How to Measure Your 2009 Performance

2009 is drawing to a close. Whether you are a professional money manager or an individual investor, it's time to measure your performance for 2009. This is a time when you can bask in your glory while also reflecting upon your mistakes.

First, let me reiterate the Finance Professor's Portfolio Grading System. This system incorporates both absolute and relative performance measures. (Please note: Performance should be calculated after you subtract all fees and expenses.)

Grade A: Your rate of return substantially outperformed your benchmark by more than 5 percentage points.

Grade B: Return performance beat your benchmark by at least 0.25 percentage points but less than 5 percentage points.

Grade C: Return performance met your benchmark (or was within a reasonable margin of +/-0.25 percentage points).

Grade D: Return performance was below your benchmark by at least 0.25 percentage points but less than 5 percentage points.

Grade F: Return performance was substantially below your benchmark, by more than 5 percentage points.

Add a "+" to your letter grade if you were profitable and a "-" if you lost money.

My grade is an A+ for 2009, and you can take a closer look at my performance on my LakeView Asset Management Web site.

The most important thing is to properly select a benchmark. If you are investing in a broadly diversified portfolio of stocks, perhaps the S&P 500 is your index. If you prefer to invest in small-capitalization stocks, you might select the Russell 2000. Bond portfolio managers might seek to benchmark their performance again the Barclays Capital U.S. Aggregate Bond Index, which can be replicated to some extent with iShares Barclays Aggregate Bond ( AGG).

For example, let's suppose that you made 28% this year, and your benchmark is the S&P 500, which for purposes of this example rose 25%. You would receive a B+ as a performance grade this year, because your return performance beat your benchmark by 3 percentage points and you were profitable.

Now let's try to examine some of the root causes for this year's over-and-under performance.

1. Timing, Opportunity and Fear

When a client called me in March to ask if it was time to head for the exits, I told him I wouldn't blame him for doing so but that it was a once-in-a-lifetime opportunity to get aggressive in the stock market. I said we should swing for the fences. We did, even adding a little leverage, and he is up more than 60% this year.

Too many investors sold out when it was too late and vowed never to get back in. If so, you missed a huge move, the likes of which may not afford itself to investors in a single year for generations to come. As Warren Buffett wrote in a 2008 New York Times piece, "Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."

Which investor were you: the opportunist who saw the fear in other people's faces or the one who acquiesced to the fear reflected in your own mirror? Opportunists outperformed in 2009; the fearful underperformed.

2. Bucking the Recession

Each and every recession has a company or sector that is able not only to withstand the debilitating effects of the recession but also to grow despite the economic slowdown. Exxon ( XOM) (then without Mobil) was able to do so during the recession of the late '70s/early '80s. Starbucks ( SBUX) bucked the recession in the early 2000s, though it wasn't so lucky in the most recent recession. This go-'round, Apple ( AAPL) and Google ( GOOG) broke free of the recessionary forces of gravity and grew revenue and earnings. Did you do the necessary research to put you into such names? If so, you likely outperformed this year.

3. Emerging Markets

While conventional wisdom dictates that the U.S. pulls the rest of the world out of recession, in 2009 it was the emerging markets that led the way.

Take a look at this chart comparing the S&P 500, the iShares China Index ( FXI), the iShares Brazil Index ETF ( EWZ) and the iShares Emerging Market Index ETF ( EEM). Clearly, 2009 was a year to have exposure in the emerging markets. If you did, then you also likely outperformed.

4. Retail

The consumer was supposed to have been buried in a final resting place in 2008. Home prices plummeted, credit was scarce, and jobs were lost. But one thing I've learned about consumer behavior is that American consumers are far more sophisticated than we give them credit for. They looked for bargains. They separated wants from needs. But they still spent.

As a result, investors could not be totally absent from the retail sector. They had to be as selective as the consumer. Target ( TGT) was in; Wal-Mart ( WMT) was out. Had you followed the consumer to names such as Urban Outfitters ( URBN) and Sears Holdings ( SHLD), you likely outperformed for the year. The former was in the antirecessionary group mentioned above; the latter had a remarkable comeback in 2009.

Investing is all about anticipating. In my next article, I will look ahead to some investment themes that could play out in 2010. Until then, thanks for reading The Finance Professor in 2009, and have a most happy and healthy New Year.