My Performance Since Inception Revealed


Track Record Since Inception Sept 2007

For the very first time, I’m making public my full performance since inception now that I’ve made the announcement to start managing money (company will be called OSV Capital) by the end of this year.  Thus the importance of setting my records straight.

To make sure it is, I went through all my statements from the inception date of September 27, 2007 to December 2010 and included everything to the cent.

Back in my rookie year of 07-08, I was much too busy learning and studying instead of spending some time in calculating my IRR and keeping a record of my returns. It was not top priority. But I know better now and I also know that many people still do not measure their performance properly. If this is you, use the free spreadsheet for calculating IRR. It does it all for you automatically.

Looking back, I should have gotten into the habit of calculating the returns every month.

Nevertheless, here are the official results of my portfolio since inception. The annualized performance includes dividends and net fees.

Click on the graph below to enlarge.

Aiming to Beat the Market

To be honest, I’m surprised my results are this good and I do admit that much of it is associated with the big spike in 2009.

My record so far is 3 out of 4 beating the market and I do hope this continues but a question I’ve been asking myself is whether beating the market is that important. Don’t you think it leads to the same short term mentality on Wall Street if everyone is just focused on beating the market each year?

The correct way to think about performance would be to measure performance in 2-3 year intervals against the market. On any given year, there is a possibility of under performance, but as a value investor, there is a good chance that a company I have invested in will not realize its intrinsic value until 2 or 3 years later.

Think of it like chess or even sports. Not every team is like the Yankees or LA Lakers. There are more teams that have to rebuild and strategically acquire players for the future. The next one or two seasons could be a disappointment, but over the long run, once those players reach their intrinsic value, the return then becomes astronomical.

I see it the same way with managing a portfolio. One example is GRVY.

GRVY has fluctuated between 10-13% of my total portfolio and ended up just 4.91% in 2010. But I still hold, knowing from the beginning that it was going to take at least a good 1-2 years before I could expect any price appreciation.

Now you could settle for a consistent 15% gain every year (which is outstanding by the way) or admit there will be times of underperformance while you wait patiently for time and Mr Market to be on your side and let your value stocks explode.

That’s what I’ve learnt about value investing, especially in small to microcaps. It does nothing for a long time and continually tests your patience, and just when you have had enough and are about to sell (or have sold) news breaks and the stock literally erupts. Proof is in my 2009 performance.

My aim is to beat the market of course, but I won’t be focusing on doing it every year. I know I’m not that good. But I do know I can crush the market in the long run.

The Best 3 Mistakes of 2010

I received a very sincere email the other day where the sender described us as students of investing as we are destined to learn until we die.

And that’s true because 2010 contained many of my best mistakes. I discovered things that has helped me improve as well as giving me a reality check.

Mistake #1: Trying Too Hard

My performance in 2009 was both good and bad. The good is obvious, but what I felt like I had to do in 2010 was follow up with another successful year. I felt like I had to somehow annihilate the market a second time to prove something.

What happened instead was a complete failure.

Throughout 2010, I ended up trying too hard.

  • Trying too hard to make sure my analysis was correct.
  • Trying too hard to make sure my picks always went up instead of down.
  • Trying too hard to squeeze out as much profit as possible.
  • Trying too many things at the same time.

I was a jack of all trades master of none.

Mistake #2: Emotional Investing

I found myself watching stock prices much too often. I was constantly checking and cheering for my stocks to go up.

Until 2010, I could go for days or even a week without checking prices and not worry about price volatility.

That mentality was broken in 2010 and it led to large losses and many missed opportunities.

If price went up, I was happy and convinced myself that it would go up a little more. When prices dropped, I convinced myself that the price would fall a little more and I could buy the stock then.

As you can imagine, neither worked.

VVTV and ROIAK are prime examples of both. I bought VVTV and ROIAK with solid fundamental reasons and conviction. Both positions went up over 1000% when it reached the $5 mark. Instead of selling leading up to this point, I held on, convinced that it could go higher. Both fell in huge leaps. Once the stock reached a flat steady price towards the bottom, I sold out then.

Impatience and disappointment clouded my judgment.

Then came the opportunity to buy back into both of these stocks at prices below the required margin of safety, but nope, I had hindsight bias and refused to buy.

Mistake #3: Mistake in Selling

Transitioning nicely from mistake #2, you hear all the time about selling stocks when you have made a mistake in your analysis, but you rarely hear the opposite. If your analysis tells you that selling a stock was the wrong choice, you should buy it back.

