Pictures can speak louder than words. So here is a shot of the performance of my E*Trade account.

Jason's 2006 Investing Performance

Yikes. First one question. Is is possible to apply technical analysis to a chart of your performance? If so, I would be short Jason Coleman right now. I got hammered in December (giving back all the gains of a nice November) and my portfolio value has fallen out of the channel it was in. I should probably sell out of all my stocks even though the individual stocks themselves don’t look so bad. Or do they?

My trading strategy for that first half of the year can be summed up as “find great company stocks, buy them when they are overpriced, then sell like a pussy when the stock loses money” cause that’s exactly how I lost all that money. Other problems I was facing was investing with money that I needed for other stuff. So I would enter a decent investment (like buying MSFT at $24) and have to pull the money out at a bad time (when the stock was down $1 at $23) and then I wouldn’t have money to buy the stock at a better time (when it was close to $20, now closer to $30).

Lesson learned:

If you don’t have the liberty or patience to stay in an investment for the long term, don’t make a long term investment.

A theme that I noticed a lot this year was that I would make good calls. I just never seemed to put my money where my mouth was. Usually, my money was too busy wrapped up in a worse trade. I credit a lot of this to selective memory though.

Now something incredible happened around July. Actually three somethings. (1) I learned more about technical analysis and started trading a swing-trading strategy, (2) I left my job and started working at home, thus had more time to devote to stock research, and (3) the market turned around and soared. Which of these was more important, I’ll never know. This I know, I did a lot better than I did earlier in the year. Although I was only keeping pace with the S&P and boarder market, I at least wasn’t losing so much.

What happened in December? A lot of my loses came from a botched trade in SIRI.

New rule:

I can never trade SIRI stock again. I am always wrong.

I made a mistake that I’ve made before (WITH THE SAME STOCK); I turned a trade into an investment. In November I came up with a thesis, based on technical analysis, that SIRI would bounce from $3.60 to about $4.30 or so. I didn’t have any conviction, so I stayed out of the trade. Then the stock started taking off. At $3.90, I thought there was enough confirmation that my original thesis would hold and SIRI would see at least $4.30. That was my trade, $3.90 to $4.30. When the stock hit $4.30, I didn’t sell. I changed my mind and decided to hold on to the stock for a longer trade. Bad idea. Now the stock is down around $3.50 and probably going lower.

I was greedy. I could have sold the sucker and been happy with a nice little $150 profit. The kinds of profits that were making me so much money throughout the fall. What’s worse is that as my money was held up in SIRI I missed some opportunities to take advantage of some swings that were happening in my other holdings. I stink.

(UPDATE: I wrote this article before trading started in 2007. I am currently planning my sale of my SIRI stock. A lot of people were selling at the end of year, as people tend to sell big losers for the tax advantage at the end of the year. Now at the beginning of the year, there are a lot of stupid people who lost money, sold losers, and now have a lot of cash. These people are going to be buying on the first trading day of the year. That’s what’s happening with SIRI and a lot of stocks now. The plan to not be greedy and recoup as much of my losses as I can.)

More than E*Trade
I’ve been especially risky with my E*Trade account. There are a few reasons for this. (1) I’m young and my account size is small. Thus, I’m more able to recover from a big loss. (2) I’m using this account to learn about trading and investing. Some people advocate paper trading, but I find that trading with real money makes it that much more real. Part of learning to trade is learning how to make money. Paper trading is fine for this. A bigger part of learning to trade is learning to control your emotions and tendencies. This can only be done when something real is at stake. And (3) my E*Trade account is only 1/3rd of my total savings. I have another third saved in mutual funds through a 401k and another third invested in my old employee share purchase plan. Let’s take a look at these other investments.

My 401k
The year-to-date returns on my 401k account is 15.9%. This was a good year for everyone. I don’t know how my numbers stack up against others. I was invested pretty evenly in 4 funds.

– Fidelity Contrafund (FCNTX) (+15%)
– Harbor Capital Appreciate Fund (HACAX) (+1.7%)
– Royce Opportunity Fund (RYPNX) (+20.4%)
– Templeton Emerging Markets Fund (TEEMX) (+25.8%)

All of the funds are “stock – growth” funds, except TEEMX which is an international fund. The fund that sticks out like a sore thumb there is HACAX. This was a fund I purchased into on a tip. That should have been a warning there.

