HOW ARE WE DOING?

Performance is everything.  Scratch that.  Risk adjusted performance is everything.  I often stress how important performance and risk adjusted returns are here at TPC.  I believe it is one of the most fundamentally misunderstood topics in the investment world.   Too many investors listen to pundits or “experts” whose risk adjusted returns are horrible.  If I didn’t think I was providing readers with sound, practical profit producing ideas I’d take my ball and go home knowing that my performance and my accountability of that performance is the only thing that should matter to readers.  If it’s not up to snuff then why read the site?  So, with that said, how have we been doing?

My personal portfolios are somewhat different from my TPC posts because I use multiple strategies (one intermediate term strategy is very similar to my “lion in the grass” type patient posting style), but my posting history has been relatively easy to follow despite rare investment ideas.  How have I done?

The site is fairly new (inception September ’08) so let’s start at the beginning.  On October 2nd we said “risks in equities were rising“.   Over the following weekend on October 5th, we actually asked if the market could crash.  We all know what happened next.  My greatest mistake late last year was not shorting the market, but being in cash was by no means a bad thing.   I put cash to work on November 21st which was days before the powerful Fed induced rally (I actually sold into that rally immediately in personal portfolios so I missed some portion of the gains thereafter).   We became incredibly cautious as the new year began.   We called the March 8th bottom to the day.   We called for commodity purchases on March 6th although our focus on Nat Gas was dead wrong.   I even said (to my own bewilderment) the banks looked attractive on March 10th.

We turned cautious in late March again (which was wrong), but maintained that you couldn’t short the government induced rally.   In early April, before anyone in the mainstream media was talking about it, we called the government out for driving stocks higher in an attempt to recapitalize the banks (which worked beautifully over a month later).   Our recent call to buy VIX hasn’t been great.   But our call to buy Yen has been spot on.   I said the market would likely top with the stress test results (which was dead on thus far) and currently maintain that we are in a near-term topping process that began when the government stopped intervening in the market.  I believe stocks represent a poor near-term risk/reward trade.

All in all we’ve done pretty well with a few hiccups and certainly some regrets.  But the important point here is that the risk adjusted returns of following the broad market calls by TPC have been very good.  In my intermediate term portfolio YTD returns are in the high single digits having only been invested in stocks for a few weeks this year (think treasury note on steroids).  With this kind of low negative volatility and huge cash position we’re staring at Sharpe ratios over 2 and Sortino ratios over 3.  These are excellent risk adjusted returns.

To give you some idea of how important the risk adjusted returns are I give you the Legg Mason Value Trust.  I have previously run the figures on LMVTX.  YTD the fund is up slightly less than my intermediate term portfolio, but has several times the volatility and portfolio risk.  It has ALL of the negative vol that I experienced NONE of this year.  It’s incredibly important to note that 7% is not always 7%.  Some people get there by playing craps all evening.  Others get there thru savvy risk management.   Bill Miller gets there by playing craps all night (while ravaging the free drinks).

Performance and accountability are everything in the stock market.  When I am wrong I hope to call myself out on it or be called out on it.  I write this blog as much for my own personal development as yours.  Constructive criticism never hurt anyone.  Not understanding someone’s performance on a risk adjusted basis, however, will certainly hurt your portfolio.

*I should note that this site is a roadmap rather than someplace where you should expect to receive stock “tips” and investment advice.  This is not Cramer’s lightning round – in fact I hope it is the opposite – someplace for people to get ideas, bounce them around and come to their own practical conclusions.  This also isn’t your financial advisor’s office.  I’m here to help by all means possible, but not to hold hands.  With that said, I hope everyone is enjoying the site thus far.   The readers and comments so far have been incredibly generous and I have attracted the best audience around.  I am by no means perfect, and it’s nice to know that the readers understand that EVERYONE in the stock market is constantly learning – especially yours truly.  I have a lot of good ideas for the site going forward that I hope everyone will benefit from.

I hope your weekend was great.  Strap your boots up.  This week isn’t going to be a short one despite the loss of a Monday….

Cullen Roche

Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.

He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.