Me vs. the S&P 500–2013 Edition

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With the 31-Day Money Challenge having come to an end, I’m without excuses. Did I or did I not beat the S&P 500 index in 2013 with my stock picks?

I’m a big believer in low cost, passive index mutual funds. Most of our investments are in Vanguard and Fidelity index funds that cost between 4 and 15 basis points. (If you don’t believe costs matter, listen to this podcast from the 31-Day Money Challenge.) I’d advise most investors to steer clear of individual stocks.

A few years ago, I opened a SEP IRA at Scottrade. One of the benefits of running an online business (or any business for that matter) is that you can set aside a lot more money for retirement. The SEP IRA contribution limit for 2014 is a whopping $52,000.

I decided to invest my SEP IRA contributions in individual stocks. It wasn’t that I thought I was some great stock picker. Three things led me to this choice–

  1. The joy of reading financial statements and evaluating companies;
  2. The desire not to invest in what is popular; and
  3. The will-power to stick with my choices even as the market tanks.

(Truth be told, there were a few other reasons why individual stocks make a nice addition to a passive portfolio.)

As I got comfortable investing in stocks, I took my stock-picking on the road. We travelled from my SEP IRA to my taxable brokerage account at Vanguard (I now also have one at OptionsXpress, in part because of its $100 bonus on new accounts). Today, individual stocks represent 15 to 20% of our portfolio.

So did I beat the S&P 500 in 2013?

Most years since I started picking stocks I’ve beat the S&P 500. Having bought many of my stock and ETFs in the 2008 to 2010 period in industries that were punished (think banking and real estate), my individual stock portfolio benefited nicely from the rebound. While I haven’t always kept detailed records of my performance, that’s much easier today with the free online tool, Personal Capital (you can read my review here).

With an S&P 500 that returned 29.6% (32.39% with dividends reinvested), 2013 was a tough year to beat the index. My portfolio of individual stocks in fact fell short, returning 25.43% with dividends reinvested.

Not a bad year at all, but nearly 7% less than the index. To me, this is not at all surprising. When the S&P 500 has such an incredible year, it’s very difficult to beat it.

Anyway, enough with the excuses, here’s the breakdown:

  • Apple: 23.41%
  • Apple*: 43.25%
  • Ford: 22.30%
  • McDonalds**: 17.28%
  • Berkshire: 32.17%
  • Pepsi: 24.71%
  • Verizon: 19.55%
  • Citi**: 33.77%
  • Cisco**: 8.14%
  • ITB**: 9.36%

*I listed Apple twice because I purchased a significant stake in the company’s stock in mid-2013.

**I sold these stocks near the end of the year to simplify and consolidate our portfolio.

My 25.43% return is of course a weighted average.

My Take on the Investments

Here are my quick thoughts on the stocks that I still own:

Apple: I initially bought shares of Apple many years ago because I loved the company. That’s not a good reason to invest in a stock. I love Tesla as a company, too, but its price per share is way too expensive. Last year I bought more stock in Apple because it was on sale. At about $395 a share, it was trading at a P/E of around 9. It has an incredible balance sheet, unparalleled brand, and generates a ton of cash.

My current view is that Apple is a good buy at current prices. Even assuming its days of double-digit growth are over, even as a single-digit growth company plus its dividend it’s a good investment. The potential for another breakout product (bigger iPhone, iWatch, iTV, etc.) is icing on the cake.

Berkshire Hathaway: Buying shares of BRK is like investing in a no fee large cap mutual fund. Berkshire has stakes in dozens of companies in a variety of verticals (e.g., insurance, transportation, financials, media, entertainment etc.). Owning stock in Berkshire also gave me entry into the annual shareholders meeting. Last May I took my wife and daughter to hear Warren Buffett and Charlie Munger talk shop. It was a marvelous experience.

Pepsi: I bought Pepsi for its dividend and diversity. Its product range is far more diverse than Coke. Its yield is about 2.80%, and I expect it to continue to growth given its remarkable brand and excellent distribution. That being said, I haven’t added to my position in several years. The price is too expensive for my tastes.

Verizon: VZ was another purchase made because of its nearly 5% dividend (at the time of my purchase). I have some concerns about its business model. A lot is changing in the industry, and competition is fierce. I’ll like be donating much of my position over the next year or two.

Ford: I bought Ford for one reason and one reason only–it was dirt cheap. My initial purchase was in August 2012 at $9.21 a share. Today it trades at about $15 a share, and that’s after the down turn in the market we’ve experienced in 2014. It sports a dividend yield of nearly 3.5%, which has been a nice source of recurring income.

Well, there you have it. All in all a very good year. I didn’t keep pace with the S&P 500, but my stocks performed nicely. If you have individual stocks, leave a comment to let us know about your favorite picks.

Published or Updated: April 9, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Hey well at least you tried right. Playing and investing in stocks is fun as it is without the competition behind comparing your picks to an index. Looking forward to what you will pick in this down market?

    • Rob Berger says:

      El, my picks won’t change much if at all during a down market. I’ll likely just buy more of what I have a cheaper prices.

  2. Steve says:

    Not to be cruel but I’m glad to see the index beat your picks and I understand that won’t always be the case. I used to be an individual stock owner but in recent years I’ve gone with all index fund investing and this helps to justify the decision. I consider you a real smart guy and this helps to illustrate the benefit of passive investing. Thanks for sharing, Rob!

    • Rob Berger says:

      Steve, it’s one of the reasons I share my “failures.” I have reasons for investing in individual stocks and don’t have any plans to stop. But the vast majority of our investments are in passive index funds.

  3. That’s a very nice breakdown of your performance — how did you go about selecting those stocks? It seems to me if you beat the market most years, you’d make more money investing in your strategies than doing it all passively. You’re already doing the work to select stocks — the only thing that would change would be the size of your positions and your returns. Of course I’m ignoring your tax situation there, and tax consideration argue for the passive portfolio, but still….

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