I thought that I needed to diversify a bit more and didn’t know which fund to choose; a colleague suggested HACAX and I thought, “Why not?”. In the middle of the year, I saw that HACAX had handled the pull back from May-July much worse than my other funds. While other funds were floating a bit above 2% returns (or much higher in some cases), HACAX was down almost 10%. The stock was overweight in technology, which had been hit the hardest in May. But I new that tech (and the stocks HACAX owned) were going to lead the turn around in July. So I stayed with the stock. They managed to crawl back to positive but didn’t improve much once they got there. I thought that they had made some bad moves. So I moved the money I had in HACAX into another international fund: Fidelity Diversified International (FDIVX). I’m now about 50-50 international vs. US funds. This is a bit higher than recommended, but I think good for an aggressive portfolio.

My ESPP: Accenture (ACN)
Here is a chart of ACN for the year.

ACN 2006 Chart

Not too shabby. In July, I sold about half of my stake. I was quitting my job and needed the money as a cushion until my independent work starting producing more cash. Some of the money profits found their way into the E*Trade account. The stock I sold in July had been bought at much lower than $28. The options came with a 15% discount too. Nice. The remaining shares continued to do very nice throughout the rest of the year. Exact numbers are hard to come by, but the gains in ACN made up for all of my loses in the E*Trade account and then some. Overall, both accounts are up about 10-15%. Plus the 15.9% gains in my 401k, and I have about 13-15% gains overall. Very acceptable, but I know I can do better.

That’s all for now. It’s been educational and entertaining to look back on my year of trading in 2006. Thanks for being there with me.

And my buy & hold Mutual Fund based portfolio returned about 15%; My wife’s managed portfolio returned about 13%; and the sleepy portfolio returned about 14.7%. These returns all in the Canadian Stock & Mutual Fund Market…… I know which part of your experience I value!

Best wishes in the new year on building your portfolio.

David

How much did commissions contribute to your net loss? I started off with Scottrade but have moved the majority of my holdings to Zecco. I was getting hurt bad on commissions.

My SIRI pain: bought at 5.00 earlier in the year and finally sold for 3.60. Now I know SIRI and XM are going to merge since I sold!

Yeah, commissions stink. With the E*Trade account, my net loss was ($629). I paid $441 in commissions.

I have thought numerous times about moving to another broker for commissions, but I’m really happy with how E*Trade has treated me otherwise. As my account size grows, the commission cost will become a smaller part of my gains/losses.

BTW, to reiterate how screwy this math is, ($629) was my realized gains/losses. Meaning, how much I lost after selling stock. The stocks I still held at the end of the year were up about $50 on paper. The total size of my E*Trade account at the end of the year was about $5800. So I was down $580 on $5800, or a 10% loss.

The loss in the chart is much higher, but I imagine that is due to how the size of the account varied as I put money in and took it out. The account size varied from a low of $2000 in January to a high of $7200 in September. So while my account size was smaller, I was making larger % losses. And while my account size was larger, I was making larger % gains. That worked out nice.

Mark, unfortunately, Henry Blodgett’s math and projections are insanely optimistic, though his strategy is not bad for most people.

He assumes 10% returns every year compounded, with no years of losses. In actual practice (the famed “historical” view), these numbers simply do not happen. At the peak of the market in 1999, the COMPOUNDED rate of return was only 9.7% (since 1926). To achive this remarkable level (which, even though it is only 0.3% points below Blodget’s projection, already costs you $1m using his same process) the market required massive overvaluation.

Since then, the actual level has dropped to less than 9%, which would leave you with $6.5 million after 50 years. Not bad, but you have to consider inflation at 3% annually, you would lose 75% of the value over 50 years so its closer to $1.5 million

Where does the 10 or 11% figure that is often quoted come from? Its a statistical quirk. The market AVERAGES 10-11% returns, but as investors, we do not get AVERAGE returns, we get compounded returns. What is published as examples are compounded average returns. This may all seem complicated but basically it amounts to this. When you take an average (arithmetic mean) losses and gains count the same. But when you are compounding, losses do not have the same impact on returns as gains.

An example. Say we invested $1000 and earned 100% in our first year. In the second year, we lost 50%. If we take the average, of these returns we get a positive 25% gain.

(100-50)/2 = 25

But we know that actually, we are back where we started. Having gained 100% we had $2000 when we started the 2nd year, and then we lost 50%, so we are back at $1000. Our compounded return was 0%, but if I take our average returns and then compound them, i would suggest that we should be pretty damn rich by now.

This only happens when you have losses, since losses in the markets are rarer than gains, the impact is somewhat muted, but the real comparisons we have to make are to returns of 8 or 9 percent. Sadly, as a result of another statistical quirk, stocks were relatively cheap (on a P/E basis) in 1926, so the historical returns outpaced actual underlying growth in intrisic value (earning power), such a result is unlikely to happen again, at least, not without a big crash first (to make stocks cheaper). Obviously, though, if you invest throught that period, you are going to take some big hits.

