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My long-delayed report on the Jubak's Picks portfolio for 2012
04/29/2013 6:22 pm EST
Yes, on an absolute basis the portfolio badly lagged the Standard and Poor’s 500. The return on that index was 16% for 2012.
However, a good part of that lag—about half—was a result of the big cash position in the portfolio. The portfolio ended 2011 37% in cash and, after a year of trying to put money to work at good value I ended the year at 29% cash.
Doing some rough what ifs for 2012 on the effect of holding all that cash I get an 11.74% return on the money that the portfolio actually had invested in the stock market in 2012. That still trails the return on the S&P 500 but not nearly as badly as the actual portfolio did.
Besides depressing returns for the portfolio that cash position also lowered the volatility and the risk in the portfolio. So in theory you got lower returns but slept better at night.
I’ve always felt a certain amount of ambivalence about risk-adjusted returns.
Yes, I do believe risk-adjusted returns matter. If you shoot for the moon and hit it, you’ve had a great year. But that doesn’t justify shooting for the moon all the time. It’s a high-risk strategy that will catch up to most investors over time.
But, on the other hand, I haven’t yet found a grocery store that will give me more groceries or a car dealer that will give me more car because I’m paying in risk-adjusted dollars. At some point, a dollar is a dollar is a dollar. Risk adjusted or not.
And then, of course, let’s not forget that even accounting for the big cash position in Jubak’s Picks, the portfolio still trailed the S&P 500 in 2012.
Certainly the portfolio’s high cash position wasn’t to blame for all of that underperformance—it’s hard to match the index when your picks include Nokia (NOK) and OncoGenex (OGXI.)
What else went wrong in 2012?
I think the biggest problem was an extension of the reason I held so much cash. If you don’t trust the market—and I didn’t in 2012 and don’t trust it much in 2013 either—you look for the esoteric rather than the middle of the road. And you certainly never buy something that feels over-valued.
The problem in 2012 was that the middle of the road performed quite well thank you. And that waiting for a bargain in the middle of a rally winds up creating a huge opportunity cost.
On the esoteric side, it meant that I bought MGM Resorts International (MGM) because it liked the deleveraging that a market flush with cheap money allowed the company to achieve. Not a horrible pick—the stock was up 11.6% in 2012, but it still trailed the index. I liked SeaDrill (SDRL) because it had leveraged its way to a leading position in the deep water drilling sector—and because it’s high dividend gave me insurance, I felt, in any down turn. Again not a bad pick—up 21.3% in 2012.
But I could have done better, much better, by going more mainstream in this rally. Marathon Petroleum (MPC), a refiner positioned to take advantage of the mid-continent oil and gas boom, was up 93% in 2012—but I could never bring myself to actually put it in the portfolio. I kept waiting for the dip that would let me get in at a more “reasonable price.”
Or Cheniere Energy (LNG), another stock that I kept writing about but couldn’t bring myself to buy. It was up 116% in 2012.
All this is 20-20 hindsight, of course. Even if in hindsight I think I should have seen more of this coming in 2012.
The danger right now, of course, is that my experience of 2012 will color the way that I invest in 2013 even though 2013 isn’t the same as 2012. Yes, I’d sure like to make up lost ground, but that doesn’t mean a knee-jerk buy of the stuff I wish I’d bought in 2012—just because I didn’t buy them then. Right now, in fact, if you compare this point in 2013 to a year ago in 2012, I think you should reasonably conclude that growth is dodgier in the Eurozone and China than it was a year ago. That valuations look more stretched, given the likely slump in earnings growth in the first and second quarter of 2013 due to slower global growth and the effects of the sequester. And that this bull market seems to be showing its age with sentiment starting to look for a correction in the summer.
2013 is it’s own year—not a year to correct the mistakes of 2012.
I’ll have a report on the first quarter of 2013 up sometime in the next week of so. Let’s see how I’m doing this year. (And I’ll try to include more detail on returns for the portfolio against other indexes and for more time periods. But I just wanted to get something up on 2012 before we got to 2014.)
The long-term return (which includes dividends and reinvested dividends) on the Jubak’s Picks portfolio since inception in May 1997 was 334% as of the end of 2012. That compares to a gain (which does not include dividends) of 71% on the Standard & Poor’s 500. Including dividends and reinvested dividends the return of the Standard & Poor’s 500 during that period was 125%. (In case you were wondering if dividends count.)
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 did own positions in Cheniere Energy, Marathon Petroleum, and SeaDrill as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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