Calculating Our Nanalyze Tech Stock Portfolio Performance
Here’s a fun exercise to think about. If you managed your own portfolio of tech stocks over the past 20 years, what sort of return would be considered good? (Don’t cheat and try to Google some numbers. Bear with us here please.) How about +400%? If we told you we returned +400% over the past 20 years in our Nanalyze Disruptive Tech Stock Portfolio, would you be impressed? Astute readers will quickly point to the need for a benchmark to assess how good that return is, and they’re exactly right. Let’s use the most notorious tech stock benchmark there is – the Nasdaq.
This is kind of crazy to think about, but over the past 20 years, the Nasdaq has returned over +320%. So, a +400% return is nothing to scoff at. In the case of our own portfolio, we’ve returned about +480% based on the capital we committed originally. We started managing the portfolio in 1998, stopped contributing capital into the portfolio around 2003, and then managed it until today, making every mistake you can think of along the way. It’s only because of dumb luck that the account has any value left in it at all.
Maybe the biggest rookie mistake we made was bouncing around brokers chasing lower transaction costs (a non-issue in today’s world). Consequently, much of the record keeping has been lost. This means we have some leeway in selecting what time frame to use when looking at performance. And what a difference the time frame makes.
Cherry-Picking Time Frames
Let’s look at how time frame selection affects how well the benchmark performs using some simple returns from Yahoo Finance on the Nasdaq ETF, QQQ:
- Nasdaq 18-year rolling return +1,176%
- Nasdaq 19-year rolling return +709%
- Nasdaq 20-year rolling return +320%
- Nasdaq 21-year rolling return +247%
We know that we’ve returned +480% based on capital we committed over a 5-year time frame. If we choose the date we stopped contributing as the starting point, then it looks pretty bad – Nanalyze +480% vs. Nasdaq +1,176%. But, if we just look at a 20-year rolling return which reflects the midpoint of when we would have theoretically been half vested, suddenly we’re looking pretty rosy.
You can see how time frame and benchmark selection can dramatically affect the perception of performance. But there’s another reason why our returns are actually better than they appear. We need to consider risk vs. reward.
We aren’t just sitting on a giant pile of paper gains right now, because we’ve locked some of those in. That’s because we take an overall bearish view of the market right now, for reasons largely surrounding hype and The Rona, and that means we want to have some dry powder in case there’s another March 2020. Today, we’re sitting on nearly 30% in cash after putting some structure in place during 2020 so that we could provide our readers with a live portfolio that now contains (checks with broker…) 27 different tech stocks. Since we don’t have incoming cash going into the portfolio, the only way to raise cash was to trim positions and even exit some entirely.
While we’re taking on a lot less risk right now holding 30% cash, we’re also missing out on quite a bit of upside. Being the risk-averse investors we are, we have no problem missing out on some upside in exchange for the chance to buy cheaper assets should a recession hit. There is not one among us who can say with a straight face that today’s market hype is deserved in the face of a global pandemic that has decimated a trillion dollars of economic value in the travel industry alone.
Now that we’ve put some sort of structure around our portfolio, we know what positions we’re holding, and the average cost of these positions (the tax man always requires one knoweth thou average cost). We know what we put in, and we know what we’ve gotten back. In cases where we’re up 200/300/400/500 percent on any given stock, it makes sense to recoup some of our capital to put to use later. If things soar to the moon, we won’t cry about not having a bigger position. As the old saying goes, “If it’s the next Microsoft, then all I need is a little, and if it’s not, then I’m glad I only invested a little.”
The Sharpe Ratio
As we’ve pointed out in this article, there are many ways we can torture the data until it tells the investment world we’re the second coming of Nostradamus. People fall for this stuff all the time. When someone tells the world they returned +400% over the past 20 years, few people bother to check that return against a benchmark because it’s easier to just accept the fact that someone else is better at picking stocks than you are. That’s why we don’t want to focus much on overall portfolio performance. It’s largely irrelevant, because there are so many different ways to measure it.
We’ve been speaking with a lot of readers lately. What we’ve found is that most of them trade off our insights without following what we’re actually doing very closely. We’re rarely asked for performance numbers because not many people find that useful. They’re more sophisticated. (And when they open their wallets to purchase a premium subscription, they become even more sophisticated – and better looking.) Most readers aren’t asking us to prove our competency because our content speaks for itself. They’re reading what we say, having the “ah-hah” moment, comparing our findings to their own findings, or as is often the case, avoiding stocks with too many red flags. (Very few pundits out there warn investors about what stocks they shouldn’t be buying.) Many of our readers are institutional, and our miniscule trading activities have very little significance. For serious investors, the bigger picture is what matters the most.
Since we’re holding a large amount of cash, we’ll need to start using more sophisticated ways to describe performance, or else such numbers are useless. The Sharpe ratio is about as boring as it sounds, but it’s one way to measure our risk-adjusted performance. As we put more structure around our investment methodology, we’ll find it useful to benchmark our strategy against Nasdaq, or some other appropriate benchmark, because that’s how we’ll be able to tell it’s working. That’s something we’ll look at down the road, but not right now. In the meantime, we continue to refine our Nanalyze Tech Investing Methodology with such rules as:
- Not investing in pre-revenue companies
- Avoiding companies with small market caps
- Using dollar-cost averaging to build positions slowly over time
- Selling positions slowly over time
- Trimming positions if they run up too quickly
That last bullet point is where we’re going to focus next. We’ve been toying with the notion of looking at each trade in terms of “capital committed,” then looking to recoup that capital as quickly as possible (in the face of a strong bull market) so that we can play with the house’s money and put our capital to work on other opportunities.
We’ve hardly had anyone ask for our portfolio performance numbers, but we expect those questions will arise. It’s a natural thing to be concerned about. Those who ask firstly need to understand how easy it is to pull the wool over people’s eyes when you control the performance benchmark and timeframe selection.
What may be more valuable is to teach people how to invest so that they might make their own decisions and learn how to become better investors. When we make mistakes, we can just attribute it to “the learning process” and people will think even more highly of us because of the Pratfall effect. If by now you’re starting to think that the whole finance world is just a bunch of malarkey, you’re getting a lot closer to the truth.
We sold our Global X Fintech ETF holding and used the proceeds to purchase a legaltech stock with a 70% market share. A $50 billion opportunity awaits, and they've only achieved about 3% penetration – plenty of room to run. Become a Nanalyze Premium annual subscriber and we'll show you our entire portfolio of more than 30 tech stocks.