Bottom line – ignore all the people who tell you that you can get rich being average. It’s just not true.

Doug – your math is all wrong.

All that matters is that in 5 years time, every $1 you put in is worth $1.61. That is an average compounded return of 10% over 5 years. It could go down 20% in one year, and then up 10% the next. We all realise that is not a 10% per annum gain in those two years, but that is NOT how the return is calculated (as you seem to be suggesting) – you do not just add the average yearly returns together, nor is the 10% value a MEDIAN yearly return.

If you don’t understand the differences between these terms, you should not be giving out investment advice.

Start with your initial investment value, subtract that from your final value, then work out what the AVERAGE annual compound rate would need to be.

I no longer trade, so don’t care if it goes down 20% in a year – in 10 years time that will be a mere dip on the way to a 150% total return.

The Watcher

PS You can get rich off average returns – just watch me.

Watch The Watcher. That’s some heavy shit. 😉

On a more serious side, thanks for the discussion guys. Might I add:
– Math is tricky (and misleading) sometimes.
– We’d all like to be better than average.
– That said, assuming you have an average income and invest 20% of that income with average returns, you will actual get above-average wealth. This is because the average American is investing much less than 20% of their income.
– So participation is key.
– If you are smart, you are starting earlier than the average investor too.
– I think individual investors CAN beat the returns of mutual funds and the larger market. Focus on taking advantage of your small size.
– So try for a while. Especially while your account size is small, thus the risk is smaller.
– If you suck at it (like I did this year – but give it more than one year), leave your money with the professionals or in index funds and accept the fact that you will retire with just $6 million vs. $12 million or whatever the difference would be.

Good luck, all.

Don’t try to be a genius investor. You will end up with returns that look like those in the graph. I made ~ 15% this year, the index way.

Thanks for the advice, CPA, but I think I keep trying for a bit longer. I am drawn to investing. I like the feeling of using my mind to make money. I like the feeling of making money because I’m smarter than everyone else (or the average guy out there).

I expect to have a much higher net worth as I get older and my earning power grows. I think it is possible for an individual investor get 20-25% gains. The difference between 15% (not a historical average for indexes or mutual funds) and 20% is not so much on my small account size, but 5% of $1 million is an extra $50k… compounded.

So, like I said, I have to give it a try. There were a lot of people who told me I couldn’t make money at poker… that it’s just a game of chance for suckers. But I was able to make money playing poker. I stunk at poker at first too, but I figured it out.

Investing in stocks is a similar activity, based on similar skills. Stock however have the bonus of allowing you to play with a lot of money against opponents that are still weak. It is harder to find a weak poker player playing with a lot of money than it is to find a dumb schmuck (like me) playing in the stock market with a lot of money (not me yet).

And then there is the feeling that you have control over your money. When my individual account was down over 20%, I didn’t feel nearly as bad as when the one mutual fund I picked was down 10%. “What are those frak-heads doing with my money!?” “Okay, I need to step it up and get in gear. At least I’m learning something while my account is small.”

In regards to your question about how good your mutual fund performance of 15.9% was, let’s assume you have a brain-dead, balanced allocation of the following Vanguard index funds:

20% International
20% REIT
20% Small Cap
20% Large Cap
20% Bonds

This portfolio would have returned 20.14% this past year after expenses beating your 100% stock portfolio with less risk.

Let’s say you had a riskier allocation of no bonds — and you believe the data presented about value > growth, small > large, emerging > developed, allocation of different assets to reduce risk, etc. Just off the top of my head, you’re looking at something like the following:

10% Commodities
20% REIT
10% International
10% International Value
5% Emerging Market
10% Large Cap
5% Large Cap Value
20% Small Cap
10% Small Cap Value

This portfolio of Vanguard index funds would have returned 24.96% this past year.

So yes, you’ve underperformed the market quite a bit. Chasing hot sectors, chasing hot funds, chasing hot stocks — that kind of activity usually reduces your returns. What you need to do is read up on the various asset classes, decide on how of each fits your risk/return profile and then stick to the percentages.

Or maybe I should buy Vanguard funds 😉

Thanks for the numbers, Mossy.

Do you have the individual returns for each of those funds? Or do I need to look them up myself?

I’m trying to figure out what’s causing the high returns in that mix.

Mossy, first point: I wouldn’t describe my investment technique (especially with regards to my mutual fund selection) as “chasing hot” anything. I don’t think I “chase” my investments, nor do I invest in what’s “hot” simply for the fact that it’s “hot”. Maybe you were just generalizing though.

On benchmarks: I’ve been benchmarking against the S&P, which returned 15.8% last year. So my mutual fund returns are in line. I think my fund blend probably had about an equal amount of risk as the S&P last year, so this makes sense. No risk for returns trade off here.

