HenryWirth.com
Beating the Market since June 2001

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Investing 501

Every intelligent and knowledgeable investor knows that it is incredibly difficult to outperform the risk adjusted return of an appropriate index over the long run. That means every intelligent and knowledgeable investor should make an important decision:

1. I will buy an index fund because I do not believe I can outperform an index.



If you chose #1, then you probably know more than most investors i.e., the chance of outperforming the return of an appropriate index over the long run is about 10%.

2. I believe I can outperform the risk adjusted return of an index, so I am going to select a portfolio of stocks within the index.

If you chose #2, then develop a written strategy to meet your objective. If you do not develop a written strategy, then you will have an imaginary strategy. Imaginary strategies only work in fairy tales. Most amateur investors have imaginary strategies, and most amateur investors are dismal failures.

Or, rather than developing a written strategy yourself, you could say I'm going to pay someone else to select stocks for me. Since you're reading this on my website, this could be your strategy:

I'm going to pay Henry Wirth to select Micro-Cap stocks for me because he has beaten the risk adjusted return of the Russell Micro-Cap Index by a significant amount over considerably more than ten years.

Obviously it is no longer possible to subscribe, but the info that follows may be of interest.

I'm flattered, but recognize that past performance is NOT an indicator of future performance. If it were, then investing would be easy and everyone would be rich, and that is clearly not possible. Henry Wirth's chance of outperforming an index in the future is no better than anyone else's.

From June 2001 thru September 2013 more than 100 investors subscribed to WW. Thru September 2013, WW was unbelievably successful, but at that point only about 40 subscribers were still with me. Every year I generally pick up a few new members, and every year I generally lose a few old members. Most of the 40 remaining members were with me at the beginning, but why did more than 60 give up during a period in which my newsletter gained more than 1,391% while my most appropriate index, the Russell Micro-Cap Index, gained only 127%?

Nothing is ever certain when one plays the investing game, but I'll try to explain why more than 60 subscribers, or about 60% dropped out from 2001 thru September 2013.

1. They weren’t able to duplicate the returns I reported.
2. They bailed out during a declining period. (I lost 23 during 2011 & 2012)
3. They got discouraged after a few bad quarters.
4. They didn’t have enough money to make it worth the effort.

How much money does it take to make it worth the effort?

I know many of my subscribers, so I have a fairly good idea how much money they invest. My best guess is that the average portfolio is probably over $200,000. There are a few million dollar plus portfolios. The largest portfolio I know about is slightly over $3 million.

If you have a $100,000 portfolio, and if (BIG IF) you can outperform an appropriate index by 10%, then that means you are receiving a reward of $10,000 for your effort. If you have a much larger portfolio, then your reward will be much larger.

If you start with a $30,000 portfolio, and if (BIG IF) you can outperform an appropriate index by 10%, then that means you are receiving a reward of $3,000 for your effort. Regardless of how much money you have, only you can determine if the risk and the potential reward are worth the effort of managing an active portfolio.

I can tell you, with reasonable certainty, that most of the dropouts before 2010 started with less than $30,000. In theory, a modest portfolio should succeed. I have a number of loyal subscribers who started with less than $20,000, but frequently, for a variety of reasons, a modest portfolio fails to work satisfactorily.

The primary reason for failure is probably lack of discipline during a declining period or worse, starting during a declining or underperforming period. I under-performed the iShares Micro-Cap ETF (Ticker IWC) during 2011 and 2012, and 100% of the subscribers that joined during this period quit. If I had started shortly after 2010, then I'm pretty sure that I would have quit too.

The next few paragraphs may help explain the secondary failure mode during an out-performing period.

If you purchase all sixty of the recommended stocks each quarter, then your returns will probably agree with the returns I report. If you purchase fewer than the recommended number of stocks, then you are probably NOT going to experience the same returns I report. You may get lucky and buy a group of winners, but you could also experience some bad luck and wind up with a group of relative losers.

If you started with $30,000, then I recommend that you buy every second stock that is recommended. Buying every second stock won’t guarantee the same return I report, but over a one year period your return would probably be within reasonable limits of the return I report. That means you would be buying in $1,000 lots initially. Buying in smaller lots means the transaction costs would doom you.

For more reading before you subscribe go to Transaction Costs