My Investing Performance for 2010

Investing and capital allocation is something I’ve studied at length for the last 10 years by building my own businesses, managing my own investments and by reading countless accounts of the successes and failures of other successful investors. Over the last few years I have been able to successfully apply this knowledge to my investments in publicly-traded stocks and options. This essay represents the first time I publicly discuss my performance.

About Me.

I have been an entrepreneur since the age of 6 when I would spend my Saturdays selling cookies and lemonade on street corners. A few years later I had a weekend car wash business, then I had 5 paper routes, and then a lawn maintenance company. At age 16 I started a software development business, which I still own.

At age 20 I had a handful of clients that were paying my way through college, but realized I didn’t want to be a programmer forever. The part of my job that I really enjoyed was learning about the inner workings of my clients’ businesses and making them more efficient. The software I created simply offered a way to learn about businesses and make them more money. This was when it hit me that understanding and building businesses is my life’s work and the best way to do this was to become a professional investor.

I have spent the last 10 years pursuing opportunities that I felt would prepare me for selecting and understanding which assets (real estate, businesses, etc.) make the best investments. Initially I had planned on investing in real estate, but a few years ago I made the decision to focus on stocks and businesses. While the financial analysis of real estate and businesses is fairly similar, analyzing businesses is a better fit for my circle of competence. Plus, owning stocks is far more scalable than owning and operating real estate.

I am ready to form an investment partnership to manage money for a small group of friends and family. My short term goal is to raise a modest sum and expand slowly by earning word of mouth recommendations from my investors. This is how Warren Buffett, the world’s greatest investor, started his Buffett Partnerships of the 1950′s and 1960′s and I believe its still a viable strategy.

I realize that becoming a money manager requires the ability to present my record and qualifications to others in hopes that they will entrust me with the honor of managing their money. It is always my aim to be as transparent and honest as possible. That is the purpose of this first essay. My future essays will attempt to explain my methodologies and philosophies in plain english so that friends and family with very little investing experience can understand what I do.

My Benchmark.

Before we get to the results, lets talk about benchmarks. Defining a benchmark is important because it represents a viable, passive alternative to active investment. If a professional investor cannot consistently beat their benchmark, they have no business managing money.

Warren Buffett used the Dow Jones Industrial Average (“the Dow”) as his Benchmark back in the 50′s because it was something anyone could invest in effortlessly and, over time, achieve a reasonable rate of return that mimics the growth of the US economy. I believe the modern-day equivalent of the Dow is the S&P 500 Index and this is where I would put my money if I were unable to actively invest it at a higher rate of return.

If you compare the results of individual professional investors to the S&P 500, the percentage of pro’s that lag its performance (and charge a hefty fee for doing so) is staggering. Anyone can invest in the S&P 500 by purchasing shares in a low-fee index fund from Vanguard or Fidelity. The low fees and multitude of investment options is why the S&P 500 represents the best passive investment and my benchmark.

By how many percentage points I am up or down in a given year is less important than by how many points I am able beat my benchmark. For example, its preferable to be down 10% when my benchmark is down 20% than it is to be up 27% when my benchmark is up 25%. In the first case, I beat the benchmark by 10%. In the second I beat it by 2%.

My Results.

Lets start with the benchmark results. If someone had invested $10,000 in the S&P 500 index on January 1st, 2010 then their investment would be worth $11,432 on December 31st, 2010. This represents a return of +14.32%.

The same $10,000 in my investment account on January 1st, 2010 grew to approximately $25,500 on December 31st, 2010. This represents a return of ~+155%, beating my benchmark by ~+140.68%.

Note: I say “approximately” because I added a relatively small amount of money to the pot in May. I’m not sure how that affects the annual rate of return calculation so I ballpark’d it for the time being.

I openly acknowledge the ridiculousness of  beating the S&P 500 by such a wide margin and its surely something I will not be able to repeat any time soon. My goal is to beat the S&P 500 by 10% every year, which was also Buffett’s goal for most of his early career.

Because its easy to dismiss 1 year of performance as “getting lucky”, its prudent to share my performance in 2009 and 2008. Here are the charts (click on the image to enlarge it):

In 2009 my investments grew by +106% vs +27.11% for the S&P 500, beating my benchmark by 78.89%. My goal was achieved in 2009.

In 2008 my money was in a high yield savings account. My return was approximately +2% vs. -37.22% for the, beating my benchmark by ~39.22%. My goal was also achieved in 2008.

My Methods.

While my methods will be explored at length in future essays, I feel its necessary to give a very brief summary of how these results were achieved. It’s not magic or luck. Its not terribly complicated either. I don’t use advanced mathematical models based on “efficient market theories.” I take calculated risks based on rational analysis of the companies that I purchase stock in and I aim to make my purchases when other investors are clearly making emotional decisions.

My greatest inspiration comes from the methods employed by two ridiculously successful value investors: Warren Buffett and Joel Greenblatt. They each use slightly different approaches to finding companies with intrinsic values that are higher than the price their stock is selling for.

Put another way, Buffett and Greenblatt seek out undervalued companies and buy them at a discount. This can happen for a variety of reasons and they key is to be sure that the reason behind the discount is not something that will cripple the company long-term. When I identify an undervalued company, I either buy stock or options, depending on the situation.

I do use leverage. Sometimes I buy long-expiring options, which offer about 5-to-1 leverage and I am happy to use 10% my investment funds to buy them if the opportunity warrants it. I will borrow up to 30% of my investment funds to buy stocks on margin. As the general market becomes overvalued relative to the US Gross National Product, my tolerance for using options and debt will decrease.

I don’t believe in wide diversification. The statistical benefits of owning more than 6-8 stocks at any given time are outweighed by the my inability to maintain a deep understanding of more than 6-8 stocks. It’s very hard to find 5 spectacular companies that are selling at a discount to their intrinsic value. Forget about finding 20, or more, in the name of safety as many “investment gurus” recommend.

That’s it. It’s simple, but simplicity is rarely easy.

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I do not feel that accepting comments here will add value to this essay. If you have any questions or comments or just want to discuss investing, you can email me at or @ me on Twitter @AndyParkinson.