Good Evening. As a pre holiday gift to you all I wanted to take a moment and reflect on
the year that was. It’s not over yet of course, and a blog will soon follow going over Q4
statistics in depth as well as how the JSPM-Omaha Growth Model has performed
relative to the market indexes, but now is a good time to remind readers that this is as
good as it gets. Not in the real world of course, just in terms of the stock market. If there
were ever a year where Wall Street and mainstreet diverged, there is no better example
than the present.
In the past several days I have heard from several JSPM Clients. Paraphrasing some
messages I have received, the majority are of the euphoric variety:
“OMG!!! I just saw my account!”
“Damn you guys are good!”
“It’s going to be a damn good Christmas at the Jones household!”
There is no harm in being excited about money made in the markets. We should be,
provided we know and understand that what is going on in equities as an asset class
right now is not the norm. Returns in excess of 100% YTD is not to be expected and
likely won’t happen again for some time. If you are new to this, a word of caution is as
follows:
Stocks as an asset class generally return 8% a year on average. Yes, it pays best to
own the standouts and yes you can expect us to continue doing just that. But nobody
should expect this kind of performance year after year. This is coming from a guy who
runs a portfolio geared towards outperformance. We charge a fee to clients based on
outperformance and we have delivered. We will continue to, but I don’t want folks to
expect that a portfolio should double every year. If that is happening, you are taking on
far too much risk, and that is a recipe for disaster.
Years ago when developing my portfolio management strategies, I devised a plan to
find stocks in the sectors exhibiting relative strength, and overweighting those best in
class in those areas. My own personal system ranks stocks in terms of precious stones:
Diamond, Ruby, Emerald, Sapphire.
Individual names in these groupings have the best sales and EPS growth, often high
free cash flow, higher than average ROE, strong institutional sponsorship and so on.
Those names are the ones that led us out of the mess we found ourselves in this spring,
and they continue to do just fine. The problem now, is that stocks with other group
rankings are up 10,15,20% a day.
Cement, Glass Shards, River Rock.
Stocks with little to no sales and EPS, in debt, high short interest, probable fraud, etc.
are blasting off as if their underlying fundamentals are rock solid. It’s a chase for
performance into the end of the year, and anything with a ticker symbol and a pulse are
returning astronomical sums of money in the form of short term capital gains. This won’t
last of course, and everyone this market vacuuming up will shortly be spit out, leaving
them to wonder what happened.
If you have seen my blogs in the past laying out the risk cycle, you’ll understand what I
mean. Here is a look at where the risk cycle is as we speak:
Redlined. You know what happens next. You run out of gas, get pulled over or blow the engine. There is no permanent red line, the foot will come off the accelerator sooner or later. Everyone I know is now sending me stock picks of the God awful variety. Everyone is part of some stock trading Facebook group or making thousands a day on Twitter. I’m not mad about it, I’m simply cognizant of the fact that when the market makes everyone an expert, it is shortly about to teach them a lesson. It has happened to me plenty oftimes, and it won’t again. Too much is at stake now, and managing risk is of paramount importance.
I don’t want this message to be misconstrued. I am not bearish, not even a little bit. In markets and in life I’ve always been an eternal optimist, believing the best days are always yet to come. I promise the best days lie ahead, but do yourselves a favor and take this as a reminder that markets don’t get any easier than they are right now.
Between now and the end of the year, I’m giving you a homework assignment: Take a look at your YTD returns. Whether it is you managing your own capital or someone else ,take a moment to spot check how you are doing in relation to the index of your choice. If you are younger, not yet retired and still have years ahead of you to invest, you likelycan suppose you are in a high percentage of stocks. If you are retired or close, you likely have a portfolio of the 60/40 stocks/bonds weighting. If capital preservation is your goal, the numbers which follow may not be as important, but will still give you a good idea of what you might expect:
SPX Index: 14% YTD (a bit higher than historical avg)
DJX Index:5% YTD (on par with historical avg)
IWM Index: 21% (on par with historical avg)
NDX Index: 45% (please don’t expect this again)
This is just a gentle reminder that what the market gives, it can and will take away just as fast. Please make sure you have a system of risk management that makes sense and is in alignment with your own personal goals. Allow yourself to enjoy your hard earned gains, but remember that defense can and will win games.
As an aside we are currently accepting accounts with minimums of $50,000 through our MyPortfolioFix website for a short time only. Reach out to us anytime if you have questions. We love all current and prospective clients alike, except the ones sending us stock tips at all hours.
We’ve got that covered.
Stay safe. Trent J. Smalley, CMT
JSPM Portfolio Manager