How I Earned 17% Compound Annual Return For 6 Years
Summary Using a carefully crafted portfolio of 18 stocks, I have beat the S&P 500 for the past six years. My portfolio consists of Consumer Stocks, Utilities and Railroads. I buy stocks in small increments on pullbacks to reduce risk and increase profit. Using a carefully crafted portfolio of 18 stocks, I have achieved 17.17% compound annual return since Jan. 1, 2009. I have been investing money for 21 years, and achieved my best years from 2009 to 2014. This article will discuss why I purchased these stocks and my outlook for 2015. My strategy is first and foremost not to lose money. Cash is king. Much of the gains in recent years were from decisions that I made five and 10 years ago. I invested in consumer, utility and railroad stocks that have durability, decent profit margins and a solid future. Over the years, I tended to sell the losers and buy more of the winners. Own the best and sell the rest. Nearly all my gains were from stocks. I only added bonds to the portfolio in early 2014. My brokerage accounts at Charles Schwab have achieved 17.17% compound annual returns from Jan. 1, 2009, to Dec. 24, 2014, compared with 14.41% compound annual return for the S&P 500 over the same time period. If you look at the this chart on my personal blog, you will see my portfolio risk and return are better than a typical aggressive portfolio. Schwab says the risk or standard deviation for an Aggressive Portfolio is 15.40 and the return 15.07. My risk was lower at 11.79, and my 17.17% return was 2.1% better than an Aggressive Portfolio. Below are the securities in our largest brokerage account, which was up 17% in 2014. Name Purchase Price Price on Dec. 28, 2014 % of Portfolio My % Return YTD Return to 12/28/14 Berkshire Hathaway (NYSE: BRK.B ) 117.43 151.35 12.63 28.88% 27.66 Boston Beer Co. (NYSE: SAM ) 218.67 295.74 10.86 35.25 22.31 Canadian National Railway (NYSE: CNI ) 57.32 68.69 1.15 19.84 20.47 Church & Dwight (NYSE: CHD ) 62.14 80.18 6.96 29.03 20.97 Coca Cola (NYSE: KO ) 28.31 42.96 2.72 51.77 3.99 Colgate-Palmolive (NYSE: CL ) 63.90 70.88 0.3 10.93 8.69 ConAgra Foods (NYSE: CAG ) 23.80 36.86 0.26 54.86 9.38 Dominion Resources (NYSE: D ) 58.17 79.28 4.23 36.29 22.56 DuPont (NYSE: DD ) 45.51 75.13 0.21 65.08 15.64 Hershey (NYSE: HSY ) 97.91 106.41 1.78 8.69 9.44 JM Smucker (NYSE: SJM ) 83.77 103.39 0.86 23.41 -0.22 Johnson & Johnson (NYSE: JNJ ) 66.45 105.06 1.31 58.11 14.71 McDonalds (NYSE: MCD ) 75.50 94.78 0.24 25.54 -2.32 Norfolk Southern (NYSE: NSC ) 94.62 111.54 0.28 17.88 20.16 PepsiCo (NYSE: PEP ) 78.70 97.05 2.27 23.32 17.01 Reynolds American (NYSE: RAI ) 37.28 65.71 0.38 76.27 31.45 Union Pacific (NYSE: UNP ) 78.71 120.39 32.14 52.96 43.32 Westar Energy (NYSE: WR ) 36.10 41.87 0.7 15.98 30.15 Burlington Northern Santa Fe 3.05% Due 03/15/22 0.97 100.6348 4.2 3.35 + 3.05% coupon =6.4% N/A Burlington Northern Santa Fe 3.05% Due 09/01/22 0.99 99.9219 4.17 1.90+3.05% coupon = 4.95% N/A Union Pacific 2.75% Due 04/15/23 0.95 98.6744 4.12 4.27+2.75% coupon=7% N/A Union Pacific 2.95% Due 01/15/23 0.96 100.3483 4.19 4.32+2.95% Coupon = 7.27% N/A Cash 1.00 1.00 4.04 You can see that 16.67% of the portfolio is invested in railroad bonds. I bought my Investment Grade bonds on Feb. 3, 2014. U.S. interest rates actually fell in 2014, so my bonds appreciated. My total return on my bonds in 2014 — appreciation plus coupon — was 6.4%. Going forward, I believe my bonds will lose value, because I expect interest rates to rise in 2015. However, I am prepared for these bonds to lose up to 10%, even 20% of market value. I like the income. I plan to hold the bonds to term, so I will not lose anything. From the chart, you can see that my largest holding is Union Pacific ( UNP ) at 32.14% of my portfolio. There is some risk involved with owning so much stock in one company, but the outlook for Union Pacific, and railroads in general, is outstanding. Until that changes, I plan to hold my railroad stocks. When I was a reporter working for a local newspaper, a banker used to come up to me at public meetings and ask me to bring my car loans to him. I would always tell him that I have no