Has The Market Left You In The Dust?
Has The Market Left You In The Dust?
Here’s What We Will Cover Today
What to do when you’re underperforming the market
Quality Portfolio Update for March
Beat the market - Driving alpha with Data - next steps
1. Is The Market Leaving You In The Dust?
Riding a hot market can be a lot of fun! But if you’ve been investing for more than a hot minute, odds are you’ve found yourself in a place where it feels like the stock market has moved on without you. If this hasn’t happened to you yet, sooner or later it will. Even great investors find themselves in such a pickle from time to time.
Legendary investor, Warren Buffett, has experienced this on more than one occasion. Since 1986 shares of Berkshire Hathaway underperformed the S&P 500 during 13 calendar years. The margin of underperformance during 9 out of these 13 years exceeded more than 10%. The most extreme example was 1999. The S&P 500 was on pace to lock in its 5th consecutive year of returning more than 20%, meanwhile shares of Berkshire Hathaway were sitting in the red. By year-end the S&P 500 was up 21.07% but Berkshire Hathaway was down 19.86%, that’s 40.93% of underperformance. Can you imagine the feeling of missing out on over 40% of returns?! Not an easy thing to stomach, even for long-term followers of the Oracle of Omaha.
But what loyal investors of Berkshire Hathaway know is that Mr. Buffett isn’t one to chase the market, nor does he deviate from his investing philosophy if he finds his strategy underperforming in the short-term.
Low and behold, we all know the Dot-Com bubble popped in 2000 and what ensued was three consecutive years of negative returns for the S&P 500. Over this period of time the S&P gave up more than 40%, meanwhile shares of Berkshire Hathaway climbed by more than 29%. The net margin of outperformance for the time period 1999 - 2002 was a win of 28.5% in Berkshire Hathaway’s favor. This cycle of short-term underperformance to the S&P 500 followed by long-term outperformance was constant for Berkshire Hathaway.
What does this mean for you as an investor. Well it shows you that you have to be patient and give your strategy time to work. Berkshire Hathaway has crushed the S&P 500 since its inception but individual investors could have achieved terrible returns owning the stock if they moved in and out at the wrong times. The moral of the story is to pick a strategy that fits your goals and stick with it through good and bad times.
What To Do If You Find Yourself In This Situation
So what should you do if you find yourself in a similar situation? There’s really only one logical thing you can do, and that is to evaluate your strategy. Are you invested in securities that meet your investment objectives? Do you like the stocks or funds that make up your portfolio? Does the reason you invested in these securities in the first place still hold true? Is your portfolio meeting the objective you intended for it to achieve? If the answer to all of these 4 questions is “yes”, then you do nothing.
If your strategy is working as you intended, and you like the stocks/funds that make up your portfolio, then who cares if the market is moving along faster. Sooner or later the market will go through the next correction and it is pivotal that at that time you like your portfolio, because it will be much easier to stomach the blow having conviction in the positions you hold.
Now if you find that you don’t like your portfolio or you have doubts about the strategy you are following, it’s a good time to re-evaluate. Ask yourself what it is you would like your portfolio to achieve, come up with a simple and attainable goal. Then figure out the simplest portfolio that will maximize the odds of reaching your goal the fastest, while taking on the least amount of risk.
Easier said then done, I know. Remember the acronym KISS: Keep It Simple, Stupid.
What resonates with me is investing in high quality companies, slowly building a growing passive dividend stream, and generating a 12% compounded annual growth rate (long-term). My goal is to have $5 million in invested assets, generating approximately $100k in dividend income and I want to reach this goal in the next 25 years. A 12% CAGR would be sufficient for me to reach my goal without the need to invest any more capital. I realize that I may not be able to attain a 12% CAGR over the next 25 years, therefore I still invest a decent percentage of my earned income across my various brokerage accounts. I believe my goal is attainable, and barring any major hiccups life may throw my way, I should be able to reach my goal faster than 25 years. Fingers crossed!
2. Quality Portfolio Update
Two months ago I revealed the High Quality Dividend Growth Portfolio, made up of 25 stocks that will be tracked in this newsletter for the duration of this year. You can read more about this portfolio here. And here’s another post that covered some statistics for the included stocks.
The portfolio got off to a modest start this year, returning +1.32% in January compared to +1.59% for SPY and +0.14% for SCHD. February looked a little better, the portfolio climbed by +5.83% compared to +5.22% for SPY and +1.84% for SCHD. March wasn’t too great, the portfolio tacked on +1.49% compared to +3.27% for SPY and +4.65% for SCHD.
Year-to-date, the portfolio has a return of +8.81% compared to +10.39% for SPY and +6.72% for SCHD. So its performing well but not keeping up pace with the S&P 500 thus far. The goal isn’t necessarily to beat the market but to generate a healthy return.
The valuation tilted version of the portfolio that places an outsized bet on the 5 most attractive stocks is performing slightly worse. Year-to-date it is up +6.09%, and underperforming both SPY and SCHD.
Here are the latest prices, annual dividends, yields and valuations for each holding. The 5 stocks highlighted in blue are the 5 most undervalued stocks chosen in the valuation tilted version of the portfolio for quarter 2.
Since the last update, Applied Materials announced a dividend increase of 25%. As of March end the dividend growth rate for the portfolio stands at 9.78%, this is a combination of organic dividend growth and already announced increases. The portfolio currently has a 1.56% dividend yield and appears to be reasonably valued as a whole.
3. Beat The Market - Driving Alpha with Data
I bet some of you were expecting the next update in the “driving alpha with data” series today. I have decided to add a valuation technique into the model to hopefully make it even better. I haven’t had enough time to finish accumulating and testing the data. Therefore the last part of the model will be delayed. In the coming weeks I will provide an update on the model portfolios including the valuation technique. Afterwards I will re-select the optimal model and launch a portfolio that will be tracked going forward. The target launch date for this portfolio is May 1st.