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How We Achieve High Returns

Peter Lynch called them “10 baggers”. Some people call them “home runs”. Some authors describe them as “long tails”. They have been called “high-fliers”.  What are they? They are stocks that will grow ten-fold or more.

The strategy at Adams Financial Concepts, LLC (AFC) and for Mike Adams, even before founding AFC, has been to search for those companies with the potential to be 10-baggers and to do that in portfolios with a limited number of total holdings. When there are 300 stocks in a portfolio the 10-bagger will make little difference on the total portfolio performance. But in a portfolio of eight to ten stocks, one high flier can have a dramatic effect on the performance.

JP Morgan did a study in which they found that since 1980, 320 of the 500 stocks in the Standard and Poor’s 500 were removed from the index: “the S&P 500 deletions that were a consequence of stocks that failed outright [and] were removed due to substantial declines in their market value or were acquired after suffering such a decline”.[1] In other words, almost 70% of the stocks in the S&P 500 lose money. The study went further in saying “…of the Russell 3000 companies since 1980 roughly 40% of all stocks suffered a permanent 70%+ decline from their peak value.”

There is a reason that S&P[2] and Eugene Fama[3] have found only three to five percent of all professional money managers to do better than the market over the longer-term (10 years) as measured by their benchmarks. 

I know of no one who always picks winning stocks. There are going to be losers. And yes I have had stocks that have lost as much as 70% of their value. So to achieve the level of return my clients have experienced over the years means that I have to pick those long-tail 10 baggers to offset the losses of a few stocks and furnish the superior returns.

Over the last two years, the composite of my client accounts net of all fees, expenses and costs has been 40% and 77%. There is a reason for those returns. Client portfolios hold eight to ten stocks. Of those stocks, three stocks added in 2019 and three from added in previous years, six in total, seem to be moving like they will be 10-baggers. The pandemic accelerated the upswing in two of the stocks, but the others were doing well even before the pandemic. Incidentally, none of the FAANG stocks are in the portfolios. They have not met my criteria for inclusion.

What this says to me is that the performance of the last two years is not just luck. It also says that there is some not insignificant probability that the performance will continue to be very good. It is not a guarantee and I have to say that. But I am guardedly optimistic.

I do know there will be setbacks and downturns and unexpected occurrences. The returns that have been achieved are with portfolios that were fully invested in all of those times and still achieved the reported results. This covers 16 years through the Great Recession and through the pandemic. The composite is still doing better than the S&P 500 total return by 3 ½% per year on the average.

Past performance is no guarantee of future results.

[1] “The Agony & Ecstasy: The Risks and Rewards of a Concentrated Stock Position”, Michael Cembalest, JP Morgan Asset Management, 2014.

[2] “SPIVA US Scorecard”, aye Soe and Ryan Poirier, S&P Dow Jones, 2018.

[3] Luck versus Skill in the Cross-Section of Mutual fund Returns, Eugene Fama and Kenneth French, The Journal of Finance, October 2010

Disclaimers:

  1. Luck versus Skill in the Cross-Section of Mutual fund Returns, Eugene Fama and Kenneth French, The Journal of Finance, October 2010
  2. Adams Financial Concepts (AFC) Managed Accounts results are net of all fees and expenses. The results are net, net, net.
  3. AFC Managed Accounts returns include all active accounts as well as all closed accounts with the same objective: to beat the S&P 500 over the longer-term (10 years).
  4. AFC Managed Accounts do not include the results of the Incentive Profit Sharing Accounts.
  5. The performance presented is that of actual client accounts and includes all equity Growth Accounts with one quarter or more. These are not hypothetical, models or back tested.
  6. Portfolios are concentrated in as few as 8 equities. Since William Sharpe received the Nobel Prize for showing there is no significant difference in volatility risk for portfolios of 8-9 stocks as compared to 300 stocks.
  7. AFC Managed Accounts include capital gains and losses, both realized and unrealized, but do not include the impact of taxes on capital gains.
  8. “I’m always fully invested. It’s a great feeling to be caught with your pants up” – Peter Lynch
  9. AFC accepts that there will be times when there will be periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare us out of the market.
  10. Past performance is no guarantee of future returns.
  11. S&P 500 Index includes dividends reinvested
  12. Trailing returns since the formation of Adams Financial Concepts, LLC: