Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Thursday April 1, 2021. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Average 20% Annual Returns: The Upper Bound Of Stock Investments?!

In this newsletter, we discuss the upper bound or the ceiling of stock investments and relates this with our portfolios. Before we discuss annual returns, we will first review Warren Buffett’s annual shareholder letter. 

Warren Buffett’s annual shareholder letter

This weekend, Warren Buffett released his annual letter for Berkshire Hathaway’s shareholders. As usual, we enjoy reading his writings that are full of wisdom and common sense. Here are some of gems from the letter: 

  • On Berkshire’s stock holdings: “As I’ve emphasized many times, Charlie and I view Berkshire’s holdings of marketable stocks – at yearend worth $281 billion – as a collection of businesses.”. This is perhaps one of the hardest or simplest facts in Buffett’s stock investment philosophy: he doesn’t simply view his stock holdings as some pieces of papers that are valued daily by stock markets. What he cares most is these companies’ businesses or simply put: profits. 
  • Buffett stated that it’s more profitable and enjoyable and far less work to own non-controlling portion of a wonderful business (aka stocks) than struggling with 100% of a marginal enterprise. So owning high quality business stocks is actually better than day to day managing a so-so business. 
  • The best results occur at companies that require minimal assets to conduct high-margin businesses – and offer goods or services that will expand their sales volume with only minor needs for additional capital.” — again, he can’t emphasize enough how important to find a good business that’s highly profitable than being settled with mediocre ones. 
  • Still, investors must never forget that their expenses are Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts.” — always beware of costly products and services. 
  • in 1959, 11 young Omaha doctors started to invest in a Buffett’s partnership and ever since, they have kept Berkshire’s stocks. Now one turned to 100 and two were in their high-90s. “This group’s startling durability – along with the fact that Charlie and I are 97 and 90, respectively – serves up an interesting question: Could it be that Berkshire ownership fosters longevity?” It’ll be well rewarded if one is able to adhere and being associated with a sound partnership, group, strategy or whatever for a long period of time. 

Though it might seem that what MyPlanIQ advocates: using low cost ETFs and funds and relying on more or less market timing/technical strategies, is totally different from Buffett’s investment philosophy, we actually find there are many things in common: low cost, quality companies, even viewing an index fund as a collection of business, and consistently sticking to a strategy for a long term etc. 

Berkshire Hathaway’s average annual return from 1965 to 2020: 20%

Now let’s turn our attention to investment returns from Berkshire, an excellent mutual fund and one of our portfolios. 

The following is the Berkshire’s long term investment returns from the letter. 

So Berkshire Hathaway’s average annual return for the past 55 years is exactly 20%. Well, it’s somewhat an adage in investment community that 20% annual return is the ceiling of stock investments. Just imagine, a $10,000 invested in 1965 would be worth $281 million, compared with $2.34 million if it were invested in S&P 500 index fund (which is still a lot of money, by the way)!

This piqued our interest to look at long running mutual funds and our portfolios. It turns out that BPTRX (Baron Partners Retail) ,a famous growth fund, managed by Ron Baron, is achieving a closer feat for the past 17 years. Here are some numbers: 

Portfolio Performance Comparison (as of 2/26/2021):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2003 AR*

Since 1997 AR** 

P Composite Momentum Scoring Fidelity Select Funds 57.7% 18.0% 21.1% 15.7% 16.6% 18.8% 20%
BPTRX (Baron Partners Retail) 122.6% 49.9% 41.6% 23.5% 16.4% 19.4% N/A
BGRFX (Baron Growth Retail) 32.9% 21.3% 21.4% 14.3% 10.9% 12.7% 12.2%
Berkshire Hathaway 2.4% 5.3% 11.9% 11.2% 9.5% 9.1% 10.1%

*: 5/12/2003 for BPTRX (its inception date) and Fidelity Select Funds portfolio. 1/1/2003 for Berkshire

**: 12/31/1996: Fidelity Select Funds portfolio start date

NOTE: the return figures for BPTRX and Fidelity portfolio have end date 2/26/2021 while Berkshire’s end date is 12/31/2020. So the above comparison with Berkshire is not entirely apple to apple. Just for illustration purpose. 

