybe forever.

In the above referenced retirement account I have about 60% cash; the remainder in order of committment size is 2 equity special situations that I think will be relatively uncorrelated with the S&P, oil and gas, Japanese equity, a Canadian timber investment and the smallest portion in a couple of gold miners. No mutual funds.

This allocation I have had since about May of this year. Prior to that, I had more US and Japanese equity.

I don't think any of this is necessarily better than other approaches, but it is what I like to do and what I feel comfortable with.

I may not get the highest return, but I don't think I will get badly slammed either. Like many of us, I have evaluated and passed on plenty of stocks that would have made me rich.(Dell, MSFT!) But I am not a visionary. I looked at Dell and all I saw was a store. Big mistake, but I don't feel comfortable with expensive goods.

My overall expectation is a long US equity bear market, interrupted by some good rallies. If I am wrong, I'll still do allright, just not as well as someone who has not trimmed sail.

Mikey

 

[haha]

Re: Read the book, Wab.

It's not a typical trader's book and it doesn't merit the criticism until AFTER it's been read. 

I would sure like to second this sentiment. Let's not forget, it's a long fight, and this is maybe round 4 or 5 for most of us. Until the investor has either crapped out, or is in the ground, we can't really judge his performance.

An awful lot of what passes for investment knowledge stikes me more as investment catechism. Who made me?-"Bernstein made me." Why did Bernstein make me? "To love and obey him."

It's like reading a book about women, and then telling some guy with a wife and 2 girlfriends what women are like.

Which reminds me of a story. A guy is getting married for the 5th time. His buddy says, "Gosh Bill, after all you've been through, why are you getting married again?" Bill reflects a moment, and then answers, "Well frankly, I miss the cheating."

Mikey

 

[azanon]

7000 publicly traded issuers in the country and you think the chance of picking at least one spectacular winner is all that good?

Next time you're betting, I'll take some of the other side.

Ive seen more than one credible source that said a portfolio of 8 to 10 stocks provides almost the same level of diversity as a portfolio of 100-200 stocks (aka mutual fund).  So... near same level of diversity, even less expensive, and some chance, albeit small, to have a superstar (as opposed to (effectively, return wise) no chance with your blind monkey index fund).

 

[wabmester]

Like many of us, I have evaluated and passed on plenty of stocks that would have made me rich.(Dell, MSFT!)

I've owned MSFT, INTC, and DELL on and off for 15+ years. I got in at the right time, but never let my positions get/stay large enough to make a huge difference on my net worth. That's the problem I have with stock picking, it's not enough to know which stocks to buy, but you also have to know how big a stake to take, and when to exit.

I still have trouble making large bets and letting winners ride. A submarine would definitely help