Enclosed are the return calculations for your account(s). Where applicable, three, five, ten year and returns since inception are included as well. The S&P 500 returned 1.38% including dividends in 2015. Our composite returned -3.20% in 2015 (individual results may vary). Since inception on 01/01/2000, our composite has returned 220.30% vs. 88.97% for the S&P 500 with dividends. That represents a compound annual return of 7.55% for the composite vs. 4.05% for the S&P 500 with dividends.
The S&P 500 index itself finished in negative territory in 2015. The small positive overall return was the result of the inclusion of dividends. Within the index, only a handful of stocks made positive contributions to the return, among the primary ones were Facebook, Amazon, Netflix, Google /Alphabet. Other industries, particularly energy and commodities, fared quite poorly. The shares of energy companies were down on average more than 23% for the year. The new-year has begun with a sharp sell-off that has continued into February. Those in our industry who make a living forecasting the unknowable – stock market pundits- are busily explaining to anxious investors that the sell-off is either a run-of-the-mill correction after a long period of rising prices or the beginning of a severe decline. Take your pick. Unfortunately, very few of us have been blessed with the ability to peer into the future and ascertain the short-term direction of stock prices. As such, we are left to utilize our more primitive toolkits which include analyzing corporate balance sheets, income statements, cash-flow statements, capital allocation decisions and transaction prices in the mergers & acquisitions arena. In short, what matters and what is knowable.
Based the above-mentioned criteria, we are optimistic that collectively, the securities positions in our managed portfolios are priced to deliver attractive future returns. Within this group of securities is a well-capitalized mortgage insurer, with a high-quality book of insured business, trading a mid-single digit multiple to earnings. We also own a REIT that owns more than 30,000 single family homes throughout the country with attractive rental streams and good appreciation potential. It is doubtful that either business could be purchased at their prevailing prices in the private market, but the current malaise surrounding these industries in the publicly traded markets allow for purchase prices at what are likely substantial discounts to their private market values. What is important for the investor to note is the current malaise is almost certainly transitory, while ability of the aforementioned businesses to earn and distribute meaningful cash- flow to owners is not. This ability to distribute meaningful cash to owners is what will ultimately determine value.