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F Wall Street Investment Performance

By Joe Ponzio on August 9, 2008

It is just over a year since F Wall Street began on June 25, 2007. I first posted about the Blackstone (BX) IPO — a cautionary post warning visitors that excitement + lack of information = thanks, but no thanks. As many visitors know, my style is hardly predicated on activity. In fact, I'm more of a Charlie Munger assiduity-type investor — sit on your ass until a no-brainer comes along.

In this "rough and turbulent" market, let's take a look at the first year's success and overall performance.

How Mr. Market Has Fared

I find it somewhat silly to compare performance to the indices for one simple reason — it is impossible for most investors to hold a portfolio equal to the indices. So, we'll compare our performance to the Diamond Trust Series (DIA) — an exchange traded fund that closely tracks the Dow Jones Industrial Average — and the Vanguard 500 Index Fund (VFINX) — a mutual fund built to track the S&P 500. The Diamond carries fees of roughly 0.18%; VFINX has an expense ratio of roughly 0.15%.

From June 25, 2007 through August 8, 2007, DIA fell roughly 10.3% when factoring in the effect of reinvested dividends. Because we are looking at a period of just over 13 months, let's convert to an average annual return — the average annual return for the DIA was (9.2%). A VFINX investor fared a bit worse — down 11.6% over the thirteen months, or (10.4%) on an average annual basis.

The F Wall Street Outperformance

Just following the blog closely, the F Wall Street non-conventional investor did much better. The total return for the thirteen months was 14.6%, with an average annual return of 12.9%. The relative outperformance was stunning. The DIA was the better of the two passive index investments, and F Wall Street outperformed it by 24.9% on a cumulative basis, and 22.1% on an annualized basis.

A $100,000 investment in the Diamond on June 25, 2007 was worth $87,765.63 on August 8, 2008. Throwing $100,000 into a brokerage account on June 25, 2007, patiently practicing your assiduity, and buying the no-brainers discussed on F Wall Street would leave you pleasantly surprised to find $114,629.08 in your account on August 8, 2008.

Admittedly, judging performance based on thirteen months is silly. You can't look at ten years of business history, project the future of the company for twenty years, and then focus on daily or annual performance. Still, if visitors are on the fence about practicing assiduity, waiting for a fat pitch, and ignoring the markets, this first year might help push you off the fence and into the annual reports.

The Chart of Performance

For you visual folks out there:

Growth of $10,000

F Wall Street Stock Holdings

The F Wall Street portfolio would currently contain just five investments:

* Because no price target was discussed, I used the average of the open, high, low, and close for the day.

You'll note that I did not include any other positions discussed (eg. Graham Corporation (GHM), Pfizer (PFE)) because I never really analyzed them thoroughly on the blog or talked about them after the fact.

F Wall Street Workouts

In addition to the five long-term purchases, we engaged in two workouts — both of which were highly successful:

I did not include the Clear Channel Communication workout that I bought and sold the week of March 25, 2008 because I never really discussed it here, I didn't assume a double-dip on Tribune when the price tanked for a brief hour the day of the deal for no reason (but I think I mentioned it somewhere on here after the fact), and I didn't assume an "average down" in RTSX — purchasing more when the price kept tanking to the mid-$20s prior to the deal's close.

In short — I didn't pretend that every transaction was perfect and at the perfect price. Instead, I tried to use plain vanilla purchases and sales based on the dates I discussed them (or the day following the evening I discussed them) and I assumed $9.99 trades on the stock purchases and sales. I assumed we purchased every stock that was attractive, cheap, and timely. For example, I didn't assume a late March purchase of Nutrisystem because I talked about it later. I did assume we bought it that day after I posted this comment one evening.

Sitting on Cash

As of August 8, 2008, the portfolio would have about 40.2% in cash.

Portfolio Construction

Building a portfolio is all about confidence and risk. If you find four to six Johnson & Johnsons and Wal-Marts trading at discounts, you need not worry about owning anything else. You can put 20% or 25% of your portfolio into wonderful, rock solid businesses selling at discounts and walk away from your portfolio for years.

In the F Wall Street portfolio, I put 20% into Wal-Mart and 20% into Johnson & Johnson.

The mid-caps and the "it's a cheap mid-cap but I wouldn't hold it forever" stocks may have a place in your portfolio, but each position shouldn't be more than 5% to 15% of the overall portfolio. Adobe and American Eagle Outfitters both fell into that range; so, I put 10% of the portfolio into each.

