3 DGR Portfolio: Swing And Miss
But I'll be swinging again very soon.
3 DGR Portfolio
For those of you who have been following the newsletter since around this time last year, you may recall my “Beating The Market” series. Here are some links to refresh your memory:
It’s hard to believe that in just a few days, the portfolio will complete a full year. It’s been an interesting ride, to say the least. The strategy didn’t play out quite as expected, but I’ve had plenty of time to reflect on the process. Let me start by going over how things turned out, and then I’ll share what’s next.
Results
Right out of the gate, the portfolio struggled against a tech-driven S&P 500. It closed its first month (May) with a gain of +1.27%, while the S&P 500 (measured by SPY) posted a gain of +5.06%—already a 3.8% underperformance.
In the second month, the story was similar: the portfolio fell by -0.35% while SPY rose +3.53%, resulting in another 3.88% setback. Two months in, and the portfolio was trailing SPY by 7.85%. Not the start I was hoping for.
In the third month, we finally saw some signs of life. The portfolio gained +5.43% while SPY gained +1.21%, an outperformance of 4.22% that narrowed the gap to -3.69%. The rest of 2024 was a mixed bag of wins and losses:
August: Portfolio -0.05%, SPY +2.34% (o/u -2.39%)
September: Portfolio +3.60%, SPY +2.10% (o/u +1.50%)
October: Portfolio -2.94%, SPY -0.89% (o/u -2.05%)
November: Portfolio +7.25%, SPY +5.96% (o/u +1.29%)
December: Portfolio -6.84%, SPY -2.41% (o/u -4.43%)
By the end of 2024—eight months in—the portfolio had a total return of +6.83% compared to SPY’s +17.89%, resulting in an 11.05% underperformance. That’s a significant gap and unlikely to be closed in the final four months.
2025 Performance (So Far)
In 2025, the portfolio has outperformed SPY every single month. It hasn’t been enough to pull ahead in total return, but the margin has shrunk meaningfully:
January: Portfolio +4.04%, SPY +2.69% (o/u +1.35%)
February: Portfolio +1.21%, SPY -1.27% (o/u +2.48%)
March: Portfolio -4.22%, SPY -5.86% (o/u +1.64%)
April*: Portfolio -2.15%, SPY -2.28% (o/u +0.13%)
*through April 24th
Year-to-date in 2025, the portfolio has a total return of -1.31% versus a -6.73% loss for SPY—an outperformance of 5.42%.
Full 12-Month Performance
Combining the full 12 months, the portfolio’s return stands at +5.43% compared to SPY’s +9.95%—an underperformance of 4.52%.
This is, of course, disappointing, but it’s also the reality of investing. A backtest can look fantastic, but it’s never a guarantee of future returns. I don’t believe the model is at fault here; it was based on sound principles and made conceptual sense. Just because it didn’t work out this time doesn’t mean it can’t generate strong returns in the future. One year of underperformance is just a speed bump in a long-term investing journey.
Strategy and Model Portfolio
As I mentioned earlier, I’ve had time to reflect on both the process and the model itself. There are definitely areas for improvement that I hadn’t considered last year.
The primary area for improvement is in the valuation component. If you recall, the original strategy used Free Cash Flow Yield (FCFY) as the key valuation metric. A better approach might be to evaluate each company’s valuation individually using FCFY, rather than comparing them against each other. This aligns more closely with the research I’ve been doing lately within the broader investable universe and can be applied to this strategy as well.
Next Steps
I’m a bit torn between running this model again with some tweaks or exploring a new idea I’ve had for a more long-term portfolio based on the work I’ve been sharing in the newsletter.
Part of me wants to give this model another shot, to redeem itself—but if I do, I want to have some skin in the game. On the flip side, I don’t want to spread myself too thin by managing too many unique portfolios, especially if the capital allocated to each isn’t large enough to be meaningful. To be fair, the $8k allocated to the 3 DGR portfolio was less than 2% of the total pie, so not that impactful.
I think what I’ll do is run this model for another year, using the original capital and applying the few improvements I believe will enhance its efficiency. As for the long-term, newsletter-based portfolio idea—I’ll pursue that once I’ve had more time to fully develop it.
Unless I change my mind in the next few days, you can expect to see the construction and implementation of Year #2 of the 3 DGR portfolio documented here soon.
Full Breakdown
Once the full year is complete, I’ll also provide a more detailed breakdown of the results for both the portfolio and the broader investable universe the portfolio was selected from.
looking forward to the updates