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John Emerson
Articles (106) 

Reflections from 20 Years of Investing Pt. 1

June 18, 2013 | About:

We should not judge people by their peak of excellence, but by the distance they have traveled from the point where they started. - Henry Ward Beecher

I embark on this investing travelogue with a considerable amount of trepidation: First off, the exercise could be viewed as entirely narcissistic. Secondly, the figures I am about to divulge are not matters of public record, therefore the veracity of the numbers could easily come into question. After all, it would not be the first time that a writer invented figures to suit his purposes.

I decided to push the aforementioned apprehensions aside and proceed with my story since I believe it can serve as an inspiration to younger and disgruntled investors. Further, I believe the essays will establish with a high degree of certainty that value investing actually works and equally important, that value investing is a lifelong learning process.

When I embarked upon my investing career around 20 years ago, I was a buffoon (the first three stocks I purchased were gold junior mining stocks - more on that later). Fortunately for me, I was able to transcend the line that separates a cretin from a competent investor before I had obliterated my life savings. That process required an extensive amount of humility as well as a strong commitment to learn from my mistakes.

I had several things going in my favor: I innately possessed the correct temperament to succeed in the market, and I had always been blessed with an inherent sense of value, although that gift was not evident in my early stock picks. Those two qualities, along with a commitment to learn, are the only essential requirements for succeeding in the market.

Warren Buffett once opined: "Investing is simple but it is not easy". He elaborated on that view during an interview when he proclaimed that if he was a finance instructor the only two courses he would require would involve the pricing of securities and the correct method of viewing the market. In reality, nothing else matters; successful value investing only requires the ability to ascertain the value of an equity and the courage to purchase the security when it is being offered at a discount.

The essays will be divided into three sections: The first section will profile my unproductive years (1993 to 2000), the second will describe my initial period of competence (2001 to 2008), and the last section will focus upon my current level of enlightenment (2009 to the present). As you will learn, I became a much sounder value investor after the financial crisis of late 2008 and early 2009. With those arbitrary schemas in place, I will now report my investment results. The results will begin with 2001 since my initial learning period was entirely unproductive; additionally, I was unable to secure the proper records to analyze the data.

Rates of Return on Investments Versus the S&P

The following returns reflect the current market value of my investments versus the current value of the S&P. Bear in mind that the S&P is up about 16% year to date and has a current annualized dividend rate of slight less than 2%. Therefore, I established the current value of the S&P at plus 17% for purposes of comparisons; the market value of my portfolio is currently up about 33% year to date. That figure is slightly high since I have accrued some unpaid tax liabilities from the sale of equities earlier this year.

Since Jan. 1, 2001, my portfolios have increased approximately 547% versus 72% for the S&P with dividends added back in. The compounded annual growth rate (CAGR) of gain for my portfolio is 16.1% vs. 4.4% for the S&P.

Since Jan. 1, 2009, my portfolios have advanced approximately 196% versus 77% for the S&P with dividends added back in. The CAGR for my portfolio is 27.7% versus 13.7% for the S&P.

Bear in mind that the S&P figures represent pretax figures while my figures represent partially taxed figures. Should I sell all my holdings immediately I would incur a substantial tax liability which would significantly diminish my rate of return. The same would be true with an investor who attempted to mirror the results of the S&P should he decide to cash in his profits. In the best of worlds, all comparisons would be made pretax; such a practice would substantially increase the outperformance of my portfolio.

It should also be noted that my portfolios experienced a 46% decline between the calendar year end of 2007 and year end of 2008. Even more nerve wracking was the peak to trough decline in my portfolios in excess of 60% from October 2007 to March 2009. It should be noted that the downside volatility of my portfolio greatly exceeded the downside volatility of the S&P index. Try explaining your investment acumen to your wife during such a period.

Now that I have divulged the obligatory boring figures which were necessary to establish my credibility, the remainder of my investment journey is going to be revealed in an anecdotal manner. The voyage will contain numerous tales and reflections which I hope that readers will find to be amusing as well as informative. The next three articles will chronicle my metamorphoses from an investing buffoon to an increasingly competent value investor.

Finally, it should be noted that value investing is a dynamic rather than a static pursuit. In the movie Annie Hall, Woody Allen's character once noted: "Relationships are like sharks: They have to move forward or they die." Such is the case with value investing. Value investors must continue to improve upon their investment skills and continue to increase their knowledge of the companies and the industries which supply them with their livelihood.

In my next article, I will chronicle my period as an investment buffoon which encompassed much of the 1990s. Contrary to popular belief, I will dispel the widely held notion that any moron could have made money during that period. Alas, I should have been in index funds during my apprenticeship as a value investor.

About the author:

John Emerson
I have been of student of value investing since the mid 1990s. I have continued to read and study value theory on an ongoing basis. My investment philosophy most closely resembles Walter Schloss although I employ considerably less diversification. I also pattern my style after Buffett's early investment career when he was able to purchase shares of tiny companies.

Rating: 4.1/5 (37 votes)



The Science of Hitting
The Science of Hitting - 7 years ago    Report SPAM
Fantastic article - and almost as good as your returns over the past 12 years; congrats on your success! Looking forward to the coming articles in this series.

Gurufocus premium member - 7 years ago
These are great returns, John! Will you share with us which investments contributed to those returns?
TRinAK - 7 years ago    Report SPAM
thank you for sharing
Nvakeel - 7 years ago    Report SPAM
Thanks a lot for sharing this article. I am novice in Value Investing and articles like these sharing experiences helps a lot understanding the power of Value Investing.

Keep up the good work.

John Emerson
John Emerson - 7 years ago    Report SPAM

I appreciate the interest in the article and the kind words. I will get to many of the individual stocks that I selected and the theories behind the purchases but that will mainly come in the third and fourth articles. I imagine that readers will be quite surprised at some of the stocks that performed well; it was a pretty eclectic bunch. But first I have to retrace the painful 1990s and explain to readers what not to do--how's that for a tease?
Nvakeel - 7 years ago    Report SPAM
Looking forward :)
Moneymaker5o1 - 7 years ago    Report SPAM

Finally, great original content from Gurufocus... very rare nowadays
Cornelius Chan
Cornelius Chan - 7 years ago    Report SPAM

I always enjoy John Emerson's articles. Like sitting down at the kitchen table with a friendly value-investing uncle. Looking forward to the rest.
Dwhitney - 7 years ago    Report SPAM
'Try explaining your investment acumen to your wife during such a period.' -- I know that feeling ;)
Epictetus - 7 years ago    Report SPAM
Wonderful articles John, thank you.

From the high quality of your articles, it would not have been a stretch to foresee your good returns.

Cdubey - 7 years ago    Report SPAM
Excellent read, thank you ! Hurry up with the rest of the story.

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Performances of the stocks mentioned by John Emerson

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