Monday, February 16, 2015

Cokeefe

This guy (I assume it's a guy) posted an article on gurufocus boasting 303% performance in the past six years or 25% compounded.  He claims to have beat the S&P 500 by 157% or an average of 22% a year.

 2009  2010  2011  2012  2013   2014
Return 74.22% 58.65%  50.31% 24.62%  43.05%  18.67%
+/- S&P 500  47.76% 43.59%  35.25% 8.66% 10.66%   3.25%

How did he do it?

"I approach investing as an owner of the companies that I am buying. This impacts how I buy and hold stocks.

I evaluate buying marketable equity shares of companies in much the same way I would evaluate a business for acquisition entirely. I want the business to be (a) easy to understand, (b) run by able and honest managers, (c) with an enduring competitive advantage (moat) and favorable long-term prospects, and (d) at an attractive price (discount to its intrinsic value which is the discounted value of the cash that can be taken out of the business during its remaining life).

There is a tremendous advantage of being an individual investor. Portions of outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving selling the entire business. Consequently, bargains in business ownership, which are typically not available directly through corporate acquisition, can be obtained indirectly through stock ownership.

In terms of selling I don't. I want to own these superstar companies as long possible. This also removes the concern over guessing about what is happening, or might happen, with the overall economy. In other words, if you owned 100% of a great company generating incredible returns on invested capital, you would not sell simply because there is an economic problem in Europe. With that said, why sell partial ownership shares of solid companies if there is a problem with the overall economy? The only thing that I worry about, after buying partial ownership of great companies, is whether the aforementioned reasons for buying are preserved. I only sell if the company no longer provides excellent economics or is run by able and honest management.

It took me several years to learn how to properly value a business. You cannot simply go by Earnings per Share (EPS) because the quality and sources of the earnings can be quite different amongst companies. My favorite metric is Return on Invested Capital (ROIC). It measures how much each dollar re-invested can produce in earnings. For example, a 24% ROIC will tell you that for every $1.00 the company re-invests it has produced 24 cents of earnings.

Patience, discipline, and emotional intelligence (self-awareness) are the main factors in investing on your own. Most investors are their own worst enemies – buying and selling too often, ignoring the boundaries of their mental horsepower. Individual investors tend to buy with the herd after prices are already highly inflated and sell in a panic when the market drops. Instead, focus on buying great companies with the aforementioned qualities when the market price is publicly trading at a discount to its intrinsic value. This is where the individual investor has a huge advantage over the professional; most fund managers don’t have the leeway to patiently wait for exceptional opportunities.

***

Sounds good to me, but contributor Dr. Paul Price is skeptical because his return sounds too good to be true.

Call me skeptical.

You have no profile on view and no link(s) to any website or newsletter. This is the first article you have published here on GuruFocus.

There is not a single example of the stocks you own or owned. Your claimed results would have been statistically improbable or impossible to achieve in a diversified portfolio with any substantial size.

If what you detailed is true you likley had a very small starting amount of capital, stayed incredibly concentrated, highly levered or some combination of all those factors. Or... it could all be made up.

Unless you show some supporting data, nobody reading your article has any reason to believe the gains which you claim to have accomplished were real.

***

Cokeefe then supplied a link to a previous (and nearly the same) article which provides more information on his holdings.

Here were author's 21 holdings:

Visa
Gilead
National Oilwell Varco
Ebix
Fiat Chrysler
Cummins
Syntel
Walgreen
Netease
Microsoft
Illinois Toolworks
American Tower
Apple
HDFC
Blackrock
eBay
Intercontinental Exchange
Intel
Total
Intuitive Surgical
Citigroup

And here's his current portfolio at Morningstar.  The one change is that he sold Fiat Chrysler and bought Biglari Holdings.  Interesting to see a slight variance between the year-by-year performance at the two sites.  That wouldn't make sense unless it adjusts your performance if you bought or sold a holding (which also wouldn't make sense.)  And a wide variance in the 2010 and 2011 returns in the gurufocus article vs. the valuewalk article.

So let's take him at his word and say he never sold any of these stocks (even though he just sold Fiat Chrysler) and bought all of them five years ago (unlikely, but let's just say he did).  Let's see how well they performed.

                                                 2010    2011   2012    2013   2014
Visa (V)                                  -18.93   45.21  50.27   47.82  18.50
Gilead (GILD)                          -16.25   12.94  79.45 104.49  25.51
National Oilwell Varco (NOV)     53.46    1.77    1.25    17.69  -6.32
Ebix (EBIX)                               45.42   -6.46 -26.20   -8.28  17.54
Cummins (CMI)                       141.79 -18.78  25.15   32.18    4.26
Syntel (SYNT)                           27.64  -1.65   19.99   69.59  -1.09
Walgreen (WBA)                        7.80  -13.09  14.97   58.39  34.93
Netease (NTES)                        -3.90   24.07  -5.17    87.16  29.27
Microsoft (MSFT)                     -6.63    -4.55    6.09   43.69  27.24
Illinois Tool Works (ITW)          13.98   -9.91   33.35   40.90  14.78
American Tower (AMT)            19.51   16.89   30.26    4.72   25.60
Apple (AAPL)                           53.07   25.56   32.71    7.64   40.03
Averages                                  26.42    6.00   21.84   42.17  19.19

Reported                                   50.31  33.55   24.62    43.05  17.91
S&P                                          15.06    2.11   16.00    32.39  13.69

I just chose the first twelve stocks because I was lazy but wanted to include AAPL which has had a nice five year run.  And I'll use the valuewalk figures for the reported return instead of the gurufocus figures.

Looking at the results, my first observation is that the averages did indeed beat the S&P 500 every year and by a significant margin.  The second observation is that 2012-2014 averages were in the ballpark of the reported returns, but the 2010 and 2011 averages did not come close.

To reconcile this, one would have to assume that he didn't own all the stocks during those years.  2011 is hard to reconcile though as Visa was the only stock of the twelve I looked at, that beat the reported average.

I suppose his portfolio could possibly be legitimate if one assumes he didn't own very many stocks during 2010 and 2011 and he just happened happened to own the right few stocks during those years (and probably owned some stocks that I didn't include above).

If legitimate, I would think that his portfolio will probably drift more toward the average as time goes on.  But still his philosophy seems sound and he will probably do fine.

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