The small-caps and the "it's a cheap small-cap but I wouldn't hold it forever" businesses are riskier in that a large competitor can crush them; so, each one should be less than 8% to 10% of your portfolio. Nutrisystem falls into that category and I assumed an investment of 5% into the company.

As many of you know, I don't mind using leverage on workouts if I'm fully invested. In the case of the F Wall Street portfolio, there was a ton of cash; so, no leverage was needed. Each workout was 20% of the total portfolio, even though I've talked about using as much as 30% as well as leverage.

Investment Performance vs. Portfolio Performance

Throughout the year, the portfolio sat (and continues to sit) on a considerable amount of cash as we look for new ideas. That cash is a drag on performance. Though the portfolio grew 14.6%, that return includes the effect of cash. The investments, excluding the effect of cash, grew 24.4 % — an average annual return of 23.5% — which includes some stellar performance, some mediocre performance, and American Eagle's 50% haircut.

The investments on F Wall Street outperformed an investment in the Diamond Trust Series by 34.7% over thirteen months.

The Portfolio Plan

The logical question is: Now what? What is plan for these holdings? Should we take our profits and/or beatings and run? The market may get worse. Should we cash out and wait to rebuy on the dips?

I look over the portfolio and I don't see anything worth selling yet. American Eagle Outfitters has seen its business take a turn for the worse; so, I'd institute Phil Fisher's three year rule. Management has two and a half years left to get the business growing again or I'm gone.

Nutrisystem was grossly overpriced last year at $70 and change. When it hit $13 and change, I felt like the slowed growth (and some shrinkage) was factored in and it was still cheap. Assuming things play out as I expect, I see no reason to sell considering my ultra-cheap buy price. Of course, I'll monitor the business going forward, but not daily.

Adobe is fairly priced but I think it is a solid company. If I run out of cash and need to sell something, I'm happy to sell Adobe. If I don't need cash, I think my money is better parked in Adobe at $34 and change than in a money market for a few years.

Johnson & Johnson and Wal-Mart are permanent holdings so long as their businesses remain solid.

I don't have to make any real decisions today. Sitting 40% in cash, I have to look for new opportunities — not fret over taking profits or losses on long-term businesses I just purchased in the past thirteen months.

The Portfolio's Expenses and Risk Measures

To date, we've effected nine transactions — five long-term purchases and two workouts (for two transactions each). The total paid in commissions was $89.91, assuming $9.99 trades. Thus, the total expense ratio of the F Wall Street portfolio was 0.08% — half that of the funds mentioned earlier, two of the lowest cost funds in the universe.

How "risky" was the F Wall Street portfolio? Let's think of it this way — the two funds had to be fully invested the entire time, and they had to hold stock in all of the companies of the DJIA or S&P 500 respectively, regardless of how great, mediocre, or bad those companies (i) were or (ii) were expected to become. The F Wall Street portfolio was 81% invested at its highest, but largely held and holds a ton of cash as we looked around for great opportunities.

The two pillars of the portfolio — JNJ and WMT — are massive, international companies with little business risk. Though many will argue that having 20% of a portfolio in a single company is crazy, those same people would love to own JNJ or WMT outright, even if it was their only investment. Add to that the fact that these businesses were purchased when they were on sale based on our estimations of intrinsic value and our risk plummets well below that of other investors (speculators) that blindly invest 20% of their portfolio into a single company with absolute disregard to value or fundamentals.

I've said it before — beta measures are nonsense and I don't even look at or consider them. Still, for you numbers-oriented investors out there: The beta of the F Wall Street portfolio was 1.3 and the R-squared was 0.57 (or 57, depending on how you like your numbers). So, the portfolio moves faster than the market — a good thing. And, it moves largely independent of the market — another good thing.

Putting It All Together

One year performance means nothing. To date, however, F Wall Street has largely been a series of posts with no coherent portfolio to track. Even I was getting confused as to what we've discussed. In the past thirteen months, we've had a lot of successes, we've taken a short-term beating (AEO), we've engaged in some successful workouts, we've missed some short-term beatings (BX, ALU, AMLN, to name a few), and we've missed some high fliers (RIMM). And we've done it all without any regrets — comfortably, confidently, and at high rates of return.

