Saturday, 11 January 2014

Three Years On

Today marks three years to the day that I first purchased a stock under a value investing rationale. Since then I have learned a great deal about the challenges of investing, and also earned a chunk of money along the way. Of course, the journey of learning has only begun, but if it continues to be this enjoyable then I'll be sticking around for a while.

As I said the first time I posted my performance on this blog, I believe that for a value investor, the absolute minimum period of time upon which you can start to judge ability is three years, although a five-year test would be far preferable. The shorter the timeframe, the more that good or bad luck comes into the equation, but give an investor a few decades, and skill almost entirely accounts for the result. Please keep in mind that for the first 15 months, I only held one stock (Forge Group), so one could argue that period of time shouldn't count. With that said, judgement day has arrived, and I'm not all too worried.

In dollar terms, the biggest winner has been Forge Group, with a net $1124 gain (including brokerage and franking credits). Conversely, Delta SBD has been the major drag, as I currently sit on an $809 paper loss. All up, my portfolio started out with $5522 and is now at $8465, which is 53.3% gain. This works out to a compound annual growth rate of 15.3%. If I can maintain that trajectory, I'll cross the million-dollar level in around 33.5 years, and if I manage to hang on until age 100, my birthday present that year will be the attainment of a billion dollar nest egg. While these are obviously simple extrapolations, they make the point that just about anyone who saves a small amount of money and patiently invests it sensibly (either personally or through a fund manager) can end up quite wealthy.

These are satisfactory absolute results, but they need to be viewed in the context of the general market, which I have chosen to be the All Ordinaries Total Return Index. During the same period, the index has appreciated by 25.9%, or an annual rate of 8.0%. This happens to be slightly below the historical long term return of circa 9%-10% annually, so this hasn't been a particularly buoyant period. It is interesting to note that the Small Ordinaries Index Total Return Index - comprised of the smaller companies more representative of where I invest - has declined by 15.3% in the past three years, but I'm not about to go changing my benchmark to look better. The number I deem to be the most important is an investor's annualised outperformance/underperformance relative to the index, and I have previously stated my goal is to beat the All Ordinaries total return index by at least 5% per annum over the long term. So far this has been achieved at 7.3% annualised outperformance.

Although I think most people would view my set of numbers as quite good, and despite the arresting mathematics of compound interest highlighted above, I have occasionally felt that my performance hasn't been good enough. When you see or hear other investors producing extraordinary results in a short space of time, it is easy to want to change strategy and start betting on more speculative situations that offer the possibility of great gains, but also great losses. At times like these, I like to remind myself of one of my favourite Charlie Munger quotes: Someone will always be getting richer faster than you. This is not a tragedy. And then once again, I am content with being the billionaire centenarian.

Please click on the image and zoom in for a better view

1 comment:

  1. Congratulations Chris - keep up the good (patient) work. Getting rich slowly through hard work, rather than quickly through (mostly) blind luck, will be far more rewarding.