November 24, 2013
I’ve updated the year-to-date performance of the VIIR portfolio through October 31, 2013. You’ll notice a huge improvement in the performance of the portfolio in comparison to the year-to-date numbers ending September 30, 2013. The prior performance data assumed that all cash in the model portfolio earned zero returns. While this helped isolate the returns from just the stock portion of the portfolio, it didn’t reflect reality. It also helps that the stocks in the VIIR portfolio have been performing well, despite the periodic panics that keep happening in the Indian equity market.
The performance below includes the returns from our proprietary asset allocation model. In addition to providing stock investment recommendations, we also provide Premium Access subscribers with a full asset allocation model. Thus, the chart below is a more accurate picture of the total return you would have achieved had you followed the VIIR model portfolio investment recommendations.
A recent article about the underpeformance of Prashant Jain’s HDFC Top 200 fund, India’s largest fund, emphasizes that even market veterans are having trouble navigating the current market environment. I’m highlighting the article to not only emphasize the remarkable performance of the VIIR portfolio but also reflect on the importance of having a long-term time perspective when investing.
Prashant Jain has produced an enviable track record of beating the market year-in and year-out. Despite his track record of beating the market by a wide margin and making his investors wealthy, he’s getting criticized in the press for underperforming in 2013. Fortunately, Mr. Jain remains unfazed by the criticism and is sticking with his investment process. A lesser investment manager would’ve succumbed to the criticism and started chasing stocks in order to make up the performance gap.
The following quote from David Herro, a US fund manager, emphasizes how taking a long-term time perspective creates investment opportunities:
I would assert the biggest reason quality companies sell at discounts to intrinsic value is time horizon. Without short-term visibility, most investors don’t have the conviction or courage to hold a stock that’s facing some sort of challenge, either internally or externally generated. It seems kind of ridiculous, but what most people in the market miss is that intrinsic value is the sum of all future cash flows discounted back to present. It’s not just the next six months’ earnings or the next year’s earnings. To truly invest for the long-term, you have to be able to withstand underperformance in the short-term, and the fact of the matter is that most people can’t
When I identify a stock for the VIIR portfolio, I’m looking for high quality businesses that will generate significant free cash flow. Equity returns in the long run are driven by cash flow generation, not earnings. By taking a long-term time perspective the VIIR portfolio continues to outperform in the short-term. It’s paradoxical in a way. Those investors who are always focused on beating the market in the short-run always end up underperforming because they are always chasing stock performance. You want to be ahead of the pack not chasing it. If you just switch your investing mindset from a short-term to a long-term focus, you’ll be well on your way to start outperforming the market.