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Think of Your Portfolio as a Business

August 13, 2012 | About:
Investors and people in general talk about their results but the reality is that it's difficult to easily track their performance. That is why I have striven to honestly measure my own performance, so that at least I can understand it. In order to make sense out of it, in the clearest way possible. I mange my own money so I don't care to report to others and can therefore be as straightforward as possible to avoid fooling myself. I also manage a bit of my mother-in-law's money, but that's more due to her insistence and to protect her from past bad "investments" than because I like doing it.

I'll share my approach here: Essentially, I see my investments as if they were a business or a company by themselves and apply some basic accountancy principles in order to evaluate them. Since I have some experience valuing companies, this way of looking at my performance immediately lets me know how I'm doing.

Here is a practical example. The typical measure is comparing, in percentage terms, your performance relative to an index. The following table below shows the relative returns of my portfolio, a part of which can be seen here, compared to the S&P total return since 2006. Both returns include dividends.

Note that the results for the current year go up to August 7, the last time I checked them.


















YearS&PMy Portf
2012 11.10% 15.30%
20110.97%3.72%
201013.24%16.79%
200922.57%160.13%
2008-36.09%-30.46%
20075.60%-5.00%
200613.92%9.28%


It gives confidence to do percentage points better than the S&P500, but what I care about are the absolute results. Relative results are nonetheless necessary. If your relative results are less than the market you should consider putting your money periodically, in equal amounts, in some market index funds with low commissions. Then you will accomplish two things: You will have more time for yourself and you will do better financially. If you manage your money, more than relative results should be sought. It’s not enough to say, “I did fine, I lost 15%, the market did worse.” Mutual funds reason that way because they are the ones measured relatively. Their managers will get paid and keep their jobs as long as they have good relative results, even if they lose your money in absolute terms. But I would be quite disappointed if I lost money, no matter how much better I did than the market.

For a private investor, relative results are necessary, but what is essential are 1) capital preservation and after that 2) absolute growth. Minimize your losses and strive to win in absolute terms decent amounts. Be selective and when you are convinced that the odds are clearly on your side, bet big. Character plays a big role too. Make sure you have it. Ask yourself if you panicked in 2008 instead of acting with conviction by deploying your cash after unique opportunities you knew about. But okay, enough words. Here are the absolute results:





















YearInvested
Amount (*)
End
Value
Cash sent/


Cum
Gain/


Cum
2012 €113.553 €130.923-€2.750/


€56.793
€17.370/


€74.130
2011€112.127€116.302€14.854/


€59.543
€4.176/


€56.759
2010€83.290€97.273-€11.259/


€44.689
€13.983/


€52.584
2009€36.347€94.549-€10.337/


€55.948
€58.202/


€38.601
2008€67.129€46.684€44.199/


€66.286
-€20.444/


-€19.601
2007€24.136€22.929€0/


€22.086
-€1.206/


€843
2006€22.086€24.136€22.086/


€22.086
€2.049/


€2.049


(*) Invested amount is the amount used to invest during the year — the end amount coming from the previous year plus the cash inflows or outflows into the broker.

The information above may be seen as the evolution of a business: a company with a portfolio of assets composed of equity and liabilities. The assets that make up the portfolio is the value of all my brokerage accounts.

The portfolio equity are all the accumulated gains and losses on my accounts. The equity or the accumulation of gains and losses is obtained with both realized and unrealized gains and losses, with long and short positions, with or without margin and with multiple currencies. They include gains and losses obtained with dividends, interests, options, stocks, bonds, CFDs, futures, etc.

Liabilities is the total money sent to my accounts, like a loan to them that needs to be returned.

The equity or accumulated earnings is the accumulation of the yearly portfolio gains or losses. So the increase in equity in a given year can be seen as the portfolio earnings for that year. Equity has evolved from €2,049 by the end of 2006, to €74,130 as of August 7 of this year, passing through negative equity of minus €19,601 by the end of 2008 and recovering afterwards. The yearly earnings since 2006 up until this year to date have been (in thousand €): 2, -1, -20, 58, 14, 4 and 17 and their sum is €74 thousand, which corresponds to the portfolio equity or accumulated earnings. As expected, assets minus liabilities equals equity, since the current portfolio value of €130.923 (assets), minus all the money that I have sent to my brokers, adding up to €56.793 (liabilities), is what I have gained. In this case €74.130 is the portfolio equity or its accumulated earnings.

Anyone can value their investments in such a way. You just need to keep track of what you sent or withdrew from your broker and of the net value in your broker. You don't have to worry about interest, commissions or specific stock returns. All is added up on your broker statements. Note that this does not take into account the taxes on realized profits which you will have to deduct and can vary in each particular case depending on what country you are in and many other factors.