All in all, I think we've had some very intelligent discussions and I think our performance, albeit short-term, is quite satisfactory, particularly in relation to the overall markets.

Happy belated birthday F Wall Street. Thank you to the more than three million visitors around the world that make this website enjoyable and educational. Let's have many more years just like the past one.

22 comments. Read them below or add yours!

 
 

The Discussion on F Wall Street Investment Performance

Jae Jun said,
Thanks for the wonderful year of educational and enlightening posts.
I'll definitely be around for the next year.
 
David said,
Amazing Joe, we as investors couldn't ask for more from a website. Thanks much. I think the book you're working on could become an investing classic - looking forward to the release.

David from
http://www.hybrid-car-sho...
 
Rene said,
Happy birthday! Thanks for this site, may it have many more years left.
 
Kaf said,
Thanks for this amazing site, and your realistic practical advice, i have learned a lot and yes i can not wait for the book either.
 
Allen said,
I only wish someday that someone would describe me in the same terms that I would describe this site : Great design, better content.
 
Rene said,
I think we who admire this site do so because of Joe's assiduous effort to refine our understanding of the "value" investment philosophy. I particularly like the teacher/student tenor of Joe's lectures/inquiries, in which he seems to be learning right along with the rest of us. That, to me, is the true path to wisdom-seeking as opposed to the the marketing of "wisdom" you see in nearly every other investing site.

I have learned a lot in the short time I've been coming to this site. I've learned about valuating stocks and more importantly, I've learned about myself as an investor. I don't always agree with everything here, but I always take it seriously and feel confident of the sincerity of the thesis being promoted/investigated. At other sites you see pronouncements by famous "experts" which are at best wild guesses and at worst patently ridiculous, but carry the weight of "authority". Here, reason and empirical evidence are king. My kind of joint.
 
Amit D. said,
Congrats!! I'll be looking forward for 2008-2012.

It should be interesting to see how the portfolio will do against recession and inflation together. Also, I'll be looking forward to the logical conclusions your going to draw out of the invested time frame.
 
Casey Mattson said,
Hey Joe,

Happy B-Day to FWallStreet! Been a fan since the beginning. Keep up the great work.

Are you considering a "portfolio tracker" of sorts?

 
Joe Ponzio said,
Performance: One thing I did not include in the performance - and I guess I should have - is the option sale on AEO back in November. That would have pushed the return just over 15% for the thirteen months. My bad.

Casey: I will not have a performance tracker here because they are too short-sighted (ie., daily). Instead, I'll do a post like this one each year. Daily price swings are unimportant to the long-term investor and I think a daily portfolio tracker would detract from the long-term message here.

All: Thanks for the wonderful comments and support. It was a heck of a first year. I know I am extremely behind on updating the functionality of the website - the designer is working on my company's site first. Expect to see some minor changes here over the next few weeks before any major changes (like a forum).

Workouts: A visitor tipped me off about the Landry's Restaurants workout two weeks ago. The CEO is offering $21 a share in a going private transaction. I analyzed the deal and got in a few dollars ago when the premium was over 40%. I'm adding it to the F Wall Street portfolio today at $18.12 - a 15% premium to the going private price. Thoughts?
 
(MikeR) said,
Fertitta, the CEO, who is offering to buy LNY owns something like 39% of the shares, so shareholder approval seems certain. So is the only thing that would stop this Fertitta changing his mind?
 
Bill said,
Joe-
A belated Happy Birthday to F Wall Street!

I'm still trying to get my head around the usage of options to provide additional returns and/or effectively reduce the cost basis of a stock. For example, Adobe is up around my calculated intrinsic value - would now be a good time to start selling some covered calls? August $45 calls seem to be going at $1.25 right now, or about 2.7% of the current price ($45.64 at the moment). Or should I be calculating the effective premium as $.61, since the current price is $.64 above the strike price? Or should I only be looking for currently out of the money call prices?

Thanks for bearing with this newbie...

- Bill
 
Casey Mattson said,
Joe: Good point, detracts from the true focus of the site.

Wondering more along the lines of a revolving "current open positions" and "closed positions", then maybe links to post regarding that issue.
 
Joe Ponzio said,
(MikeR): Landry's is waiting for comments from the SEC - a standard procedure that falls in the "Regulation" step. Once those comments come back (or if the SEC has no comments), the deal can close.

