February 2023 Newsletter
After a big relative win in 2022 (7.6% over performance), I feel pressure to continue the winning streak, especially because I write a newsletter! The reality is that I (and you) can’t always be a winner. There are good years and bad years. It’s only in the long run that you can really determine if you’ve been doing things right. For now, a big win is nice but I do recognize that last year’s overperformance is concerning because it wasn’t intentional and that means that I could have just as easily underperformed by the same amount had my strategy been wrong. I normally only want to win by 2-3%, otherwise, the risk required to achieve higher returns is too dangerous.
However, I see an opportunity in the recent Bear Market (market loss of 20% or greater) and as a result, I will try to overperform my normal targets (intentionally) this year. Not by a whole lot, but at least a bit. I’m basing this approach on the premise that the chances of two Bear Markets in a row are slim. I plan to achieve this through my Bear Strategy, which I describe in detail in my October 2022 Newsletter. Essentially, I am overweight the Communications Sector and slightly leveraged by 3%.
I am Rebalancing… Why?
I don’t typically rebalance the portfolio at the beginning of the year. Still, because of last year’s overperformance, it’s likely a good time to set everything back to sector weights and adjust any running strategies. Market weighting is always moving around and so is the portfolio, and given enough time, things simply get out of whack and performance suffers or surges uncontrollably. Measuring strategies gets really difficult if all your sector weights are off. It’s truly a necessary portfolio management function, that needs to be done from time to time.
Due to the size of my portfolio, rebalancing is a time-intensive process that requires me to review each position and determine if I should shave or add to it based on the sector weightings found in my S&P 500 benchmark. I only do this once or twice a year knowing that typically, the more you mess with a portfolio the more likely that emotion and bias will lower your returns.
I’ve included Table 1 below, which identifies the results of my portfolio rebalancing. Many positions are now pretty close to the benchmark. The big exception is the Communications Sector, as it’s part of my Bear Strategy and is very overweight. During the rebalance, I also increased my Technology Sector significantly to almost full weight, reflecting lower market risk in that sector after the sell-off.
| Sector | S&P 500 Weight | Portfolio Weight |
|---|---|---|
| Utilities | 3.1% | 0% |
| Real Estate | 2.8% | 2.5% |
| Industrial | 8.6% | 8.9% |
| Financial | 11.8% | 14% |
| Technology | 25.9% | 23.4% |
| Consumer Discretionary | 10.2% | 9.9% |
| Health Care | 15.2% | 15.1% |
| Consumer Staples | 6.9% | 5.9% |
| Materials | 2.8% | 1.6% |
| Energy | 5.2% | 5.8% |
| Communications | 7.5% | 12.8 % |
January 2023 Performance
In January, my portfolio continued to perform neck and neck with the market benchmark. My oversized bet on the Communications Sector has started to pay off; it is up 20% in the last month or so. If you recall, I hypothesized that a recovery after a Bear Market would propel the biggest losing sectors ahead of everything else. The approach is not anything earth-shattering, it’s been observed time and time again; people simply forget history. The better question is when should I unwind the strategy? Another question is if the strategy is successful, then why am I just meeting market performance? It’s uncertain at this time and too early to really start making inferences on performance. Nevertheless, it’s an interesting trend to observe and follow.
Looking Forwards
I am feeling positive knowing that it would be very unusual to have another bad bear market year. The 20% decline in 2022 was rare, making a strong probability for a positive 2023 year. It’s not surprising to me that January has started really strong.
What about a recession? From an economist’s perspective, we technically already fell into a recession in previous quarters and now GDP is growing again. Recessions are not usually noticeable until things get terrible and are what Central Banks need to cool down inflation. Inflation has been falling, so Central Banks may not need to keep their foot on the brakes for long. There continues to be a lot of unusual nuttiness as it relates to the macro side of the economy, so there are some unknown risks that are surely waiting to jump out at us. However, these are risks that can occur anytime, so how is this different than any other day? However, volatility is likely to stay high.
