Portfolio Performance for 2011
Overall we had a good year. The Moose Pond Investors portfolio returned 6.7% compared with 1.3% for the S&P (with dividends reinvested). The value of a MoosePond share on 31 December was $15.398 compared with $14.404 at the end of 2010.
Our success for the year resulted in part from avoiding losses. We made some good defensive moves. Six of the seven stocks that we sold this year went down after we sold them. Two of them, Almost Family Inc. and Transocean Inc., lost about 50%. We replaced the stocks we sold by either buying new companies or adding to existing positions. In both cases we looked for quality stocks with strong projected 5-year return.
Our new positions in AFLAC, Apple, and Google have all done well. A performance report and summary of the current portfolio holdings at year end can be found here. We kept the portfolio well balanced and nearly fully invested all year.
As the brokers say, past performance does not guarantee future results. However, the methodology we have used over the past ten years seems to be working. We have found Manifest Investing to be particularly helpful in managing our portfolio. We rely on the projected average return and quality metrics in the dashboard view to quickly identity when to increase or decrease our holdings in a stock.
Happy New Year to all!
Annual Report for 2010
Moose Pond Investors has completed its tenth full year of operation. We have 19 partners made up of family and friends throughout the United States. Here is our Report to the Moose Pond Investors for 2010.
Portfolio Performance
In 2010, we had a total return of 14.4%. The S&P 500 was up 15.06% for the same period. If we had invested in the Vanguard S&P 500 index fund, VFINX, our return would have been 14.9%. The value of a unit increased from $12.659 to $14.404.
Over the past three years, Moose Pond has done significantly better than both the S&P 500 and the Russell 2000. Moose Pond’s annual return for the three-year period was 3.1%. In comparison, the S&P 500 was down 1.4% and the Russell 2000 was up only 2.2%. (The S&P is a large cap index and the Russell 2000 is a small cap index.) Our portfolio has both asset classes.
The annual returns for Moose Pond Investors are calculated using internal rate of return (IRR). This method is more precise because it looks at actual cash flows. It better accounts for partner investments and market fluctuations throughout the year. Calculating annual return using the change in unit value from year to year is a close approximation. (more…)
Looking at Our Portfolio
As we head into the fall season, the equity market has improved significantly from its bleak lows in March. However, even though we are beating the S&P 500 (an index of large caps stocks) our portfolio has not fully recovered. Year-to-date, we are up 17.4% compared to 15.1% for the S&P500.
There are several tools, some of which were developed by NAIC / BetterInvesting for looking at an entire portfolio. The portfolio evaluation review technique or “PERT” takes data from individual stock selection guides and creates a table. Sorting this information allows identification of the outliers.
PERT Report. Here is the PERT Report for the Mose Pond Investors portfolio. This report is sorted on estimated total return, lowest to highest. Looking at the low end, several companies in our portfolio stand out as being candidates for replacement, e.g., AIG, Helmerich & Payne (HP), and Illinois Tools Works (ITW).
Before making any decisions based on the PERT report, it is important to understand how Toolkit 6 calculates total % return. The PERT report uses the estimated earnings per share (EPS) for the next 12 months and extends those earnings for four more years (for a total of five years) using the EPS growth rate from section 1 of the SSG. The 5-year estimated EPS is multiplied by the estimated future PE (which is the average of the high and low PE from section 4 of the stock selection guide). This give an expended price in five years. 5-year price appreciation then is a simple calculation — [(Future Price / Present Price) ^ (1/5)] – 1.
The total return is the the sum of the price appreciation in percent and the average dividend payout in percent. This may sound complicated, but it is not. The total return calculation depends on the accuracy of the 12 month projected EPS, the applied 5-year EPS growth rate and the estimated future PE. Despite the wonderful precision of the software, PAR is just a reasoned guess based on three independent variables.
The return on any stock is a function of only three variables: earnings, dividends, and valuation (i.e., the price to earnings ratio). When we try to predict earnings or PE ratios five years into the future, we must use judgment and we are often wrong. That is why we revisit our judgment each quarter as companies publish new earnings reports.
