F Wall Street Investment Performance

August 9, 2008 by Joe Ponzio

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:

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.

A Note From Joe Ponzio

This section is for comments from F Wall Street visitors. Do not assume that Joe Ponzio agrees with or otherwise endorses any particular comment just because it appears or remains on this website.