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The Jubak’s Picks, my 12-18 month portfolio, returned 3.9% in the fourth quarter of 2009.

That trailed the major indexes. For the quarter the Dow Jones Industrial average climbed 7.4%, the Standard & Poor’s 500 was up 5.5%, and the NASDAQ Composite was up 6.9%.

For the year the Jubak’s Picks portfolio was up 21.3%.

That was slightly ahead of one major index, but behind the other two. For 2009 the Dow Jones Industrials were up 18.8%, the Standard & Poor’s 500 was up 23.5%, and the NASDAQ Composite rose 43.9%

The portfolio’s total return since inception on May 7, 1997 is 1997 is now 282%.

My problem all year was that I never quite trusted this rally. In retrospect I was dead wrong. The rally that began in March 2009 was (or maybe that should be “is”) one of the great recovery rallies in market history.

How great?

Well, it’s taken the sell-off of early 2010 to take the performance of this recovery rally down enough so that as of February 12 it merely matched the 1982 recovery rally. That rally ushered in what turned out to be an 18-year bull market.

So after the recent correction this recovery rally is only tied for the greatest recovery rally in market history.

It’s hard to match the performance of that kind of market rally when you don’t trust the rally and continue to hold a big chunk of cash out of the market. Jubak’s Picks ended the third quarter of 2009, for example, with 27% of the portfolio in cash. I put some more in work in the fourth quarter but still finished that period with 20% of the portfolio in cash.

If you’re holding 20% cash and want to match the 7.4% of the Dow Jones Industrials for the fourth quarter, your stock picks need to return about 9.3% for the period. Mine clocked in with a 4.25% return if you eliminate the drag of cash.

For the year my large cash position didn’t cause nearly as much underperformance (unless, groan, you compare it to the NASDAQ Composite.) That’s because by being 40% or so in cash in the first quarter of 2009, I didn’t take nearly as big a hit as the major indexes did when the market continued its swoon in that quarter. For that period the Dow Industrial Average was down 13.3% and the S&P 500 was down 11.1%. The NASDAQ Composite dropped just 3.1%

The lesson here is pretty obvious, I think. When you’re in the midst of the greatest recovery rally of all time (or the one that’s tied for greatest, at least), nothing beats putting all your cash on the table and riding the hot hand.

That’s not to say that I couldn’t have done better even with this cash position if I’d done a better job of stock picking.

If you doubt the rally, of course, you sell some winners too soon.

For example, in the third quarter I sold Joy Global (JOYG) on September 22 at $49.54 after roughly a 33% gain in a month. I closed the year just $2 a share higher. But then proceeded to tack on another $8 a share by February 12. That’s a 20% gain I could have picked up with perfect hindsight.

And sometimes I definitely sold a winner because the gains made me nervous and switched into a seemingly safer stock that then went ahead and dropped faster than the winner I’d sold. So far my buy in the fourth quarter of Ritchie Bros. Auctioneers has definitely worked out that way.

I mention all these mistakes not so much to beat up on myself—I by and large haven’t found self-flagellation a useful investment technique—as to illustrate an important investment lesson.

The past does influence the way we invest in the present. And it’s awfully hard to put money into stocks just after a bear market has kicked the stuffing out of your portfolio and delivered a stiff kick to your self-confidence.

In reality, although I wish I’d matched the indexes this year, I’m pretty proud that I managed to stay invested to the degree that I did. Yes, 20% or 30% cash was a lot of carry this year, but it sure beats being 100% on the sidelines. And looking back at 2008, the sidelines looked very tempting this year.

I didn’t stay on the sidelines not because I’m an especially courageous investor. I don’t think I am, in general.

But I do know my market history. I do know that one of the reasons that bear markets are so devastating to investors’ portfolios is because investors stay on the sidelines nursing their wounds during the most powerful stages of any recovery rally. I was determined not to miss out on all the goodies if this rally turned out to be the real thing.

And I know that the other reason that bear markets are so devastating is that investors who miss the bulk of a big recovery rally are then driven by regret into plunging whole hog into the recovery rally just as it peaks. They then get killed in any subsequent correction. Or absolutely massacred if the recovery rally doesn’t usher in a true bull but instead turns out to be a rally in a long secular bear market.

So I’m relatively happy with my 21.3% in 2009. I’m not scarred by missing out on all the fun and I might even be able to play it appropriately safe in 2010 for what promises to be a very, very tough year to read.

By the way, I don’t think the rally of 2009 has by any means put a definite end to the possibility that we’re in a long term bear market that began in 2000. Remember that the last great bull market ran for almost 20 years. A secular bear could last just as long.

And a three or four year bull market rally inside a secular bear wouldn’t be unheard or either.

I’m going to take a look at what we know about long-term bear markets and long bull market rallies inside long-term bear markets in a post on Friday.

In the meantime, here are the traditional Jubak Picks long-term performance numbers.

For the three years that ended on December 31, 2009 the portfolio is up a whopping 0.5%. That’s not an annualized return. That’s the total return for the period.

Terrible until you compare it to the 21.4% loss for the S&P 500 during that three year period. That’s the loss even after the huge recovery rally in 2009. That’s how tough this huge bear market has been on investors.

 Looking back five years—a period which takes in some of the recovery from the bear market that began in 2000 but none of the losses from that bear–Jubak’s Picks is solidly in the black with a return of 52.97% versus a 7.98% loss for the S&P 500. Since inception on May 7, 1997, Jubak’s Picks is up a cumulative 282% (versus a 37% return for the S&P 500.)

 I’ll post my usual charts of long and short-term returns in the next day or so when I migrate this post to the left hand performance report link.

I’m sorry that it’s taken so long for me to post fourth quarter and 2009 performance numbers. I’ve had to convert all my records to a new system of performance tracking in the last three months. That’s taken time. (And is not yet complete.) I’ve double and triple-checked these numbers and I don’t think that I’ve missed anything. But if any of you who do track my portfolios on your own (and you’d be surprised how many people do) think you’ve found an error, please e-mail me at and I’ll dig into the discrepancy. Thanks as always for reading and for paying so much attention to the details. It’s actually very comforting to know that so many people watch so closely.