You recently completed a very verbose series here at DQYDJ on investor psychology, the failure of the Efficient Market Hypothesis, and how to improve on buy and hold. If you survived all of that, you’re probably wondering: “hey PK! You mentioned in the EMH article that you trade stocks on valuation. How do you know that you’re doing the right thing?”
Good point dear reader, and to tell you the truth, until I ran the numbers this weekend I wasn’t quite sure. However, lucky for you (and my ego) I have now run the numbers and am ready to share my investing history.
A Little Personal Background
Unlike some of you, I can actually point to the date I traded my first individual stock: (because it wasn’t an incredibly long time ago) March 3, 2009, a little bit before I started this website. It’s not that I’m new to investing, it’s just that for the beginning of my investing career I stuck to mutual funds. Even today, individual stocks make up less than 20% of my net worth.
I started investing by reading a bit about the Efficient Market Hypothesis and by, of course, completing the most important text on that subject, A Random Walk Down Wall Street. Yes, the mutual fund portion of my portfolio is still set by what I learned from those days.
Since I only have 38 months of individual stock investing history, my value strategies have really only been tested by two types of markets… the massive bull market which started around when I did, and the side to side trending market of the recent past. The point? My strategies (and my emotions) haven’t been tested by a true bear market – even though I did continue to invest heavily in stock mutual funds during the Great Recession.
So, did I beat the market from 3/3/2009 until 5/4/2012?
My return (annualized): 29.93%
S&P 500 Return (annualized): 26.37%
So I’ve been able to generate 3.56% of excess returns per year over the last 1,158 days. It’s not Warren Buffett’s track record, but hey, maybe I’ll have to invest more in individual stocks in the future (and sell some of those mutual funds). At least I’ll impress this guy:
Maybe so, but who’s to say I wouldn’t have invested differently had my whole portfolio been on the line?
I know that I’d irreparably ruin DQYDJ’s reputation if I didn’t show you how I calculated the return. The short answer is: use your trading history to set up a spreadsheet in Excel (or OpenOffice or Google Documents) and run XIRR on your cash flows. Here’s a graph of my inflows and outflows since 3/3/2009 (and yes, I did spend my dividends in the beginning, so you can see them as very small outflows). Inflows are negative (depositing money to buy stock), outflows are positive (withdrawing money). The “last” outflow is the current balance – 100% (it doesn’t mean that last Friday I pulled out all my stock, it’s just the value of the portfolio as of Friday at the market close).
As for the S&P 500, this analysis is biased towards it. Most people use the price return of the index – but that would discount dividends and share options. I used the S&P 500 total return index, which happens to include reinvested dividends. On 3/3/2009 it closed at 1126.18, and on 5/4/2012 it closed at 2366.39, for a 26.37% annual return. See the problem? You can’t invest directly in an index, so your actual return would be less due to management fees and transactions. Oh, and you may have spent the dividends. I’m just saying!
Do you think I’m lucky or good? Is it better to be lucky or good? Is it actually unlucky to be lucky when you first start something risky? Will I regress to the mean? Should I sell my mutual funds and only buy individual stocks from here on out?