2010 Annual Investment Performance Review

This could also be subtitled “Why should I care about what Leprechaun Investor blogs about”.  Of course you should only be interested in what I have to say, if my views and approach have been successful over time.

I have always been religious about tracking my investment performance.  It is all too easy to kid yourself about the returns that you are achieving in your portfolio.  This especially happens because over time you are generally adding to your investments.  In order to get a true performance picture you need to normalize for these investment inflows.  Today I share my simple approach to tracking returns, and in future I will cover more sophisticated approaches.

Beyond generating a positive return you also want to make sure that you are beating a competitive performance benchmark.  For this I simply take a leaf from Warren Buffett’s annual letter to shareholders.  He maintains a table of total annual returns (including dividends) for the S&P 500 index.  Each year he compares the annual increase in book value of his company.  The following table shows the returns of Leprechaun Investor compared to both the S&P 500 as well as Buffett:

S&P 500 Difference Buffett Difference
1996 255.2% 23.0% 232.2% 31.8% 223.4%
1997 57.9% 33.4% 24.5% 34.1% 23.8%
1998 21.3% 28.6% (7.3%) 48.3% (27.0%)
1999 89.6% 21.0% 68.6% 0.5% 89.1%
2000 (0.3%) (9.1%) 8.8% 6.5% (6.8%)
2001 (47.7%) (11.9%) (35.8%) (6.2%) (41.5%)
2002 (55.8%) (22.1%) (33.7%) 10.0% (65.8%)
2003 114.0% 28.7% 85.3% 21.0% 93.0%
2004 (13.9%) 10.9% (24.8%) 10.5% (24.4%)
2005 42.8% 4.9% 37.9% 6.4% 36.4%
2006 9.8% 15.8% (6.0%) 18.4% (8.6%)
2007 10.3% 5.5% 4.8% 11.0% (0.7%)
2008 (10.5%) (37.0%) 26.5% (9.6%) (0.9%)
2009 30.1% 26.5% 3.6% 19.8% 10.3%
2010 40.8% 15.1% 25.7% 13.0% 27.8%

When you look at the indexed returns in the following chart, you notice the amazing consistency of Buffet and the huge volatility of the Leprechaun Investor portfolio.  The fall out from the dotcom bubble was a very painful, and important lesson for me.  Up until that point I was enjoying terrific returns and had grown too confident in my abilities.  This meant that when the bubble burst I was not ready to change direction.

Performance vs Benchmarks 1996 - 2010

Performance vs Benchmarks 1996 - 2010

I took the lesson to heart and became better at managing downside risk, even if that meant sacrificing stronger returns in the good times.  As you can see in the next chart, the compounded returns have paid off handsomely, even surviving one of the most brutal bear markets since the Great Depression.

Performance vs Benchmarks 2002 - 2010

Performance vs Benchmarks 2002 - 2010

As an aside: Warren Buffett was one of the greatest influences on my investment style.  Early in the 80’s I contacted Berkshire Hathaway, and they kindly sent me reprints of all his letters.  Nowadays it is much easier with the link to his letters online.  However for a broader and more easily digested alternative I cannot recommend Roger Lowenstein’s biography of Buffett strongly enough.

Update February 24th: Warren Buffett’s annual letter just came out.  I updated the table and the charts with the latest year for Buffett’s data.  He also did the calculation for the dividends of the S&P 500 which took the return up from 13% to 15.1%

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