Anodyne Inc. Vs. Relentless Market Carnage

First off, a distribution missed while tooling around the Pacific Northwest with Jamie and the cats:

Dominion Citrus Income Fund (DOM.UN): 12,346 units x .01/unit = $123.46 (31 July)

Cash balance, $133.71

Out of curiosity, I spent twenty minutes with the stats, wondering how the portfolio's recent performance would compare with the TSE 300's. I've read numerous books and academic studies that suggest that a low P/E (price-to-earnings) ratio portfolio will actually perform better in bear markets than in times of market euphoria, and I thought I'd anecdotally test my "book learning."

TSE 300 index, 25 October 2006 - 10 August 2007: 9.11% gain

Anodyne Inc. 25 October 2006 - 10 August 2007: 22.18% gain

Relative result: 13.07% A small improvement in performance, despite the Market Carnage.

Interesting.

The concept of Market Carnage is worth thinking through. Let's say I bought a piece of recreational property -- an unimproved lot in Gold Bridge, say -- for $10,000 on January 1st. Then today I call a realtor and learn that the most anyone will offer me for the lot is $7400. Have I lost money? Only if I have to sell today. Otherwise, the realtor's offer is mine to take or leave. And unless I'm impelled to sell, I have many years of vacations to look forward to, endless days of reading and solitaire in a tent with the Incredible Talking Cats and various loved ones, with vicious horseflies buzzing around outside and showers rattling off the roof. (Not to mention the property's slow appreciation over the full duration of my holding period -- thirty or forty years minimum, or the old Buffetesque "forever"). I've always liked watching things grow.

Why would I sell my property today? Maybe because a computer told me to. Maybe because my margin loans were being called, because my holdings, at least on paper, had fallen in value. Or maybe because I was leveraged up the ass. But as an individual, I have the opportunity of declining all the bells and whistles of modern finance. I can simply focus on growing a portfolio of solid businesses with (largely) predictable operating results, without any regard to program trading, buying on margin, leveraging my equity, trading derivatives or risk, or other kinds of foolishness designed to goose short term performance at the expense of individual control.

- posted by cjb @ 6:54 PM