Bill: You would get $1.25 per share, but give up the shares at $45. Here's the way I look at it: You would get $1.25 a share, but deliver the stock at $45 if it closes at $46.25 before expiration (and you get called). So, the effective premium is $1.25 and your gamble is against the short-term. Will Adobe go above $46.25 before the August expiration?

Either way, you end up at a $45 sale price plus $1.25 per share.

Casey: Let me weigh the pros and cons of such a list. I really don't want people focusing on the short-term; so, if I can up with a crafty way to do it, I certainly will.
 
JC said,
Joe,

Do you usually enter a new position all in one shot? By that, I mean do you buy your whole 20% position as a single trade? It seems like you made that assumption here. What are your thoughts on DCA as the quotation price goes lower?

JC
 
Mark said,
I thought you never invested in workouts prior to regulartory approval?
 
Joe Ponzio said,
JC: I was very conservative with the numbers here - a bit too conservative, in fact. Yes - as the price drops, I will continue to buy more so long as (i) I have the cash and (ii) I still believe in the business.

A lot of people have e-mailed me about this so I am going to offer up a second performance post with more realistic numbers based on how I would have actually managed the portfolio.

Mark: I don't like regulatory approval, but SEC comments/approval is generally simple. Fill out some forms, send them in, wait for comments. It is rare that the SEC would ever block a deal (unless there were fraud issues); so, I don't consider SEC comments/approval to be a regulatory hurdle.
 
Rene said,
Here is the part I find baffling about some value investor's picks. Let's take Joe's pick of AEO, Buffett's pick of BAC and Miller's pick of certain (I forget which) homebuilders. All of these picks went south precipitously after they were bought. I looked at all of them at the time the acquisitions were made public and they all looked like great value plays at the time, if you just looked at the numbers. But then I stepped back from the numbers and thought about the macro environment of each industry (consumer discretionary, financial and home building and saw nothing but a huge blinking sign that screamed "value trap".

It was hard. I remember I was tempted to buy BAC at around 37 and then again in the high twenties, but I couldn't do it. I remember thinking, "you must be some kind of clinical narcissist to think you are smarter than Warren Buffett". BAC is now on the way up again and I'm still happy that I didn't buy it even at the bottom. Home builders? I don't care if it is Bill Miller, that one truly baffles me. Finally there is Joe's AEO. I looked at it again after this post and going by the numbers it is as good as some of my favorites, maybe even a little better, specially at the current price, but I still can't imagine it. I can't imagine the American consumer buying anything but the bare essentials for quite a while.

So this is what I don't get. It just appears to me, that sometimes, great value investors don't get their nose out of the SEC filings long enough to smell the coffee or hear the rumble of several banks, home builders and retailers crumbling. I know all three of these people are smarter than me by a magnitude of several and have forgotten more about investing than I'll ever know, which probably explains why I just don't get it.
 
Joe Ponzio said,
The question that needs to be answered is: Are the stocks being hammered because of a fundamental breakdown in the business? Or, is it part of a broad industry sell-off? Or, is it a little bit of both?

I don't think that the value of AEO's business is down 40% since last year; so, we can't take action based on price cues. If the value of the business drops below our buy price or the current price, a sell is warranted. While some retailers are "crumbling," AEO is far from dead right now.

You bring up a great point:

But then I stepped back from the numbers and thought about the macro environment of each industry (consumer discretionary, financial and home building and saw nothing but a huge blinking sign that screamed "value trap".

Knowing how the economy is today, it's easy to look back and say, "This and that should have been avoided." The problem is that these sort of statements have to be made without the price action in mind:

JNJ's business has not grown that much since last year's $62 purchase; but, it seems to be brilliant in today's market...based on the price action.

WMT was cheap at $42 last year, but looks so much better because the price is 25% higher. Sure it benefits from the recession as it pulls customers away from other stores; but, it also hurts because people - in general - will spend less. But, had you avoided all retailers - all consumer stocks - you missed Wal-Mart on the cheap.

The best way to judge AEO, WMT, or any business is after 3 or so years of owning it. Would I like to have purchased AEO only to see it sore 200% the following year? You bet! Regardless of recent price action, it was purchased on the cheap. If management can get the value growing again, AEO will likely provide a very handsome long-term return.

