2007 Equity & Options Portfolio Performances

Today is the first day of the 2008 trading year.

As such, until 4PM today, I can justifiably focus on our terrific equity and option portfolio performances for 2007.

The gross return on my equity portfolio last year was 34.8%. The S&P500 earned a total return of 5.49% according to today's Wall Street Journal 2007 market summary section. Their value is typically pretty accurate.

Thus, my equity portfolio outperformed the S&P500 Index for 2007 by 29.3 percentage points, or, in banker speak, 2930 basis points. On a net basis, if I charged a 1-and-20 hedge fund fee structure, the net performance would be 26%, which still results in an impressive 20.5 percentage point outperformance.

As I mentioned in this recent post, our portfolio held two of the S&P500's and large-cap total return performers for 2007, Apple and National Oilwell Varco. This isn't the first time my equity portfolios have selected at least one of the best ten performers of the S&P500 in a calendar year.

During 2007, the portfolio experienced only two down months, June and November, while the index fluctated all year, with five negative return months.

As can be seen from the illustrative chart on this webpage, 2007 was the best equity portfolio performance since 1999. However, it hasn't been the best performance in the last 17 years, by far.

The average average outperformance of the equity strategy over the S&P500 is just shy of 8 percentage points, or 800 basis points.

With respect to our options portfolios, which are based on the same selections and weights as our monthly equity selections, they ended the year essentially the same as I noted in this post just a week ago. In that post, I noted,

"While there are a variety of methods for weighting and annualizing the various monthly portfolio returns, the overall return for this year, to date, for uniform monthly investments, is in the neighborhood of 70%.

Since call options have downside loss protection, relative to holding equities, and allow for inherent leverage of as much as 20x, they provide much higher returns than the equity approach, while using the same selection process and weightings.

By applying the results of proprietary research into the performance of large-cap equities over time, our portfolios, both equities and options, tend to consistently produce superior returns, relative to the S&P500 and its related options instruments.

Not every month's portfolio achieves the same high returns. But, on balance, already, they've delivered stunningly good performances in one of the most challenging and volatile seven month periods in the equity markets in the last five years."

While we are now primarily focused on investing in the optionized variant of our basic equity strategy, we look to the latter's continued strong performance as an indicator of the basic validity of our equity selection approach.

The reason I mention this here is not to solicit interest in our investment business, because we don't actually seek customers, aside from a few carefully selected, sophisticated investors already known to us.

Rather, we feel that the performance of the investment strategies, particularly their consistently superior performance relative to the S&P500, over time, validates my observations and insights in this blog.

The perspective I take in my commentaries reflects our belief that managing businesses for consistently superior performance is the best way for CEOs and their management teams to reward their shareholders. Thus, the comments I make in this blog are based upon what I have found, through my proprietary research, relates to consistently superior performing firms, in terms of total returns.

And these findings continue to work in today's equity and derivatives markets.

So, today, as 2008 begins, and we reset our portfolio return back to zero, I'm pleased to review a very positive, successful 2007 for our various investment portfolios.