Wednesday, August 5, 2009

Six Stock Portfolio Update

Portfolio performance since mentioning on April 9, 2009 that I like these six stocks* as long-term investments if bought near prevailing prices at that time (or lower, of course).

While I never make stock recommendations each of these, at the right price, are what I consider attractive long-term investments for my own capital.

Stock|% Change**
WFC|+30.9%
DEO|+37.0%
PM  |+21.5%
PEP |+8.1%
LOW|+11.5%
AXP|+60.8%

Total return for the six stocks combined is 28.3% (excluding dividends) since April 9th. S&P 500 SPDR ETF is up 17.1% since that date. This is a conservative calculation of returns based upon the average price of each security on the date mentioned. Better market prices were available in subsequent days so total returns could have been improved with some careful accumulation.

The purpose is not to measure returns over such a short time frame. It's just, in part, an easy to verify working example of Newton's 4th Law.

Many equity investors would get improved returns if they: 1) bought and held shares in 5-10 great businesses (if time permits stock research), 2) avoided the hyperactive trading that is so popular these days to minimize mistakes & frictional costs, and 3) sold shares in a business only if the core economics become impaired or opportunity costs are extremely high.

This portfolio certainly won't outperform in every period but in the long run it has a reasonable probability of beating the S&P 500. It's not likely outperform the very best portfolio managers but should do very well against most mutual funds over a period of 10 years or longer with lower risk.

There's no shortage of evidence that many actively managed equity mutual funds underperform the S&P 500.  Also, DALBAR's Quantitative Analysis of Investor Behavior (QAIB) study released in March 2009 revealed that over the past 20 years investors in stock mutual funds have underperformed the S&P 500 by 6.5% a year (8.35% vs. 1.87%). Beyond the performance of the funds themselves, it shows that much of these poor returns come down to investor behavior. The tendency of investors to buy the hot mutual fund that has been going up while selling when the market is going down out of panic or fear (the same is true for stocks).

The professional money management business is lucrative whether the funds performs or not. Few (if any) industries pay so well for below par service. It may seem harsh but Charlie Munger refers to those who get paid fees to help manage money as febezzlers. A quote by him on this subject can be found in this post. The full talk that he gives on the subject can also be found here. He backs up his arguments pretty well.

In any case, this simple experiment is designed so it's easy for anyone to check the results. So if this six stock portfolio isn't performing well against the S&P 500 (it'll take a few years, at least, to meaningfully start judging performance) it will be obvious.

I don't think these are necessarily the six best businesses in the world, but I believe they are all very good businesses*** that were selling at reasonable prices on April 9th. At any moment, there is always something better to own in theory but I don't think you can't invest that way (as if stocks are baseball cards) and have consistent success.

I plan to occasionally (though rarely) add or switch some of the stocks in this portfolio but generally will make only minor changes.

Adam

Long position in DEO, AXP, PEP, PM, WFC, and LOW

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to be long the positions noted unless they sell significantly above intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** As of 7/31/09.
*** There are certainly quite a few other shares in businesses that would be good alternatives to these six. The point is to get a handful of them at a fair price and then let time work. 
 
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