14.98% – Part II

Following up from yesterday, wherein it was alleged that readers who followed all 179 suggestions here over the years might have seen their money compound at 14.98% annually, at least as of May 4, 2012 . . .

Patrick Johnson:  “The update through April 9th 2013 will be coming soon. [AND HERE IT IS.] I had the day off and got a lot of it done yesterday.  As you point out, if there were any systematic bias either for you, because I think you are swell, or against you, because someone hates authors who are registered Democrats and Harvard graduates, it would make a pretty big difference.  I did my very best to avoid any such bias. Working in my favor in my efforts to be objective was that I went through the columns first and took notes on what the recommendations were before evaluating how anything turned out.  Borealis was the one I had the hardest time judging the recommendations for. In the end, I went with what I did. If I had reiterated a buy with EVERY mention the portfolio would be very overweight in BOREF.  I strive to be objective but complicating things is that I personally hate companies like BOREF.  So perhaps I underrepresented it.  . . . Separately:  You made this point but the reason one doesn’t ten-tuple one’s money is because you aren’t fully invested from day 1 in 1996 to the present day. Investments are made in $1,000 dribs and drabs with some sales along the way.  It would be misleading if we tried to imply (which neither of us has) that one gained 900% in 17 years.  But over time, the money that was invested in your recommendations did compound at ~15% a year. An interesting addendum would be to assume one had, say, $25,000 or $40,000 or whatever in 1996 and bought and sold the recommendations, reinvesting the gains.  Or that one started with say $5,000 following the recommendations and added $1,000 per quarter in addition to reinvesting the gains.  Personally, in 1996 I was a freshman at Columbia and didn’t have $400, let alone $5,000 to my name!  There are a large number of directions we can go and hypotheses we can test.  Let me finish with the data update before we go too deep.”

☞ Isn’t this fun?  It’s like getting a long overdue report card — and finding out that we did reasonably well . . . albeit only with money we could truly afford to lose (because the same report card in March of 2009 would not have looked so good).

Also worth noting: most of the credit for any good results you may have had goes to Guru and to Christ Brown of Aristides and a few other smart people.  I won’t name my First Marblehead guy — punishment enough that he lost at least a million or two, I would guess, of actual cash, and  tens of millions of his own paper gains, when it went south.  If BOREF ever does hit big, all I can say is that, yes, it IS very substantially overweighted in my own basket of speculations.  My fingers are crossed so much on that one I may need hand surgery.

Chip in Philadelphia:  “As you constantly recommend index funds for nonspeculative investing, wouldn’t it be interesting to compare the return on your $1000 speculative investments with the return on $1000 invested in either a total market or S&P500 index fund invested on the same dates?  Isn’t the true test of a stock picker is not the return but the return compared to the market over the long-term?”

☞ Indeed.  Index funds since 1996 have not compounded at 15%.  But before I pat myself too heavily on the back, I want to make sure we’re not too far off on that number, and also bring it up to date.

Also, it should be noted, on a risk-adjusted basis, we should have outperformed the indexes . . . or else what would have justified taking the extra risk?

(“Ooh!  Ooh! I know!” “What, Horshack?” “Well, in a taxable account, even if you did no better than an index fund, you had the advantage of tax control — using your losers to lower your taxable income and your winners, held for more than a year, to fund the charitable giving, via Fidelity’s Charitable Gift Fund or one of the others, that you would otherwise have done with cash.”  “Very good, Horshack.”)

Suzanne:  “Patrick chose to use $1000 invested for each one of your stocks picks.  What happened to lots of 100? Are lots of 100 old fashioned?”

☞ Well, yes, they are old-fashioned.  Though most of us do place orders in round numbers, the computer couldn’t care less.  There’s no extra fee for odd lots as there once was).  More to the point, it would be kinda nuts to weight a $50 stock 10 times as heavily as a $5 stock, just because it sells at a higher price.

That said, I look back on the old days of round lots — and fractional rather than decimal pricing (remember halves, quarters, eighths, teenies, and two-nies?) — with considerable fondness.  Until I remember the grotesque commission structure.  (“Ooh!  Ooh!”  “What now Horshack?”  “Remember the pink sheets?”  I do.  Literally pink.  Literally sheets, long and narrow, with a giant staple at the top.  They were so much fun.)