Our performance since 1995 confirms that, in a concentrated portfolio, every stock counts. While having big winners and avoiding big losers helps, it's the main body of the portfolio that drives results, not just the outliers. Our returns come from stockpicking, not index hugging.
Net Returns by Calendar Year
The difference is stated below for each pair of annual returns.
Performance Commentary by Year
2008: In a volatile year in which all asset classes seemed to converge, stock-picking was irrelevant. Our underweight in financials cost us, as small-cap financials held up surprisingly well in contrast to their large-cap brethren. The Financials Services sector in the Russell 2000 was down only 22.7%; banks outside New York City (a third of the sector) were down only 11.7%, an amazing feat given that the Russell 2000 was down 33.8%.
2007: We had an unusual ten months in a row of positive relative performance, as good earnings growth drove our stocks consistently higher.
2006: A frustrating year, because although our holdings did fine on an absolute-return basis, the portfolio in aggregate lagged the Index, largely due to the 670 basis points that our underweight in interest rate-sensitive sectors cost us.
2005: A balanced year, with good performance from the net of our top and bottom three stocks as well as the rest of the portfolio.
2004: Despite having the core of the portfolio underperform, we beat the Russell 2000. The strong net contribution of our top three stocks minus our worst three stocks more than made up for it.
2003: Unusually, all three small-cap indices, value, growth and core, were up big because of a rebound in the most speculative of stocks (low price, non-earnings, high beta) that got crushed in 2002. Our underweight in REITs and interest rate-sensitive stocks cost us almost 500 basis points of performance, but we were also penalized because of our bias toward quality.
2002: Though we marginally lagged the Index, we consider this our worst year of execution. Our bottom three stocks cost us dearly and we have learned to adjust the risk leash of our holdings more quickly in bad times. The rest of the portfolio, however, did much better than the market.
2001: In a volatile year with big quarterly swings, our 14 percentage points of outperformance was mostly earned when the market was down.
2000: We recaptured 1999’s lost ground as easily as we had lost it, as a classic bubblemania market imploded. Boy were we glad we didn’t fall for that eyeballs nonsense (see 1999). Fifteen stocks contributed over 100 basis points each, while the top three and bottom three stocks largely cancelled each other out.
1999: In the Alice in Wonderland market of the dot-com boom, we lagged big. We stuck to our knitting, requiring our holdings to have business models based on metrics other than eyeballs, even if it made those stocks unpopular with investors.
1998: A year to remember because we were up while the market was down. We had 10 stocks that contributed over 100 basis points each, with Chico’s taking the crown, contributing over 500 basis points to performance.
1997: A whopping 22 stocks contributed over 100 basis points each to performance. Best three minus worst three gave us 650 basis points.
1996: We can thank our top three stocks, especially Pacific Sunwear, which contributed over 600 points to our performance. The balance of the portfolio was in line with the index.
1995: Our first account was funded on July 28. We spent the next few months getting the portfolio
fully invested.