Trying to guess the macro can get you into a lot of trouble. Take a look at AEO below:


In September 1996 and October 1997, the price was exactly the same. Anyone who had purchased stock in October, November, and December of 1996 was likely sick in January - down some 73%. If Yahoo! had investment forums back then, they would be overrun by "I told you so" and "It's going bankrupt" shennanigans.

You had two choices:
  • ignore the news and buy an underpriced business; or,
  • play the macro, sell (or skip it) and wait until the price rebounds.
The difference? The chart on the left shows the growth from October 1997 (assuming you waited for a rebound from the 9/1996 price) - a 24% annual return. You could have held from your 9/1996 purchase - a 22% annual gain. You could have purchased more at those lower prices - bringing your average cost down, say, 20% - a 25% annual gain. You could have sold for a 70% loss, and then reinvested when it rebounded to its 9/1997 level - a 9% average annual gain.

Every investment decision needs to be made in a 3- or 5-year timeframe. What will AEO look like in 5 years? It may be smaller than I had previously anticipated, but it should be larger than it is today. But if you play the macro, you'll be buying precisely when everyone else is, and that negates the whole strategy.

So, we should discuss AEO next April when the annual report comes out. Let's keep it on Fisher's three-year list. But let's not panic or celebrate based on one year of price movement.

Make sense?
 
Rene said,
I'm sorry Joe, but no it doesn't make sense to me. My argument has nothing to do with today's price. Like I said, I looked at the pick when you were originally talking about it, long before the stock tanked. I also read about Buffett's pick of BAC long before the stock tanked badly and the same with Miller's picks in the home builders. They all seemed very risky to me.

Normally, I'd be right there with you on your approach, but these are not normal times. A company misses estimates by $0.01 and the stock plunges. Sometimes it comes back the next day, sometimes it keeps plunging. I agree that the macro is to a large extent unpredictable, but some things are really, really obvious. Home builders are not going to be growth companies for a long, long time. The American consumer is tapped out even if he doesn't want to admit it and continues to be in denial for a while longer and financials are at best a black box right now and at worst ready to crumble as the housing market continues to crash.

What I do in light of this very dangerous environment is that I ask myself, "if this stock I'm considering buying right now were to lose %60 of its value the day after I purchased it, would I be delighted that now I can back up the truck?" If the answer is no, I don't buy it, that simple. AEO looks absolutely great in the rear view mirror. It may very well recover nicely and even go on to be a great investment, but even at this reduced price, I fear it. It's profit source, the American consumer, is in big trouble and it is in an industry with lots of good competitors. I think this is a case of a good or even great company who is in an industry that has gone from great to awful in a short time, with no recovery in sight.

JNJ and WMT on the other hand are good to great under any environment, specially JNJ. JNJ is the kind of stock you give your pre-kindergarten grand daughter for her college fund. Let JNJ drop 60% and I'll be cranking up the provervial truck and renting extra trucks. I fully realize that I'm not a very sophisticated investor, but I can only work with whatever I have been able to absorb from the classic investors we all admire and with my own common sense. Thanks for the input, I will mull over what you say here as I always do everything you post.
 
Rene said,
I have to admit that I'm completely baffled by Bill Miller. Now he's placing a huge bet on Fannie Mae or Freddie Mac (or both, I forget). I personally think he has lost his mind. He reminds me of guys who are big losers in a home poker game and towards the end of the night want to up the stakes and play Acey-Deucey and Baseball with deuces and one eyed jacks wild. Sometimes they recover their loses in that last hour, but usually they just triple their loses.
 
Frank said,
My concern with AEO and many other companies that look good in the rear view mirror is that the earnings from 2001 - 2007 were predicated on an economy where money was cheap, housing was boombing, refancning was rampent and even those with the poorest credit were able to get their hands on the money. Guess what people with poor credit do when the get their hands on money, they spend like drunken sailors. It was not sustainable and may never be repeated. I think its important that people don't draw to much analysis from this period of time which has to be viewed as an anomoly going forward. Does that mean AEO is a bad buy at these levels? I can't be certain, but I can be certain that a company like AEO was a beneficiary of the free money period of time. The home builders certainly were, the financial institutions certainly were. Buffet strategies are still gold, but I have to believe that he is applying some type of factor the owner earnings for the period from 2001 - 2007. Remember, he wasn't buying to much.
 
Amit D. said,
I disagree, he's there's been plenty of opportunities during that time frame. He continues to buy in 08. Some of them have "macro issues" if you factor rising commodity costs.
 

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