I’m Under Performing… Again!

March 2024, Newsletter

As some of you know, I travel almost half the year in my van with my wife (Nat) and dog.  Mostly to Mexico but we have been to Guatamala many times.  We are basically snowbirds (Nat objects to that description); once January comes along we leave snowy Quebec, Canada and drive south until it gets warm again.  Keeping this newsletter going on the road can get tricky as tropical climates, inviting swimming holes, and bad internet connections become big distractions. 

Investing While Travelling is Complicated

Similar to last year, my trading account locked me out because I forgot to add my temporary Mexican phone number to my trusted multi factor security list.  Luckily most of my trading had already taken place earlier this year.  So wasn’t the end of the world as I didn’t need to make any trades. In fact, I do prefer to do nothing for as long as possible.  The only drawback to this situation is that I could not see how the account was doing versus the rest of the market.  

Now that I am back in the southern USA and back into my account, I can see that the portfolio has continued to fall behind my SP500 benchmark. So it has been a miserable start to the year.  In my last newsletter, I outlined how I have changed the portfolio to lower risk and did expect that the portfolio would likely underperform going forward – so I guess this shouldn’t be a surprise.

Strategies & Risk Vs Reward

In investing it makes sense to lower risk, but at the same time, it’s all about returns. If you are going to chronically underperform the market in order to avoid all risk, what is the point in investing? You have to be strategic and try to avoid certain market risks even if it means under performing for a while. The hope is that you can more than make it up later. Alternatively you could invest in market ETFs and get market like returns and accept the associated risk.  No one ever got poor that way.

There is an expectation that by setting out really clever strategies that my portfolio will eventually outperform or at the very least achieve a lower return but with a better risk-return ratio.  In other words, underperform but with much less risk.  This unfortunately is hard to quantify with numbers. It’s really difficult to prove you made the right choice, especially if the market risk never shows up.  It’s like fire insurance, you buy it when the risk is high, but if there is no fire, was it a bad decision? Was not having insurance in a bad fire year a prudent decision?

My current less risky portfolio was built with the idea that it could outsmart the market by shunning those big 7 magnificent stocks and associated sectors that have been driving the market just before they start selling off.  That is the plan, but getting the timing right is almost impossible. This strategy could take a while to pan out, but I have recently observed a change in the market that supports my assumption that the magnificent 7 will stop leading. Technology, and communications have been consistent winners in 2023 and early 2024, however in the last 30 days this has changed, as highlighted below.

Sector returns, year to date (YTD) 2024

As you can see below, the market is being led by only a couple of sectors. These sectors have become expensive, which can’t continue forever. This is what I’m risk-proofing against.

• 12.45% Communications
• 12.14% Information Technology
• 8.14% Financials 
• 8.10% Energy
• 7.98% SP500
• 6.74% Industrials 
• 6.66% Health Care
• 5.59% Materials
• 5.02% Consumer Staples
• 2.37% Consumer Discretionary
• -0.80% Utilities
• -3.0% Real Estate

Note that the top 2 sectors are the same ones that led in 2023.

Sector returns for the last 30 days

In contrast to the list above and as per my earlier statement, the leaders have changed away from the technology/communications sectors in the last 30 days.

• 9.47% Materials 
• 8.94% Energy
• 5.25% Financials
• 5.04% Utilities
• 4.96% Industrial
• 4.22% Information Technology
• 3.98% SP 500 
• 3.59% Consumer Staples
• 3.42% Real Estate 
• 2.38% Consumer discretionary
• 2.08% Communications
• 1.88% Health Care

From my perspective, this change in sector leaders means there is hope for a long term rotation away from the usual leaders to, well, anything else.  This would certainly be beneficial to my portfolio.

Can I Take the Pain?

In the professional money management business, if you’re a fund manager and you underperform for a year or more, you will likely lose your job.  It starts with investors pulling their money out of underperforming funds so they can chase higher returns elsewhere.  The problem is that this behaviour is bad for everyone. Most of the small investors are chasing heat, in other words trend following. Ultimately buying high and selling low.  The fund managers are always under pressure to at least perform in the average to avoid getting fired.  This means keeping a boring portfolio of what every other manager holds. Sticking one’s neck out in this industry is dangerous if you happen to be wrong for any significant amount of time.

As you can see the small investor who manages their own portfolio has an advantage in that he/she is not going to get fired for under performing for a while.  Let’ be honest, however, underperforming is not fun and there’s still pressure to do something when everyone else is getting rich and you are not. There is only so much pain one can take before they need to consider that maybe their strategy is flawed somehow.

This is likely the feeling Warren Buffett had when he refused to invest in tech prior to the great tech run up and subsequent fall in the 2000s. Those stocks were simply too expensive to him, yet prices just kept going up and up.  He was eventually proven right.  Are we in the same boat now? It’s never exactly the same boat, and that is what makes it difficult to judge.  Tech is expensive, but not crazy expensive, and not all of the sector is expensive.

Hold the Line

My strategy for now will be to continue to hold the line – even if it’s a bit painful. I will let it play out.  There is some evidence that things are changing, although it’s super early.  The best investors in history were often those who did not follow the market cycle off the cliff. They were those who bought companies that were totally out of favour, in areas that were considered un-investable to many. They bought positions that kept falling while amateurs bid up companies that had no earnings. Those investors often looked bad for periods of time until the market pendulum swung back in favour of those out of favour stocks. Once that happened, long term over performance was the name of the game.

Is There a Plan B?

At some point the pain may be too great.  You should always be ready to admit you were wrong and adjust accordingly.  Especially if the pain becomes chronic.  If that’s the case, the plan would be to become more market like.  This would be simply accomplished by rebalancing to the market weight of the index and buying a bunch of market leaders like MSFT and AAPL.  Although boring, it would be a safe and good position until a new strategy can be developed.

New Positions

I have started to pick up some more speculative positions.  These are really small and not really relevant from a size perspective.  I am using some spare cash that accumulates in the account to pick these up.  I just need one to take off, even if most of these positions end up dead. As I have said before, every portfolio should have a speculative section of 2-3% total weight.

My new positions are:

• Small position in LIFT.V – a small Canadian resource company developing a lithium property.  The market cap is $148 M – very risky therefore I took only a very small position.
• Small position in LMN.V – Lumine Group a Canadian software company that was spun out of Constellation Software. It’s a speculative position with medium risk. The market cap is $2.5 B.

Marc’s Monthly Moves

Sell

• Nothing this month

Buy

• LIFT.V
• LMN.V

Marc’s Portfolio YTD Performance

• Portfolio return: 6.1 % (including currency gains)
• Portfolio return: 3.8% (without currency gains)
• S&P 500 return: 7.28%
• RSP ETF S&P equal weight 4.2%
• TSX: 4.25%

The portfolio is under performing the S&P 500 by 3.48 % points. Boo!