Portfolio management
The value of the lessons learned
I propose to take a look at my investment performance over the last year, the last 13 years and the last 49 years and try to assess what I did right, what I did wrong and lessons learned.
We will look at my worst mistakes and also the things that worked out well purely by luck. I have always read a lot about investing. But like so many things in life, like learning to ride a bicycle or swim, you ultimately have to just do it and learn from your mistakes.
2021 performance
Our total return for 2021 was 33.87% according to our discount broker. The S&P TSX Composite total return for the year was 25.1%. For the S&P 500 it was 28.261% if all dividends are reinvested when received or 26.505% if dividends are not reinvested. When I refer to the returns on our portfolio I am referring to our total financial assets, i.e. our entire retirement savings, including cash and bonds if any.
I posted details of our portfolio in this blog last May. See here.
The portfolio remained the same from January 2021 through the entire year, with one exception. In the summer I sold the Canadian company EVERTZ TECHNOLOGIES LTD – ET. It had been humming along well over the years with a return on capital (ROC) in the mid-teens and generating lots of free cash flow. But, I came to realize that it had little opportunity to reinvest that cash at high returns. It no longer met my standards for a superb company.
I invested the money in Zimmer Biomet Holdings Inc – ZBH. It says of itself: For over 90 years, Zimmer Biomet has been a driving force in the rapidly growing musculoskeletal healthcare industry. Morningstar says: Zimmer is the undisputed king of large joint reconstruction. The stock price is depressed and may stay down for a while for a number of reasons, including the fact that ‘elective’ surgery everywhere is being delayed by Covid.
Lessons learned
As for lessons learned, on the investment front nothing bad happened in the last twelve months. So, no chance to learn from the school of hard knocks. On the good side, I think what I did right was to have a portfolio of great companies and not fiddle with it. Warren Buffett says: “Inactivity strikes us as intelligent behavior.” (Buffett W. E., The Essays of Warren Buffett: Lessons for Corporate America. New York: Lawrence A. Cunningham. 1998) p.89.
A word about benchmarking; I track my performance against the main Canadian and U.S. indexes. Some people say this is unnecessary or even harmful. They say it’s best to target an average return over time that will meet your financial plan and needs. I benchmark for the simple reason that if I can’t produce superior returns over time, I’m better off putting our savings into index ETFs. As for last year’s performance, it proves nothing about my investing skill. Hundreds of thousands of investors around the world will have done as well or better. Beating the market is really quite dangerous psychologically. It can easily lead to overconfidence.
2009 to 2021 performance
Our annualized compounded total return for the period from January 1, 2009 to December 31, 2021 was 16.01%. The comparable figure for the S&P/TSX COMPOSITE INDEX is 10.05%. The annualized S&P 500 Return (Dividends Reinvested) during this period was 16.012%.
The reason I start January 1, 2009 is because our discount broker began its performance measurement service that day. It adjusts for all cash flows into and out of the accounts. It’s a somewhat warped date to begin with because the market was close to a low point in the middle of the Great Financial Crisis. In fact, in the previous twelve months our Canadian stocks were down 37% and the non-Canadian stocks down 32%, which was more or less what the indexes did.
Lessons learned
I learned some good (somewhat painful) lessons during this period. On January 1, 2009 we held 18 Canadian stocks, one U.S. stock, one Chinese stock and one British stock. The Canadian stocks made up roughly 80% of the portfolio. Ten years before it had been over 90% Canadian stocks.
During the period following 2009 we took our worst hit in a stock. I was continuing my efforts to diversify out of Canada to avoid home bias. One of the companies we invested in was Citic Pacific, a conglomerate based in Hong Kong. It owned a big chunk of Cathay Pacific Airlines, was developing an iron ore mine in Australia and many other things. It had been founded by a man who was well connected with the Chinese mainland government. The reason I chose the company was because one large investor in the company was a Canadian company controlled by one of Canada’s wealthiest families who had a seat on the board. To make a long story short, we lost a packet. Lesson learned: Do not invest just because some high profile investor has a position in the company. I think I was smitten by what Daniel Kahneman would call the ‘halo effect’. You have to do your own due diligence.
However, the main thing is to not become disheartened by a bad experience. You have to learn from it. As events turned out, the performance of other stocks in the portfolio, over time, made up for the hit.
Lessons learned
My efforts at investing outside Canada led me to invest in companies based in Germany, France, Israel, the U.K. and China. The companies were in chemicals, pharmaceuticals, telecoms and banking. They were all a disappointment. As I look back I think the reason why is something like this: Because I was investing outside my own country I tended to go for the conventional well established companies. I came to realize there is a big difference between conventional investing and conservative investing. Conventional are the household name type companies. Stolid. Been around for ever. Conservative investing is the kind of thing Warren Buffett does.
I moved away from these companies. I decided to get my international exposure from Canadian and U.S. companies with international operations. This has worked out well.
One thing I did miss in the early 2010s was the rise of the tech giants, the FAANGs. They always seemed to be way overpriced. What I was missing was the rise of the intangible economy and the impact company investment in intangibles of lasting value has on reported earnings and the balance sheet. In about 2018 I started reading about this and began to invest in some companies in tune with the modern tech economy. I was late to the party but I did get there eventually.
1973 to 2021 performance
Our annualized compounded total return for the period from January 1, 1973 to December 31, 2021 was 13.80%. The average return for the S&P/TSX COMPOSITE INDEX is 9.6%. My source does not indicate whether this is an arithmetic average or a compound average. If arithmetic, it probably overstates the S&P/TSX COMPOSITE INDEX return by almost 2%. The annualized S&P 500 Return (Dividends Reinvested) during this period was 10.87%. The annualized inflation rate for the period was 3.76%. This means our real compounded return for 49 years was 10.04%.
Lessons learned
From 1975 to the fall of 1990 I made many mistakes. Fortunately they were contained. In early 1975 I moved our retirement savings to an all stock Canadian mutual fund. I opened a small investment account on the side for practice. It was not a mad money practice account but deadly serious. I tried common stocks, options, warrants, straddles, short selling and probably other aggressive strategies I have forgotten. There was never enough money in these strategies to seriously hurt us. But, enough to really feel it. Other than the common stocks, all I felt was pain from the aggressive strategies. From 1985 to the fall of 1990 all our retirement savings were in 90 day treasury bills. Starting in late 1990 we invested in common stocks exclusively on a DIY basis. My lessons well learned, I avoided all the aggressive strategies. The approach was to only buy shares of superb companies and then only at very attractive prices.
Conclusion
John Templeton always advised to stay flexible. The world, including the investment world, is changing constantly. You have to learn from all your experiences. The trick is to keep the cost of tuition (the cost of your mistakes) as low as possible. I will continue to monitor our family’s portfolio closely and will be ready to sell stocks of companies that are losing their way. If my approach ceases to work and I can’t fix it, I won’t hesitate to move to index funds. In the meantime, beating the market by a few percent can make a huge difference. The magic is in the compounding. I invite readers to compare the result of compounding $100 at 8% compared to 6% over 30 years to see the dramatic contrast. A pocket calculator will do this for you. Happy New Year.
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For readers wishing to dig a little deeper on managing a portfolio, check out Chapter 44. Monitoring your portfolio
After an introductions this Chapter continues with these Sections:
44.01 General reading on the subjects of business, economics and finance
44.02 News specific to our companies and industries
44.04 Monitor for weeds to pull and flowers to water
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You can reach me by email at rodney@investingmotherlode.com
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Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.
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You can also use the word search feature on the right hand side of this page to find references in both blog posts and also in the Motherlode.
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Want to dig deeper into the principles behind successful investing?
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