My last 20 stock picks have averaged an amazing 50% return.  Certainly the bull market of the last 2 years has had much to do with that high number.  Yet if instead of purchasing each stock, I had purchased shares of an S&P 500 index fund, these same 20 purchases would have returned less than 23%.  That 27% outperformance of my portfolio versus the stock market is what makes me proudest, and more and more confident in my stock picking methods.

Well-known ‘Value-oriented’ mutual fund managers often tell their investors that they have a goal of outperforming the S&P 500 by an average of 10% per year over time.  It’s what Mason Hawkins of Longleaf Partners fund aims for, as well as Bruce Berkowitz of Fairholme Fund.  It’s also what Warren Buffet told his early partnership investors to expect back when he directly managed money.  Very few succeed at this.  So my 27% outperformance, though only 2 years, is quite an accomplishment.

These stock picks were accomplished thru my understanding of Buffet’s definition of Owner Earnings.  I calculate the true ‘Owner Earnings’ for a company over the past 10 years, then predict these earnings into the future.  Then I sit on my hands, watch the portfolio, and wait for the market to deliver a stock at an acceptable discount to it’s Intrinsic Value.

I give a brief overview of the process here:  Dave’s Complete Guide to Value Investing  though I don’t give away the details on how to calculate Owner Earnings (or of equal importance: at what rate to project them into the future and properly discount them).  That whole process took me 15 years to figure out.

I’m still grumbling that I missed a 70% return in Gymboree recently, by not watching my stock list for just a few days last summer!