This article was sent to members via email December 23. You can access that email at the link that follows this article.
By Brian Nelson, CFA
Hi everyone,
Many of you may be just checking your account statements or retirement account balances and might be a little disappointed for what might become the worst December return in the stock markets since the 1930s.This has certainly been a December to remember, but not for good reasons. Though things look bleak heading into the remaining days of 2018 and into 2019, there’s really no need to panic at all.
For those following the Best Ideas Newsletter portfolio, it’s easy to be disappointed with ideas such as Facebook and Johnson & Johnson, but you’re missing the big picture. I believe the concept of “putting cash to work” is simply a fallacy. Buying anything at any price isn’t putting cash to work. It’s being foolish. Price matters. In December 2017, last year, the “weighting” in cash for the simulated Best Ideas Newsletter portfolio was 28.7%. 28.7%!
Look–2018 has been one of the worst years in Valuentum’s business history because of our prudence. Everybody wants new stock idea after new stock idea, and the reality has been that the best idea for 2018 was cash. Notice how we had very few if any 9s or 10s on the Valuentum Buying Index all year!!! Cash has outperformed just about everything in the world this year, and in our simulated newsletter portfolio calculations, we don’t even assume cash generates any return! That’s how conservative we have been when presenting our simulated portfolio calculations.
A near-30% weighting in cash in the simulated Best Ideas Newsletter portfolio, the best performing asset in 2018, is just not something to overlook. I talked about how some of our best ideas have been performing in the latest edition of the Best Ideas Newsletter, but we’ve been waiting for something like this December rout. Cash is the only major asset to have a positive return thus far in 2018, and its “weighing” was roughly three times the highest bounds of any one idea we have in the portfolio.
According to research from Charlie Bilello at Pension Partners, US small caps are down 11%, emerging markets stocks are down 16.6%, EAFE stocks are down 13.8%, while REITs and gold were off 3.6% and 5%, respectively, all year-to-date measures. US large caps, preferred stocks, high yield stocks, investment grade bonds, long duration Treasuries, TIPS, US Aggregate bonds, emerging markets bonds, commodities-you name it, there’ll all in the red!
As I continue to reiterate, our business is typically punished for our prudence and experience. We got things a whole bunch right in the simulated Best Ideas Newsletter portfolio this year, but we suffer as a company because there’s always someone else out there that’s going to be recommending some speculative junk that catches the amateur’s eye, or distributing some pretty-looking backward-looking research that’s going to distract even experienced investors from what matters: forward-looking expectations.
Just how many percentage points of relative outperformance does a near-30% “weighting” in cash during 2018 contribute? Well, even if we exclude the return that cash earned (1.6%), which we have done in all calculations since inception, that’s about 3 percentage points of relative outperformance from this decision, alone. When we’re talking stocks, that’s almost a whole year’s worth of income, and when it comes to capital preservation, that matters greatly. If the market falls even further during 2018, cash will only increase its outperformance.
A lot of people are disappointed that we stopped tracking the “performance” of the simulated newsletter portfolios on a monthly basis and moved to weighting ranges for idea generation. But let me ask you: would tracking the simulated portfolios mattered to you during this December rout? Or would the idea of considering a range of 5%-30% of cash, depending on your risk tolerances be more appropriate? You know where we stood heading into this year. We had cash significantly over-weighted. I actually think some even poked fun at us.
Look–I don’t know what’s going on out there in the world of financial advice (we’re not a financial advisor), but if you’re getting pitched index funds or quantitative research backed by ambiguous or impractical data across in-sample sets, your future outcome will have more to do with luck than anything else. Your fees will not be luck though. I have to remind you, too, that stocks don’t have to go up in the long run. Absent a rigorous consideration of price versus estimated value, first and foremost, focus on strong, high-quality companies that have strong expected future free cash flow generation and very net-cash rich balance sheets.
I don’t care about losing customers by doing the right thing. I’ve been losing customers for the past seven years with great work and despite our putting up one of the most successful performances across the any newsletter provider. Read more about the history of the simulated Best Ideas Newsletter portfolio here (pdf). I have no idea what they’re expectations could possibly be. The elevated cash “weighting” in the simulated Best Ideas Newsletter portfolio heading into 2018 speaks again to our prudence and experience. I don’t want you to focus on the past, however. I want you to focus on the future. Today’s stock prices will always be driven by changes in future expectations. Once you understand this, the whole world opens up to you.
What are you paying for with a membership to Valuentum? You’re paying for our prudence and experience. When it comes down to it, the combination of prudence and experience often results in better judgment. Whether it’s the absence of many 9s or 10s this year on the VBI, or the outsize cash “weighting” in the Best Ideas Newsletter, we’re offering valuable judgment, not just any opinion. Oh — and the weighting in cash in the simulated Dividend Growth Newsletter portfolio as of December 2017, last year, prior to our migration to weighting ranges? 31.4%. See here (pdf). 31.4%!
Let’s keep looking ahead folks. I’m not sure what more I have to do to prove to you that Valuentum is the real deal! Not sure our firm is being treated fairly, but not sure that we ever have either. Thank you for your membership, and don’t forget about my new book — Value Trap: Theory of Universal Valuation — to be released in January 2019.
Link to original email: http://campaign.r20.constantcontact.com/render?m=1110817109903&ca=a50a67ad-5991-43fe-b931-11ff3f616443
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.