A question that is often asked is, “Why do your returns vary so much from year to year?”

Our reason is that the portfolio is relatively small. Generally, the fewer the number of stocks in a portfolio, the more susceptible it is to price volatility. Fortunately, even with the raging ups and downs of the general market, the President’s Portfolio has been hit by negative returns only four times since 1990. This is a record of which we are extremely proud.

Our experience is that the valuation cycle — from an undervalued, out-of-favour stock at the time of purchase, through the period of recovery to full value and our sale — is irregular. Quite often, the market is slow to recognize the improvements in a company’s fundamentals — but when sentiment shifts, it often does so dramatically, as institutions and brokers gravitate towards strong performers and propel them even higher.

For this reason, turnaround situations often more closely resemble the so-called “J-curve” of successful venture capital funds, than the more linear progression of their big-cap, “growth” brethren.

It stands to reason that, at any point in time, the companies in our portfolio will be at different points in this valuation cycle. When it happens that a large proportion of these stocks are toward the end of this process and are appreciating rapidly, we end up with another of those banner years.

This natural variability is amplified by the effect of takeovers. Often these occur at substantial premiums, and they are responsible for some of our best profits.

Finally, a year is a very short time frame. Over the long term, things tend to balance themselves out. That is why 10- and 20-year numbers are so important: the longer the term, the more merit you’ll find in the results. And our long-term figures certainly speak for themselves!

* The Contra Portfolio uses a simple rate of return to tabulate the results. It takes the dollar value of the portfolio at year end and compares it to the dollar value at the beginning of the year. This methodology includes the influence of holding cash as well as paying withholding taxes on US dividends, trading costs, etc. To keep things straightforward, no funds have been, or will be, added or withdrawn. Figures are pulled directly from a discount broker statement. The VPP also used a simple rate of return methodology which includes the influence of cash and trading fees but, unlike the Contra Portfolio, it excludes the cost of withholding taxes on US dividends. The PP methodology employed a time-weighted internal rate of return which removes the influence of cash to convey how one’s stock picks line up against the market. All returns are calculated in Canadian Dollars. Past performance is not indicative of future results.