For all of 2013 my 12-18 month Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ returned—that’s appreciation plus dividends—19.66%. In 2013 the Standard & Poor’s 500 stock index returned 32.39%. By quarter the returns on the portfolio were 4.22% for the first quarter, a loss of 1.06% in the second quarter, a positive 8.98% in the third quarter, and 6.48% in the fourth quarter.
With the 19.66% return in 2013, the total return on Jubak’s Picks since inception in May 1997 through the end of 2013 is 420%. The total return on the S&P 500 index for the same period is 192%.
Studying these results—and trying to understand how the year could have been better—during the current scary rout in emerging and other global markets reminds me of the important difference between conclusions and lessons.
Looking at my numbers, I can conclude that my returns would have been higher if I hadn’t carried so much cash all year long. My cash position at the end of each quarter in this portfolio averaged 30% with a high of 34.59% at the end of the June quarter and a low of 23.51% at the end of the December quarter. My coulda, woulda, shoulda calculation shows that if I had invested all of the portfolio at the same return that I earned on the 70% of the portfolio that was invested, the total return for the year would have been 29.62%. Of course, I can’t take that 29.62% to the bank—but this calculation is nonetheless important: It tells me that the major “mistake” I made in 2013 wasn’t in the stocks I picked but in the cash I held.
In 2013 the portfolio would have shown a higher return if I never sold anything (or at least almost nothing) on valuation or on fundamentals. For example, I sold Johnson Controls (JCI) on June 27 at $37.19 for a 47.23% gain since my purchase. But then the stock, which I called fully valued given the softness in its environmental controls unit, climbed another 37.94% through December 31, 2013.
And it certainly didn’t pay to sell battered stocks after an initial rally. For example I sold Yingli Green Energy (YGE) on July 31, 2013 at $3.24 and I was glad to get out of the battered Chinese solar stock 90.59% above the April 3 low of $1.70 a share even if I had bought the shares at $10.76 back in November 2010. The solar sector wasn’t seeing a significant increase in prices because so little capacity was being taken out of production by bankruptcy or consolidation. And then, of course, shares of Yingli Green Energy proceeded to gain another 55.86% through December 31, 2013
So looking backward at 2013, I’d have to conclude that the best thing to have done was to go all in—no cash on the sideline—to forget about valuation and fundamentals, and to never sell.
Are those conclusions useful lessons for 2014?
In most ways not.
Oh, if we hit another monster rising-tides-lift-all-boats rally based on something so powerful as a tsunami of central bank cash, then I think you’ll be well advised to remember my conclusions about 2013 and apply them as lessons to the market of 20XX. If you think you’ve absolutely identified a new market that is close to identical with the market of 2013, then yes, you should go all in, play the momentum of cash flows, and to the devil with fundamentals and valuations.
If you’ve been in the markets for a while, you’ll recognize how profitable that strategy can be if you correctly characterize the market, and how difficult and potentially dangerous getting the timing wrong can be. I remember very vividly throwing valuation to the winds in 1999, a year when the NASDAQ Composite Index returned 85.6%. Jubak’s Picks actually beat the index that year. And next year, when the NASDAQ Composite lost 39.3%, my portfolio beat the index again—to the downside.
Getting this kind of big picture market call is hard—and to make it pay you have to get it right on the upside and on the downside—and there’s definitely a price to pay on the downside for deciding that you can ignore valuations and fundamentals because the momentum is strong enough.
Going into 2014, it’s hard for me to argue that the momentum that drove the market up in 2013 will be as strong as it was last year. The Federal Reserve is reducing the new cash that it throws at financial assets—and that’s a big deal since the Fed’s monetary stimulus was a key to asset performance in 2013.
Looking back at 2013, I do remember gradually relaxing my valuation and fundamental standards as the year rolled on. In retrospect, I wish I’d relaxed them sooner and that the performance of the portfolio came closer to the S&P 500 index. But while I relaxed those standards—stretching for a target price, for example, because I didn’t want to too early sell into last year’s momentum—I didn’t abandon them. That certainly cost me some return in the short run.
Going forward, though, I don’t see any reason to pay less attention to fundamentals and valuations in 2014 than I did in 2013. I think it’s still likely that we’ll have a decent year in 2014, but, as the first weeks of the year demonstrate, performance in 2014 is likely to come with more downside risk than in 2013. If only because 2013 moved stock prices up to historic highs. And when the risk is higher and the potential gains likely to be more modest, I think it’s a good time to remember proven lessons rather than to get fixated on the conclusions from the immediately prior year.
On January 14 I announced that I would rebalance the portfolio—I decided that in order to keep the portfolio down to a manageable number of stocks, I would increase the size of each position from $12,000 at the initial buy to $14,000. To accomplish that I added $2,000 in shares to each position at the January 14 closing price. That reduced the cash position in the portfolio to 12.73% from 23.51% at the end of December.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
No related posts.