So you may simply see the performance above as a cash flow of earnings and of money sent or withdrawn. The assets (portfolio value) are now up to €130.923, and initially they were €22.086. The liabilities are the money I have sent to my brokers in order to invest, which is now up to €56.793. I like to think of the money I sent to my brokers as liabilities, as if it was a loan I took from myself in order to invest it in stocks and other things, but which should be repaid, money has to come back. Correspondingly, money withdrawn is a debt repayment. The equity is all I have gained each year, accumulated (accumulated earnings), or the assets minus the liabilities, which as expected, coincides and is now €74.130. Assets are now bigger, meaning I need to keep up a good performance so that the returns also get bigger. Hopefully I can manage not to lose.

I think it is interesting to measure your performance like the way outlined above. It's easy, clear and practical. I view my portfolio as if it was a company, a business, composed of fractions of other companies and investments of all kinds. Like that you can apply all your knowledge to evaluate how well that business (your portfolio) is doing. You can identify its equity, liabilities and assets and see its evolution. As a stock investor, you know how to read financial statements. Applying that same knowledge with my investments has allowed me to clearly evaluate their performance.

PD: The most recent performance update can be followed here. I try to keep it up to date to make sure I'm on the right track.

About the author:

Jose Vasquez
I was born in Spain and lived in France, Chile, USA and Belgium. I used to work in IT and Banking. I am a family man, I have a lovely wife, 3 sons and one step daughter. I have humble tastes, I like to stay home and read about companies. I started investing before the internet bubble. I knew little and liked technical analysis so my results were bad. Fortunately I did not have much to lose. Some years later in 2006, bored of doing real state investments, I opened an interactive brokers account and restarted. This time, not wanting to make mistakes, I decided to follow a model: Warren Buffett, he was at good making money via stocks. So I started reading about him, his shareholders letters, the books that he recommended, etc... I started applying his principles, reading 10K's digesting all sources of information. I started buying good and cheap companies to hold forever unless something changed fundamentally. When the housing crisis started I was 75% cash. By then I had identified good companies at very cheap prices so I invested most of my savings in stocks. It doubled fast. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. I changed lifestyle and moved from Belgium to the beach, Brazil, north east coast (www.kuchita.com). The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return, to move away from the inhuman life of civilization and to have some peace and sunny weather. Now I can think and study about companies 60 hours/week. I can finally do what I want full time and can say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! My portfolio is disclosed here: http://www.kuchita.com/view/sumo.php For more:

Visit Jose Vasquez's Website


Rating: 4.3/5 (23 votes)

Comments

shamashm
Shamashm premium member - 1 year ago
Hi Jose, thanks for your article. My question, a little off topic...what did you do in 2009 that generated such a great return? Best, Mark
Jose Vasquez
Jose Vasquez - 1 year ago
Hi Mark (@Shamashm),

Basically as you may see in the second table I was mostly cash before the 2008 crash. So when it came I deployed and bought cheap things. I explained more precisely here what I did in 2008/2009, just after where it says: "Most of my gains were in four areas:"

Cheers!

jrv
Nicolas73
Nicolas73 premium member - 1 year ago
Hi Jose, thank you very much for sharing your numbers and your thoughts. I appreciated it even more, because I'm currently restructuring my portfolio after having identified my weak points.

I'm reducing my risky assets (if possible without incurring in severe losses), rebalancing my cash/equity ratios, currency ratio, and trying to shift money to cash rich companies with a durable moat and a good dividend yield (easy to say, a little bit difficult to do)

Ciao!

Nicolas
Jose Vasquez
Jose Vasquez - 1 year ago
Hi Nicolas (@Nicolas73),

I agree that the 3 things you mention:

1) rebalancing my cash/equity

2) currency ratio

3) companies with a durable moat

Are essential to take into account when you manage your portfolio.

Hope you find your right balance.

Cheers!

jrv

Adib Motiwala
Adib Motiwala - 1 year ago
thanks for sharing
Jimbot
Jimbot - 1 year ago
Hi Jose,

I enjoyed your article - thanks for sharing it! And I'm glad to see that you and I overlap on some investments (BP, BRK.B, WF, SAN, KO, INTC, ERF, etc.). Great minds think alike ;)

I was wondering your thoughts on the Europe situation right now, specifically Greece and whether or not the Euro will survive should Germany dump the Euro/leave the EU. I'm sitting on a chunk of cash waiting for Greece's likely default and the inevitable market drop. Can you share your thoughts on what's going on or what you think might happen please?

Thanks in advance for your help, And congratulations on your 4th child!

Jose Vasquez
Jose Vasquez - 1 year ago
Hi @Jimbot, thanks ! Inspired by your question I wrote a post on my blog about some of my thoughts on Europe (that last link points there).

Cheers!

jrv

Jose Vasquez
Jose Vasquez - 1 year ago
Hi Jimbot! I replied here

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