I think that there will be some reversion to the mean. US stocks may not do as well as foreign or Canadian stocks after many years on top. I think a rotation into another class of stock may be on the horizon, perhaps boring value stocks, small caps, or even emerging markets… who knows. If rates can stay stable at higher levels, that would be good for the Financial Sector. The near-zero percent rates that we previously experienced aren’t good for the economy, contrary to what many believe. It’s normal to have 4-7% interest rates, we’ve had them before, and all was good. As I said, there is still lots of nuttiness out there, so we will have to see where it goes and adapt as investors.
Marc’s Monthly Moves
I sold TJX, which is the company that owns TJ Max, Winners, HomeSense, etc. I’ve done really well over the decade that I have owned it, but its metrics are not what they use to be and if we do go into a recession it will get hurt more than most.
I also sold a portion NVO, which similar to TJX has done really well, but as a result, I accumulated too much value in it. Proceeds of sales went to buys that increase my Technology Sector; these include AAPl, SHOP, KXS, INTC, TSM, and ATVI, all positions that I already own.
Marc’s Portfolio Year-to-Date Performance
- Portfolio return: +6.3% (including currency losses)
- Portfolio return: +7.45% (without currency losses)
- S&P 500 return: +7.73%
- TSX: +7.08%
The portfolio underperformed the S&P 500 by 0.28 of 1% (almost exactly the market return). Detailed positions are, as always, listed on my portfolio page.
Wait, There’s More!
Some people have asked about my biggest positions by weight, so I’ve included my Top 15 portfolio stocks by weight in the table below (note I have a little over 40 positions in total).
| Top 15 Stocks | Weight |
|---|---|
| Novo Nordisk NVO | 5% |
| Berkshire Hathaway BRK.B | 4.5% |
| Constellation Software CSU | 3.5% |
| Taiwan Semi Conductor TSM | 3.5% |
| CGI GIB.A | 3.4% |
| United Health UNH | 3.2% |
| Telus T.TO | 3.1% |
| Honeywell HON | 3.1% |
| Apple AAPL | 3.0% |
| Tractor Supply TSCO | 3.0% |
| CVS Pharmacy CVS | 2.9% |
| Canadian National CNR | 2.9% |
| Kraneshares Carbon KRBN | 2.9% |
| Cameco CCJ | 2.8% |
| Communication ETF, VOX | 2.7% |
Happy investing! M
Money with Marc 
Hi Marc,
Interesting read as always. I know you like feedback so this month I’ll provide it in the form of a question.
If your central premise is correct (and historically it is) that equities outperform other asset classes in the *long run*, why do you measure your performance against the benchmark in the *short run* (i.e., 1 year)?
I’d be curious if you have data on your long run performance vs. the benchmark, say over the last 5, 10, 20 years (apologies if you’ve already provided this before).
Happy investing.
Michael
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Michael,
Really good question, not many people think in the long run. I mostly measure performance in the short term mostly to keep an eye on rebalancing, and to test out different strategies over time. I know some investors are willing to stick to a strategy over many years without worrying about under performing, but that is simply too long for my head. I really look at investing like a game, so its always about out thinking the market and annual performance is where the game is played.
I have only been managing the hobby portfolio for roughly 10 years so my early performance was not really well documented. Based on solely starting amounts, ending amounts and time, my annualized return is just under 15%. But that does not tell the full story. Firstly, the sp500 has come in about a bit over 14% with dividends reinvested over the same time period, so its barely a beat. But earlier returns were much more varied, with later returns by average, higher and more consistent. This is mostly due to my evolution as an investor.
As for being only in equities, given enough time, no asset class beats it in the long run. So i simply do not play the other games. I can deal with day to day fluctuations of equities, i know many cannot, so i am lucky this way.
Thanks for the great question.
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I noticed you have no position in the Utilities Sector. Why is that?
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Ugg, hoping no one would notice that, considering your my editor, its not a fair observation. Ok, historically i did not like utilities because they have the tendency to act like bonds which can be bad in a rising rate environment. But now that rates have risen, there is an argument for its inclusion. I need to think about this a bit more before i make any investments into this sector.
Thanks, for your question.
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