My three-year stock-picking throwdown with Mr. Market is finally over. Let's get right to the numbers:
|Akamai (Nasdaq: AKAM )
|Harris & Harris (Nasdaq: TINY )
|IBM (NYSE: IBM )
|Oracle (Nasdaq: ORCL )
|Taiwan Semiconductor (NYSE: TSM )
|S&P 500 SPDR
Source: Yahoo! Finance. *Tracking began on Aug. 7, 2008. **Adjusted for dividends and other returns of capital.
There you have it. Three years and a day after this contest began, I walk away with a double-digit win. And that's despite:
- Picking this portfolio less than two months before the advent of a global financial crisis that kicked off a Great Recession and ongoing market turmoil.
- One of my stocks (Harris & Harris) tanking on prolonged weakness in the IPO market and another (Akamai) suffering margin erosion at the hands of aggressive competitors.
On the whole, I'm proud of my portfolio's performance. Buying to hold and reinvesting dividends in strong franchises provided all the muscle I needed to send the index packing during a particularly challenging period for indexers and stock pickers alike.
I've learned a lot from the process. First, let's take a look back at each of the stocks I picked, why I picked them, what worked, and what didn't. I'll then reveal the principal lesson I learned and tell you how I'm putting that knowledge to work in recommending stocks to our Motley Fool Rule Breakers members.
Mistakes are brutal teachers, especially when real money is on the line. Harris & Harris has cost me in my real-money portfolio. Akamai didn't -- I'm up close to 75% on the position I first opened in 2004 -- yet I'm troubled by the huge gains I've given away by waiting too long to sell the company that kicked off my Foolish career. I overestimated profit potential in each case.
Harris & Harris, I reasoned, would benefit from a conservative valuation approach. Once the market began taking IPOs again, the stock would rise as liquidity events would force asset values higher inside the nanotech venture capitalist's portfolio. Mix in an IPO or two of one of its owned companies, and net asset value per share would soar, I figured … failing to realize that as a relative small fry in the world of venture capital, Harris & Harris wouldn't be granted the same rich terms as Silicon Valley's top VCs. So while the firm was right to make an early bet on Solazyme (Nasdaq: SZYM ) , this and other recent offerings and buyouts haven't proven to be game-changing for the stock.
Akamai was "far and away" the market leader in Web content delivery when I picked it for this portfolio -- three years after it had become a winner for our Rule Breakers members. All was going well for a while. But as margins declined, I saw a short-term problem where what now looks like a sustainable problem existed. Low-margin competitors were forcing the company to cut prices faster than it could recover with higher margin services, such as enhanced ad delivery or application acceleration. Earnings hyper-growth has gone missing as a result.
Before you write a comment below to complain that I didn't list Akamai here -- it was a market-beater, after all -- understand that I consider that investment a successful failure. My initial thesis for buying in 2004 was correct, as was my re-up for this 2008 series. Neither of those facts matter at this point. Claiming victory after failing to pay attention to sell signs would be disingenuous at best.
But in the cases of IBM, Oracle, and Taiwan Semiconductor, a small touchdown dance is probably OK. Big Blue was cheap at the time this portfolio was assembled, yet still a world leader in several core tech markets. Oracle was defying skeptics by acquiring and smartly integrating growth businesses. Taiwan Semiconductor was the world's leading chip foundry in a world hungry for processing power, yet either unable or unwilling to invest to create new billion-dollar chip-making facilities. In the case of all three stocks, my thesis held and gains far outstripped the market average.
One huge lesson
Interestingly, all three of my tech winners paid dividends. Call that a coincidence if you like, but I don't think it is. History says that dividend reinvesting can lead to huge returns. Here, it provided ballast for the speculative growers I was betting on. Gains would come and go but dividends would be paid with regularity.
The Beyers Family Portfolio benefits from this same approach. Surprised? Don't be. Yes, I'm a tech investor. Yes, I believe in high-growth businesses. Yes, I'm perfectly happy to own triple-digit P/E stocks such as Qlik Technologies (Nasdaq: QLIK ) . But when it comes to managing our retirement savings, I know that small bets on informed speculations can yield huge cash gains. Why over-bet on these stocks and risk too much, especially when so many well-heeled techies will pay me for owning their shares?
Answer: there's never a good reason to over-bet. Risks should always be compensated. In this portfolio, I dare say they were, and I got a little richer as a result. I hope you did, too. Check back here soon for a new tech portfolio, and be sure to keep up with all these stocks by adding them to your watchlist today: