this weekend’s notable headlines:
Subscriber:
At (nearly) the halfway point of the year: 186 US-listed issues are trading at their annual high price versus just seven at their annual low; there is no longer any risk of a massive tax “hike” or default on the national debt in the foreseeable future; the war in the Middle East is essentially over; and Elon Musk has started a new political party. Also: war in Europe rages on, as does the trade war launched by the President on April 2nd. So while things have stabilized somewhat, future inflation—and therefore government borrowing and interest rates—remains unstable and unknowable. By a lot.
Which does not mean that people will refrain from trading on hunches/opinions/insights, mind you, even though doing so makes no sense, mathematically speaking—and guarantees losses, historically speaking.
You know what also makes no sense? The data.
For example, on Wednesday, payroll giant ADP announced that the private sector had lost 33,000 miles in June. A day later, however, the Labor Department reported that 147,000 new jobs were addded that month, more than half of these in the private sector.
Is the economy really solid, then? Is the Trump Golden Age upon us? Are we not, as has been asserted here so often, trapped in a stagflationary vortex in which every penny of economic growth is borrowed—and then some? Well, the answers now depend on if you trust the government or the private sector. Of course I’d bet on the latter, because doing so would (finally) put me in the company of JP Morgan Chairman Jamie Dimon, who last month told analysts he doesn’t trust the official numbers, as well as Fed Chair Jerome Powell. Per an article titled “Why some fear government data on the U.S. economy is losing integrity,” which was published in The Washington Post three days ago:
Which just underscores the importance of trusting audited financial statements over a minimum of several years’ time rather than the Labor Department—or any other bereaucratic-political construction. After all, if economists could see into the future, most everyone at the Fed would be a billionaire.
The question that nags the intelligent investor this weekend is not, however, whether the government is corrupt, or whether jobs were added or subtracted from the economy last month, but whether holding stocks is an endeavor in which there is much to lose and little to gain? We did not think so when we restarted the newsletter portfolio in March, though the very highly priced domestic stock market was marginalized (only three of its ten components are based in the United States. Thankfully, and unlike most institutions and many individuals, we are not bound by the walls of some Allocator Alcatraz.) That portfolio, aka iteration number eight, closed on Thursday, as promised. Here’s how it went:
Ergo our “gamble” on stocks paid off. Some observations:
Since inception nearly five years ago, our concurrent portfolio has returned an average 22.6% annually versus 14.1% for the S&P 500, both including dividends.
At these rates, $100,000 invested in our portfolio would equal $277,000 at the end of five years versus $192,000 in an S&P 500 index fund like SPY—a difference of 44.3%
We achieved this superior performance across eight, discrete portfolios largely made up of small and medium-sized companies and with no weighting.
We sat out the market for a total of nearly two years, in which our money made comparatively little return, i.e. 1-5% annually, reflecting what a money market fund would pay for cash.
Our new average return—22.6%—is strikingly close to the average annual return of the most prominent Graham-related funds—i.e. the Graham-Newman Partnership, the WJS Partnership and the Buffett Partnership (which became Berkshire Hathaway)—all of which returned 21% over decades.
I’m not sure which of these points is more impressive though I should qualify the fourth. The first “time out” was intentional; the market then seemed bubblicious. The other two timeouts were not related to market timing; I simply had shifted my focus to the Fund and was convinced that having another portfolio might be a conflict of interest. I no longer think so because one informs the other. Anyway, the portfolio would have done even better had I just kept the portfolio invested (as I did the Fund).
Here’s another observation I think is important and rarely observed: the instinct to bemoan “mistakes” is counter-productive. Rather than belly-gaze, I’d rather believe that Portfolio 8.0 was perfect—well worth the wait in fact. Yes, GRG (a restaurant no less, and, yes, I’ve preached against investing in those!) was a big loser but it fit the approach as did the others. And they performed spectacularly well—up nearly 15% in about three months, with no momentum or trendiness for tailwinds—as a group. Bemoaning GRG’s loss would be like an insurance executive fixating on the one customer who got into a car wreck. It’s called a risk pool because risks are minimized, not obliterated. Someone’s gonna crash.
So let’s continue, shall we? But with the next iteration, rather than select a small number of stocks from our investable index, let’s start with the all 49 components and whittle them down to twenty or so by the end of the year. Beginning tomorrow. Because 1) I like experiments; 2) even though six months is a compressed time period, I hope that Portfolio 9.0 will show that I possess no special insights, i.e. there’s not much value to my curating once investables are identified; 3) I’ve written a lot about how this approach is more about recognizing wrongs quickly more than being right and this is a terrific test of that principle because all that we’ll do for the next six months is identify mistaken assumptions; and 4) this should be easier to play along with, i.e. a “virtual portfolio” of sorts.
You’ll find the components listed behind the paywall. As always, our cost basis will be the average of Monday’s high and low trades.
Also: in order to make the newsletter more valuable to my beloved paying subscribers, i.e. more exclusive, the price for new subscriptions is increasing to be more inline with lesser publications. As of next week some time, the annual price will jump to $2260, or $200 per month—in other words, what you would have made in a year on a $10,000 investment with our portfolio. I am adjusting the price of the 16-class Graham course down to the same amount.
As to whether holding stocks now is an endeavor in which there is little to gain and much to lose? I really don’t know. Despite the Administration’s recent wins, the trajectory of the American economy remains mathematically unsustainable while asset prices are near all-time highs, and risk assets especially. This is not bad for everyone, mind you. The American economy is so gargantuan that some companies will benefit as consumers downshift. The problem is that this will be a small list. And a fast stock market downshift would affect everything. As Ben Graham admonished, and I paraphrase, the greatest risk is holding small stocks during market bubbles.
So waiting for big bargains, as Warren Buffett is doing, is sensible. But his options are far more limited than our own so we’ll continue to forage overseas, selectively and with caution.
James
p.s. a few years ago I decided to make a couple of predictions here, one of them being that EV mania was just that. This morning The Wall Street Journal rang the death knell for American EVs, observing: “Not even bargain-basement deals are enough to entice U.S. drivers to go all-in on electric vehicles.”
Keep reading with a 7-day free trial
Subscribe to The Intelligent Newsletter to keep reading this post and get 7 days of free access to the full post archives.