The fact that the original price you paid is lower than the price now should have no effect on the decision.

Looking Forward

My theme going forward is to remember what it was first like starting. To get back to basics.

There is more than just the 3 mistakes, but the big three is a container for the many other smaller mistakes made throughout the year.

I don’t mind sharing all this because I know you have gone through the same thing. I’m sure even Buffett and the best of them went through all this at one point in their life. How else would they be able to talk and write about such insights on behavioral finance?

The first step to getting better at anything is to admit mistakes. Now that I’ve laid it all out before you, I’m ready to advance and continue learning.

facebook

I’ve created a facebook page for Old School value. It’s a way for me to write casual and short stock related talk without spamming your inbox. So go ahead and “Like” the page and let’s get talking. I’ve found it much easier to tip off followers on stocks I am liking.

  • Outstanding post Jae. I love your humility. It really is encouraging to me when I read that you make mistakes too. I have recently made some really stupid mistakes involving emotional investing and mistakes in selling. You have no idea what a relief this gave me.

    I guess that’s the great thing about value investing: we can make mistakes and still outperform the market in the long run.

  • TI

    Great and honest post. Still outstanding performance. You inspire all of us.

    Thanks.

    Keep on going, Jae.

    Regards
    T.I.

  • Dan Mack

    Jae,

    A few months ago I read a great book on emotionally-driven investment mistakes. It goes along well with what you listed out and has helped me police my inner “Jim Cramer”.
    Your Money & Your Brain. Jason Zweig.

    http://www.amazon.com/Your-Money-Brain-Science-Neuroeconomics/dp/0743276698/ref=sr_1_1?ie=UTF8&qid=1296478051&sr=8-1

    Great post, Buffet is quoted in “Snowball” that investors could be spared repeated losses if they merely kept a journal of their mistakes and analyzed them occasionally.

  • Love the site.

    Quick question; How did you have a positive return in 2010 yet the cumulative return decreased?

  • Jae,

    Those are fantastic returns. Good luck with the money management biz. I hope you keep writing.

    Todd

  • @ Daniel,
    Thanks. I make mistakes all the time. I’ve made plenty of stupid mistakes myself. Just be sure to learn from it and you are fine.

    @ TI,
    Thanks for reading

    @ Dan,
    Thanks for the book rec. James Montier is also another great writer in the behavioral investment field.

    @ SeekingDelta,
    I’ll need to rename “cumulative”, because it’s a cumulative IRR calculation and not absolute returns. That’s why it went down in 2010 despite the 5% gain.

    @ Todd,
    Thanks a lot. Will definitely keep writing.

  • Ranajit

    Jae, that is a great performance and I agree that 3-yearly returns are better than annual. I find it better to have an absolute return number – say 15% or 20% annualized – over a 5 year period. That way I become less prone to taking big risks trying to beat the market when I am lagging behind. Also appreciate your humility and Good Luck with your endeavors.

    Btw sometime back you had posted a performance tracking spreadsheet

    http://www.oldschoolvalue.com/investment-tools/online-investment-tracking-spreadsheet/

    DO you still use this?

    I was wondering, how is the XIRR spreadsheet different/better from the one above.

    Thanks

  • Tony

    Jae Jun,

    hmm, based on two mistakes under ‘mistake #2’ you made, I suppose that you didn’t adhere to the value per share that is given by your favourite quantitative valuation models. Is it so?

  • @ Ranajit,
    I’m not at 5 years at the moment, but that’s what I plan to do. 3yr and 5yr annualized returns.
    I’ve stopped using that online version. I’m working on a better one.

    @ Tony,
    Well that’s a tough one to answer because I valued the companies off truly pessimistic measures, i.e. liquidation, without growth.

    It’s not that I didn’t adhere to it, after all my final selling price was actually close to what I had calculated using my valuation models.

    The point is really directed towards emotions and failing to reevaluate my position.

  • Ryan

    Incredible. I wish I had a few million to drop on you. Maybe one day.

  • Haha I’m sure you’ll put those millions to good use Ryan.

  • Jae,

    I love your site.

    Quick question. Are your returns the result of a passive investment strategy, like doing an indexing to the best ranked stocks in your screens? Or is an active investment strategy?

    Best regards from Argentina.

  • Fab

    Hi Jae,

    your performance is spectacular, simply amazing!!

    This is the result of your genuine passion for active value investing!!

    Furthermore, for what I’ve understood, you are a learning machine by nature!!

    An explosive combination!!

    Congratulations!!

    All the very best with your new career and your life!!

    Fab, greetings from Italy.

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