The Workshop Portfolio completes its first week as a full mechanical investing portfolio today. My reaction is a cautious "so far, so good." We ended the week down a smidge, but the cash we lost is attributable to the $80 we spent on commissions and the $11.81 I squandered buying Aetna <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %> twice by mistake.
How much is a smidge? Well for the exact numbers, may I direct your attention to the list of links to my left? Just click Current Numbers to zip straight to the new portfolio display at the bottom of this page.
As you can see, we have lots of numbers! Dust off your scroll bars, the tables go on forever. But that's because we have six individual strategies and we want to be able to track the performance of each as well as the performance of the portfolio as a whole.
Please note that for a while the long-term returns are going to look squirrelly. Overall return "since inception" assumes that all cash was added on the inception date, but in this case the portfolio quadrupled in size when we added the new strategies, so the "Since Inception" number isn't very meaningful.
For the same reason, we removed the Foolish Four's annualized return column when we withdrew some cash to bring it more into balance with the other strategies. The simple annualized return formula we used there can't cope with additions and subtractions of cash. To get an accurate feel for long-term portfolio performance, you need to look at the IRR table. (IRR, which stands for "internal rate of return," is more or less the same as CAGR. If you're not clear on the concept, Matt Richey explained it quite nicely in a Rule Maker report last October.)
We will be adding an IRR function for the Foolish Four and the other individual strategies in a few weeks. In addition to giving us a proper return for the Foolish Four, that will allow us to move small amounts of cash between subportfolios without throwing a monkey wrench into the annualized returns. (We will be keeping a zero cash balance in most subportfolios so that any cash left over from rebalancing can be shared with other strategies.)
The most important returns are those of the Workshop Portfolio a whole. (Elan calls it the "enchilada." That works better than "Workshop Portfolio as a whole.") The enchilada returns are what we will be reporting in various places around Fooldom. It's the one the "world" will be watching, but how the individual strategies do will probably be of more interest to mechanical investors. Remember: In the Workshop, the strategy is the stock. We watch strategy returns like most people watch stock performance.
As with any well-diversified portfolio, we don't expect each strategy to do uniformly well. We deliberately picked strategies that we hoped would perform differently in different markets. In theory our value strategies -- the Foolish Four and Low Price/Book -- should perform best when the markets are down, and the growth/momentum strategies should perform best when the bull steps back into the ring. We will see.
I have mentioned before that we would be evaluating the strategies in our portfolio annually and will probably be changing the mix from time to time. I want to explain that a bit more. The idea is not to drop a strategy because it hasn't performed well in the previous year. Not at all. What we intend to do is evaluate the history of our strategies against new strategies that may have been developed by the community. For example, if we find that a variation of Plowback -- say, a Plowback strategy that incorporates earnings estimates -- appears to be a better strategy, we might switch to that variation next year, no matter how Plowback performs. Or we might develop more robust value strategies that seem to offer better protection in bear markets. Every strategy is on the table every year.
Long-term commitment to mechanical investing strategies is essential if we expect long-term success, but that doesn't mean we should close the door on improvements.
A few notes about the portfolio returns tables:
In the interest of space we've modified our standard portfolio report format by leaving out the table that reports long-term percentage price change for the subportfolios. That table has no information that can't be derived from the Total Gain table. We figure that Workshop folks, being naturally bright and numerate can calculate Cost per Share in an instant as well as the Total % Return for each stocks, but just in case you're wondering: Total Percent Return is simply the Total Gain divided by the Total Cost. Or scroll back up to the enchilada table.
Each subportfolio except the Foolish Four has an inception date of 1/8/01. The inception date for the Foolish Four is 12/24/98, and since the Foolish Four stocks were carried into the Workshop, the enchilada's inception date is also 12/24/98. That's going to cause confusion; it already has. That's one reason why the "since inception" returns don't make sense. But since one of the stocks that was transferred in from the Foolish Four was purchased on 12/24/98, we are stuck with that inception date.
Fool on and prosper!