car loans, my cars are paid off. One day, he came up to me at a black tie event where he interrupted me while I was talking with some friends. Like an aggressive car salesman, the banker said, “Hey Mike we just dropped our interest rates on home loans. Why don’t you bring your home loan to my bank?” I became incensed. I said, “Mr. Banker my house is paid off. I don’t have any debt. I would be happy to lend you some money if you need it.” He sheepishly walked away and never came up to me again asking for my business. The above story illustrates a point. Bankers are eager to lend money. Many people accept the easy credit and never get out of debt. They don’t benefit from America’s pro-capitalist system that favors ownership of property and businesses. If you want to get ahead in life, stop working for bankers. Make them work for you. Pay off your debts, put your money in the bank and earn interest. Become a capitalist. Own property that appreciates in value. Buy stock in companies that are going to benefit from consumers’ daily spending habits. I own several consumer stocks. My favorite is Church & Dwight ( CHD ), a consumer household products company that owns Arm & Hammer Baking Soda and Trojan condoms — stuff people need regardless of the economy. I also own Colgate-Palmolive ( CL ) , seller of pet food and toothpaste, and Reynolds American ( RAI ), a tobacco company with a history of increasing dividends. I own no biotech stocks. In 2008, I lost about 7% of my investment in Dendreon ( OTCPK:DNDNQ ) after holding it for about four months. I sold it. I also lost money on a pain management company. After these mistakes, I vowed to stay away from biotech and most health care stocks. I own Johnson & Johnson ( JNJ ) because it is so diversified, owning a lot of personal care products as well as medical supplies. I own no mutual funds in our brokerage account. I don’t want to give money to mutual fund managers, who take 1% or even 2% management fees. Cut out the management fees, and there is more money available to invest and compound over time. We own some Vanguard 500 Index Fund (MUTF: VFINX ) in an individual retirement account. Money managers have a tough time trying to beat the Index, so why not just own the index? I buy stock in increments on pullbacks to reduce risk and increase profitability. This really paid off in buying stock in Boston Beer ( SAM ), another great consumer stock. I bought SAM shares in the first nine months of 2014 at an average price of $218; the stock recently hit $288 per share, a 32% gain. My stocks and bonds provide steady income. I do not participate in dividend reinvestment plans. Cash dividends go into my accounts, where they sit in a money market fund until I can find the next deal. I have some regrets. I bought Apple (NASDAQ: AAPL ) at $14 per share in 2000 when it had $12 per share in cash. I sold it at $18 per share when iTunes was introduced. That was a huge mistake. Part of the reason I sold it was to get out of tech and stay focused on my consumer stocks, utilities and railroad stocks. Money managers can find much to criticize with my account. I have too much exposure to railroads. However, I have written about railroads for 20 years. I understand their business models. I believe there is a renaissance taking place in rail today. Railroads are four times more efficient than trucking, especially over long distances. In 2014, railroads experienced their best year since 2007. Conclusion My portfolio is not for everybody. I can handle the risk associated with my overweight positions. I expect 2015 to be a tough year to make money. If low oil prices drag down other asset classes, we could see a bear market. However, consumers are loving the 30% gas price cut. The extra money saved at the pump will likely not sit idly in their bank accounts. I expect consumers to spend more money in 2015 than they did in 2014. The U.S. economy is growing, and this bodes well for the stock market. I am prepared for a 10%, or even 20% correction. If that happens, I will not sell stocks, I will look for opportunities to buy quality assets on the cheap. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.