In the above, we also include our model portfolio P Composite Momentum Scoring Fidelity Select Funds (listed on Advanced Strategies) or comparison. Here are some interesting observations: 

  • Ron Baron is famous for his growth stock investment acumen. Baron’s mutual funds were also once very hot in 2000 internet bubble. Unfortunately, none of them has been able to outperform BPTRX for the past 15 plus years. We include Baron Growth fund BGRFX as a reference. 
  • BPTRX made a huge jump since last year. This is mostly because of its oversized holding of Tesla stock:  on 12/31/2020, Tesla stock took  47% of its portfolio. This prompted Morningstar to issue a downgrade warning on this fund. Tesla’s stock returned 743% in 2020! More likely an anomaly. 
  • Since BPTRX’s inception on 5/12/2003, BPTRX and our Fidelity select portfolio were very much comparable: both annualized returns are approaching the 20% upper bound. 
  • Our Fidelity select portfolio’s average annual return for the past 23 years since 1997 is also 20%!
  • Unfortunately, Berkshire hasn’t performed that well for the past 20 plus years. Its return for the past 23 years is 10.1% annually, vs. S&P 500’s total return 8.9% and the Fidelity select portfolio’s 20%.  The stellar returns Berkshire had were mostly because of its great returns in early years especially in 60s and 70s. 

In addition to returns, other important factors to consider: 

  • BPTRX’s largest drawdown (i.e. for a peak to its following trough) was 51% in 2020, 56% in 2008. These compares with the Fidelity portfolio’s largest drawdown (24.5%) in 2011 since 2003. The Fidelity portfolio had a very large drawdown (43.8%) in 2000 though it still returned 3.7% in that year. 
  • In terms of diversification, the Fidelity select portfolio invests in two Fidelity select funds at a time while BPTRX holds individual stocks that can be very concentrated. To be fair, this fund has a very low turn over rate last year, only about 8% last year according to Morningstar. 
  • One should be also aware that the above returns are before tax. Both BPTRX and the Fidelity select portfolio are not tax efficient, unlike Berkshire’s long term buy and hold. This can make a huge difference. However, if one uses the portfolio in a tax deferred account like IRA, this becomes a non-issue. 

To summarize, it’s very hard to achieve a long term 20% annual return (for at least 20 years or longer). Furthermore, there will be many ups and downs along the way. Early investors in Berkshire who have been able to follow through over years have been able to reap such an upper bound return. Unfortunately, as Berkshire has become an enormously large company, the law of large numbers is its main inherent obstacle for it to be able to achieve the same feat as in its early years. Of course, one can still be reasonably sure that Berkshire will be able to deliver similar or very likely better returns than S&P 500 in the coming years. 

Finally, we would like to remind readers that we are discussing a high return fund like BPTRX or the Fidelity portfolio in a time when stock prices are at very elevated levels. Berkshire’s returns, on the other hand, are more balanced (at least when comparing with a normal mutual fund like BPTRX): it often underperformed in a market peak while doing much better in a bear market.  Readers should take this into account whenever you are reading or hearing stories on some outstanding funds or portfolios. 

Market overview

Investors finally started to pay attention to what happened in bond interest rates: 10 year Treasury interest rate once breached 1.5% last week. What happened last week is a disordered rotation, to say the least. Fortunately, it does seem like the stock market loss experienced so far might not develop into something more serious: 

The above shows that in last week, energy, financial and value stocks were not affected much. Of course, as we have cautioned over the years, since both stock and bond valuations are in unsustainable high levels, some slight perturbation in economy or geopolitical affairs can rapidly change the market dynamics, as what we saw last week. In this sense, we are not out of woods at all. 

Again, in the current very over-valued and over-extended markets, we reiterate the following practice: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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