Trend Report. This Trend Report looks at the trend of the operations of the companies in the portfolio over two consecutive quarters relative to earnings, sales, and pre-tax profit in order to view the “trend of the trends.” The report also includes total return (as described above) and projected average return or PAR.
Projected average return or PAR is calculated in a manner similar to similar to total return except that we use Section 1 of the stock section guide rather than the analysts 12-month estimates for future EPS. There are several different techniques for estimating future EPS, but projected average return or PAR is based largely on the 5-year estimated EPS in Section 1 of the SSG. The total return and PAR sometimes differ. This simple reflects the different approaches to calculating 5-year EPS.
Portfolio Allocation. It is important to understand how what asset classes are included in a portfolio. For U.S. equities, we generally characterize a stock as small, medium, or large based either ion market capitalization or total revenue. We also use fundamental analysis to characterize a stock a growth, value, or in between. In a globalized economy, it is helpful to know the extent to which a company’s revenue come from outside the U.S.
Academic studies have show that small cap stocks out perform large cap stocks over time. Similarly, value stocks tend to slightly out perform growth stocks over long periods. Also diversifying a portfolio over multiple asset classes tends to reduce risk and improve ove7rall performance.
Morningstar provides an excellent “X-Ray” tool for looking at the style and sector characteristics of a portfolio. Here are the X-Ray summaries for the Mose Pond Investors portfolio by style and sector. These reports suggest that the portfolio may be overweighted to large cap stocks.
As if all these views of our portfolio were no confusing enough, there is one more. The Manifest Investing portfolio dashboard is helpful. It shows quality and PAR for the portfolio. For the reasons discussed above, our calculation of PAR may not agree with those on Manifest Investing. However, the portfolio dashboard does provide an easy way to find outliers which require more analysis. The portfolio dashboard also provides any easy why to decide where to apply additional case (i.e., those companies with high quality and high PAR that reflect a small percentage of the overall portfolio. Conversely, the portfolio dashboard can be used to find stocks to replace (i.e., those with low PAR or quality that reflect a large percentage of the portfolio.
Taking a Long Term View
Warren Buffet’s annual letter to Berkshire Hathaway shareholders should be mandatory reading for all investors. He not only provides an economic outlook, he explains how Berkshire Hathaway makes money for its shareholders. No other publicly traded company provides the same candor or clear explanation of its operations. (All of the Berkshire Hathaway shareholder letters from 1977 to 2008 can be found here.)
Between 1965-2008, the book value of Berkshire Hathaway shares grew at compounded annual gain of 20.3%. In comparison, the S&P 500 (including dividends) had a compounded annual gain of 8.9%.
Replacing our low PAR Stocks
Using data from our portfolio dashboard on Manifest Infesting, here are some proposed changes to the portfolio.
First, sort the portfolio by projected average return (PAR) to show which stocks have the highest and lowest PAR. You do this by clicking on the PAR column heading or look at this PDF file. (Place your mouse over the embedded yellow note in the PDF file.)
The six stocks on the bottom (highlighted in yellow in the PDF file) have the lowest projected average return. Looking at these stocks, that is not surprising. Two are bank stocks (WFC and SNV). The current housing market adversely impacts LOW. Similarly, a decrease in consumer spending impacts BBBY and WMT.
We should consider replacing all of these except JNJ. (JNJ is a high quality blue chip stock despite the mediocre PAR. It is a keeper.)
Now we can add to our positions in stocks we already own with stocks that have a higher projected average return than those we are replacing.
Look at again at our portfolio dashboard. Now sort by the value this time, so our largest positions are on top and our smallest positions are on the bottom. Look for stocks for which we don’t yet have a 5% position and which have a projected average return of more than 20%. We can would increase our position in those shares to about 5% or $2,000 total.
This PDF file shows the idea. The candidates for replacement are shown with struck through text. These are the five stocks with the lowest projected average return or PAR. The candidates for additional shares are highlighted in yellow.
There are several additional stocks we may want to consider, including ADBE, AAPL, PCP, and PTR. More to follow on this.