Now how to choose and benchmark and what that means is a bigger question. Maybe I’ll explore it in a future post (Ken Fisher has a lot of smart things to say about this in his book “The Only Three Questions That Count”).

I won’t lie and say that I was “benchmarking” intelligently throughout the year. However, I’m not upset about my returns. Besides the hack HACAX, the funds I picked performed in line or above the other options which were available to me under my old 401k plan. Also, if I did have my choice of all funds, my alternative would have been to invest in an S&P ETF… not a basket of Vanguard funds. Although according to your numbers, the latter looks like a good option, no?

Do you consider that basket of Vanguard funds as a benchmark for you? If not, it’s pretty pointless to simply point out that I underperformed some other portfolio. The Vanguard fund portfolio underperformed the “buy Allegheny Technologies (ATI) and sit tight” fund by about 75%. But that would have come with a bunch of risk, right?

I guess the main point of your post was that I could have had better returns with LESS RISK, since your selection apparently has a more diverse and better hedged collection of investments. I’ll buy it. Although I admit the different in returns (especially for that second group) could also be attributed to better management and/or luck.

Again I’d like to see some more number and the specific funds, but the numbers you post are intriguing.

Part of my comment about “hot” stuff was more of a general comment of how people seem to pick funds based on the name. “Capital Apprecation” — that means wild gains!!! Or “Equity Income” — I’ll build Equity and get Income at the same time!!! I mean who would buy a fund that was named “Capital Deprecation and Income Loss” fund? I suspect your tip from the coworker was pretty much based mostly on the name game — I used to do the same back when I started looking at my first 401K 10 years ago.

All numbers I used were from Vanguard Index funds. I like using Vanguard funds as benchmarks because they show real world numbers on how you would do if you invested in the “market” versus specific stocks or funds. If your goal is to beat the market, then you should be looking at your performance against Vanguard to see your results.

Should you be worried about underperforming the market? That’s a tricky question. Yes 16% is pretty good. If you compare it to a 5% savings account, it’s great. On the otherhand, there will be losses in the future and that missing percentage of market gains could be difference between washing out a year of loss or two years of losses. For example, say the market was up 20% and you only got 10%. Next year, both you and the market were down 5%. Somebody who could market returns would still be up 10% over 2 years while 10%-5% would be 0%.

Now, I know 401Ks have limited options. Most 401Ks offer high load and/or high expense funds because they’re competing on price to the employer which they then recoup back from the employee investments. Sometimes all you can do is underperform the indexes just slightly but it is still better than never investing. Add in tax deferral + employer matching and it’s a no brainer. That doesn’t mean I can’t dream about having the full selection of Vanguard and DFA funds in my 401K.

Mossy, thanks again for the comment.

I’ve just moved my 401k to an IRA at E*Trade, which had a much greater selection of funds. I haven’t invested everything yet (and don’t mind moving things around if I find something better), so I will definitely take a look at the index funds Vanguard offers.

FWIW, here are the 3 tickers I’m invested in so far (about 25% each with 25% more in cash):
IWS (iShares S&P index), JAOSX (Janice Overseas), RYPNX (Royce Opportunity Fund – same as before).

Interesting you should mention Janus Overseas. I got into JAOSX about 11 or 12 years ago and have been continually putting in money through the years. Without a doubt, it’s been a great performer during this time. It’s made more money for me than anything else. (Mutual Qualified was close but had more taxable distributions.)

But here’s the punchline — why did I pick Janus Overseas in the first place? Well while I was doing research on funds to pick, I looked through many different books and magazines listing past performance (no online searchable databases back then) and narrowed my International fund to Janus Worldwide. But when I went open an account for JAWWX, I saw the fund was closed to new investors. So I decided what the hell – pick JAOSX even though the past history (at that time) was not as good as JAWWX. Since then, Janus Worldwide has returned 6.8% compared to Janus Overseas’ 14.5%.

When I re-evaluated all my holdings late last year, I remembered this scenario and realized how much luck was a factor. All my research on what funds to pick — completely useless. Many funds I thought were good (based on past performance) ended up underperforming. Funds picked at random turned out great. So I cashed out of all those funds — if JAWWX could outperform JAOSX 87-96 and underpeform it 97-06, it could easily flip around again — and moved the majority of my holdings to Vanguard. Vanguard is missing some asset classes like International REIT, International Small Cap Value, Micro Cap Value, Emerging Markets Value, Broad Commodities and so on which means a chunk of money spent on ETFs from other companies. Usually though, my general philosophy is that if Vanguard offers a fund or ETF in a category, it will be very hard to beat them for expenses.

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