OK, it’s well past the end of 2004 and I’ve finally calculated how my investments have done for the year. I’ve also analyzed my overall investment results since I started investing in 1996.
These are calculated using the XIRR function in OpenOffice. The XIRR function takes a series of cash flows in or out of an account and returns the internal rate of return for that account. It’s the best way to compare portfolio returns when investments or withdrawals are made on an irregular basis.
The VFINX column shows how I would have done if I had simply invested all my money into VFINX, a low-cost mutual fund which tracks the S&P 500. This number will not match numbers you see posted for VFINX for a given year because it depends on the timing of my* investments. Note that I include the cost of commissions in my performance, but not in VFINX’s.
| Date | Me | VFINX |
|---|---|---|
| 1996-2004 | 3.6% | 6.2% |
| 1996 | 22.7% | 35.7% |
| 1997 | 15.3% | 28.6% |
| 1998 | 15.1% | 24.9% |
| 1999 | 66.0% | 26.1% |
| 2000 | -25.8% | -7.4% |
| 2001 | -33.1% | -12.3% |
| 2002 | -21.1% | -22.1% |
| 2003 | 31.7% | 30.1% |
| 2004 | 13.5% | 11.7% |
A little background. The years 1996-1998 reflect my 403-b investments during residency - half in Fidelity Growth Company and half in Fidelity Contrafund. In 1998, I started to buy individual stocks, but without any underlying strategy. Until 2002, I used a strategy called Mechanical Investing, whereby you screen stocks for certain criteria and buy them without further research. Unfortunately, I followed largely momentum based strategies and in 2002, the momentum arrow was pointing decidedly downwards. From 2002-2004, I invested in well-diversified index funds based on the advice in Burton Malkiel’s, A Random Walk Down Wall Street. I still think this a safe, reasonable strategy for just about everyone.
So why did I change again? In 2004 I read Benjamin Graham’s The Intelligent Investor and realized that most of my previous individual stock investing had been decidedly un-Intelligent. I find stock research and investing fun, and I think there are inefficiences in the market, even if it may be mostly efficient, or efficient in the long run. I believe that an individual investor can find these inefficiencies, and over time can significantly outperform the market. So, while I have most of my money parked in index funds, I also have a significant minority invested in individual stocks that fit a value-investing discipline. Let’s see how I do over the next 5-10 years. If I’m still enjoying it and beating the market by 2-3% (which so far, I haven’t!), then I’ll keep doing it. If not, I’ll plead surrender to Malkiel et al and dump my money into index funds. Next report 2006…