Poetic Portfolios

It is often said that 75% of mutual fund managers fail to beat the S&P 500. This percentage fluctuates based on the year and length of time, but the fact remains that most mutual funds do not beat the market. The U.S. stock market, however, does not represent the pinnacle of performance. From 1926-1999, the U.S. stock market had an average annual return of 11%. In order to achieve superior performance, it is necessary to treat an investment portfolio like a business and learn the ways of individual stocks.

I began investing about 10 years ago, starting with mutual funds and a 401k. I quickly realized, almost intuitively, that individual stocks could provide very good returns if the proper amount of research was performed. I allocated a small portion of my investment funds to individual stocks, and began my education. This small allocation is the genesis of my first portfolio: Two Roads Diverged.

History and Performance

For several reasons, I’ve chosen not to go back 10 years to the beginning of this portfolio. The most important reason is that I did not want to go back and enter 10 years of data into Icarra’s database.

I am not sure how I fared prior to 2004, but it wasn’t entirely bad. I started investing during the early days of the internet bubble, and made some good returns by accident. These returns were eventually diminished after the crash. A big part of my holdings were in CMGI, Sun Microsystems, Corning, and Ariba. Some are good companies, but the prices I paid were way too high.

My starting place for this portfolio is 1/1/2004. Below is a chart of the performance of this portfolio since what we will call inception.

You can see quite clearly that I have lagged the market for quite some time, only catching the S&P 500 recently. According to Icarra’s calculations, The NAV of this portfolio as of 11/30/07 is 149.41. This equates to a 49.41% gain since 1/1/04 based on a starting NAV of 100.00. On an annualized basis, the return of this portfolio has been 9.52% verses 9.55% for the S&P 500.

There are a couple of reasons for the mediocre performance of this portfolio since 2004. First, my choice of stocks hasn’t been that great, and secondly, a large proportion of this portfolio was held in treasuries up until early this year. The interesting thing about portfolio management is that it is so individual. I had worries about my employment status dating back to about 2004, so I held a lot in short-term investments to protect against having to sell a stock that I did not want to sell if I needed the money for living expenses. In 2007, this portfolio became more concentrated in individual stocks. As a result, my performance has been a little better.

Year to date, this portfolio has produced 22.22% returns verses only 7.40% for the S&P 500. For the past 12 months, this portfolio returned 25.63% verses 9.00% for the S&P 500. Hopefully, this divergence will only grow over time!

Current Holdings

Below are the current holdings of this portfolio.

Company	% Portfolio
OYO Geospace (NASD: OYOG)	14.19%
Dawson Geophysical (NASD: DWSN)	14.13%
Yamana Gold (NYSE: AUY)	13.56%
C-trip (NASD: CTRP)	13.40%
Middleby (NASD: MIDD)	11.43%
Netflix (NASD: NFLX)	11.13%
ADP (NYSE: ADP)	6.79%
Jupiter Media (NASD: JUPM)	5.43%
Select Comfort (NASD: SCSS)	4.01%
Cash	5.95%
Combined	100.00%

Discussions of these holdings are soon to come to this site. I will start with the largest holdings and work my way through.

Goals

The goal of this portfolio is fairly obvious. I want to beat the market by enough of a margin to make it worth my time to cover all these stocks and allocate the available investment dollars in this portfolio. A big part of this strategy, though, is to play defense first. This means avoiding a permanent loss of capital by purchasing companies well below their intrinsic value.

Portfolio Plans

My plan for this portfolio is to perform appropriate due diligence prior to making a purchase of a company. Turnover will be low as this is a long-term, buy-and-hold portfolio. I have played companies like Jupiter Media noted above because the stock price has been extremely volatile. In general, though, turnover should be below 20% per year.

I plan to check performance quarterly and annually. I also hope to do a “look-through” earnings analysis to remind me that these are businesses that I own and not just tickers. The goal, then, is to buy the greatest amount of future earnings as cheaply as possible.

Related Entries Two Roads Diverged Performance Data is Back Starting Slow & Diversification Two Roads Performance Data Two Roads Diverged Portfolio: January 2008 Holdings Sale of Select Comfort

This entry was posted on Saturday, December 1st, 2007 at 11:05 am and is filed under Portfolios, Two Roads Diverged. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.