Each year at this time, Jeff and I review the trades we made in the portfolio during the year.  While we know every idea won’t work out, we still want to know if we’d have been better off by setting the portfolio in place on January 1st, and then calling it a year.   Did our actions help or hurt us in 2007?  

Of course, an analysis like this suffers from all sorts of faulty assumptions, most particularly the view that a fair judgment can be made on a stock pick after less than a single year period.  In addition, anytime one focuses on a second derivative of a decision, one risks missing the bigger picture.  Through yesterday, we were up 19% for the year, net of fees.  So regardless of this year’s analysis, we’re hardly in a position to complain.  

At the same time, we just can’t help ourselves.  At the very least, we want to know if we’re making any systematic errors year after year, that we may not even be aware of without taking a closer look.  We do this not to beat ourselves up, but hopefully to learn something about ourselves and make adjustments that might help us and our clients going forward.  We also want to stress that an analysis like this shouldn’t imply that we are day traders.  Our turnover this year was only 30%, well below industry averages.  We always purchase a new security with the intent to hold for the long term,  but also know that some change is inevitable in a dynamic and competitive worldwide economy.  

So what happened in 2007?  To our pleasant surprise, our changes helped our portfolio by about 2% this year.  That may not seem like a lot, but it actually isn’t too bad considering the fact that the S&P 500 is up just about 6% this year with only two trading days left.  Digging a little deeper, it looks like our best decisions were ones where we added brand new ideas to the portfolio and sold other positions completely.  In general, we tended to trim our winning positions and add to our losing positions a little too eagerly.   

In contrast, in 2006, our actions generally hurt the portfolio.  As we discussed in an earlier blog entry this month, we were concerned about the economy falling into a recession and made a number of decisions to position the portfolio more defensively.  While a recession didn’t come and we did subsequently re-adjust, we likely left 2-3% on the table.  As a result of these changes, our turnover was higher in 2006 and about in line with the industry’s average of 100%.  

Going into 2007, we made the decision to try to be more gradual with our investment process and at least for this year, the strategy seems to have served us well.  In this particular case, less turnover was more.  Going into 2008, it may make some sense, based on this year’s insights, to allow our winners a little more time to run, particularly for our smaller cap holdings.  And while the data isn’t likely robust enough to label any errors as systematic, it appears that our outright buy and sell decisions provided the greatest benefit to the portfolio, indicating that our strongest and boldest convictions often yielded the largest dividends.   

As logical as these conclusions appear, we also know that there can be a great danger in too much self-examination, which can lead to self-defeating, second-guessing.  At the end of the day, we aim to make the best possible decisions given the resources, knowledge, and experience that are available to us at the time.  

Great results are the icing on the cake.