Category Archives: Analyzing performance

positioning in a trendless market…

April 8, 2015 By in Analyzing performance, Constructing a Portfolio, Current Market Thoughts, How often to measure, Portfolio management, stock market Tags: , , , , , , 3 Comments

…that is, in the kind of market we have now.

At stock market bottoms, like the epic one we saw in March 2009, the most highly economically cyclical stocks and the ones with the weakest capital structures (i.e., the most out-of-control debt) are invariably the ones that are the most beaten down.  Because of this, they’re the ones that react the most positively to the first rays of hope that the worst economic news is behind us.

As the market and business cycles mature, leadership gradually shifts from these “value” names to secular growth stocks.  The latter are the least cyclically sensitive and are ones whose investment merit consists in their ability to grow earnings (1) faster than the consensus expects and (2) for a longer period of time than is generally recognized.

Entering year seven after the bottom, we’re deep into the growth stock period.  Dyed-in-the-wool value investors will doubtless be poring over the financials of oil and other commodity production companies.  But the strength of the market will be in technology, social media and Millennial-oriented stocks, I think.

A flat market gives us more time to search for them.

We should also be considering what is likely to happen once this up-one-day, down-the-next period is over.  My view is that the current doldrums are being caused by higher-than-normal valuation, not by perceptions of an upcoming economic slowdown.  If I’m correct, as time passes and company earnings grow, price earnings ratios will gradually shrink.  This will restore more attractive valuation  …and the market will begin to rise again.  When this will happen–and what occurs in the meantime–is less clear.  My answers are “late summer” and “nothing much.”  Alternatives might be “after the first Fed interest rate increase” and “the market goes down 5% – 10%.”

In the current market climate, there’s an easy way to check if my portfolio positioning is in line with my theorizing.

On up days in the market, my holdings should do at least as well as the market; on down days my portfolio will likely underperform.  Conversely, if I have a defensive posture, I should outperform on weak days and underperfrom on strong ones.

The portfolio from heaven will outperform around the clock.  A portfolio potentially in need of overhaul will underperform no matter what.

I normally don’t advocate analyzing portfolio performance on a day-to-day basis.  That’s because there’s often a lot of noise in daily price movements.  And short-term trends may make sense to day traders but no one else.  So there’s a risk that we get shaken out of long-term winning positions by getting scared by meaningless short-term craziness.

Still, in the current market circumstances–and if we don’t get emotionally caught up in the price movements–we have a chance to observe over a short period of time whether our portfolios have the structure we intend them to have.

 

 

 

an exercise for a choppy market

January 13, 2015 By in Analyzing performance, Constructing a Portfolio, Current Market Thoughts, Portfolio management Tags: , , , , Leave a comment

Many people think that a choppy market–up one day, down the next–like the one we seem to be caught in at the moment yields no information, either about individual stocks or the market as a whole.

This is a mistake.  It’s not as bad as failing to check your portfolio when the market is roaring ahead (everyone checks his stocks all the time in this situation, though) or falling through the floor (when even profressional sometime can’t bring themselves to look).  Still, it’s a mistake.

You don’t necessarily want to make portfolio changes, but you do want to find out two things:

–is your portfolio is geared for an up market or a down one?  …that is, whether your stocks perform well on up days and badly on down days, or vice versa.

It also possible that you have stocks that outperform all the time, or none of it.  The former are probably ones to add to, the latter to consider showing the door.

–how your individual stocks are doing.

The checking is relatively easy.  I use Google Finance, but any other online service will do as well.

Get the chart page and create a chart of the S&P 500 (.inx on Google).  Then enter your stocks/mutual funds/etfs for comparison, three or four at a time.  You can vary the charting period to be:   one day, a specific starting and ending date, or year to date.  Look for overall performance, performance during up periods and performance during down periods.

You can also try longer time periods, like three months, six months, a year or the entire time you’ve owned the stock.

Results can be surprising.  I’ve been doing thisexercise just before writing this post.  I located one clunker that I’d been thinking of as matching the market over the past six or seven months, but it’s been a chronic underperformer.  Embarrassing, maybe, but at least I now know I have a problem to fix.

 

 

equity portfolio analysis to do now

October 20, 2014 By in Analyzing performance, Constructing a Portfolio, Current Market Thoughts, fast death vs. slow death, Fixing mistakes, Keeping Score, Portfolio management, Stock ideas Tags: , , , , , , Leave a comment

Investors, even professionals, typically don’t want to look at their equity portfolios during a market downdraft.  It’s too ugly and too painful.  I’ve always thought, however, that if you can keep yourself from becoming too emotionally distraught from viewing what is after all a natural occurrence in equityland, you can get a lot of valuable insight into how the market will unfold as stocks inevitably turn up again.

Just from eyeballing charts–I’m too lazy to go back and do precise calculations–we had a particularly long and deep correction in 2011, two (maybe three, depending on how you count) in 2012, two 5%+ corrections in 2013–all before this one in 2014.

I’m pretty sure this correction has ended.  No one knows for sure until the downturn is clearly in the rear view mirror–and sometimes my native optimism gets the better of me.  I feel better  having made this disclaimer, even though there’s been enough if a reversal of form in stocks previously being pummeled (meaning most of my portfolio) to have me pretty well convinced

In any event, I think we should all do what I’m about to recommend, even if there does turn out to be another leg down.

First, two rules:

— Generally speaking, when the market declines value stocks go down less than the market; growth stocks go down more.  When the market begins to rise again after a correction, the pattern reverses itself.  We want to find stocks that are acting out of character–both good and bad.

–Often market leadership–meaning the industries/sectors that do the best–changes during/after a correction.  This change may simply validate ideas we already have  …or it may show us some economic development that we’d overlooked so far.  Either way we want to identify and ride new trends.

use a chart

For me, the simplest way to do this is graphically.  Set up a Google or Yahoo chart that will compare the performance of each stock in your portfolio with the S&P 500 from September 19th until now and look for anomalies.

Throw in some well-known names, stocks you think you might like but don’t own, volume leaders…to get a feel for what’s going on with names you don’t own.

The best case is a stock that has outperformed on the way down and which is rebounding more strongly than the market.

The worst is the opposite   …a stock that underperforms during the downturn and fails to bounce back during the rebound.  These are ones you especially want to detect and investigate.  In my book, you have to have very compelling reasons to hang on to a stock like this.  In my view, you don;t want a stock like this to be your largest position, no matter what reason you come up with.

Do this without having any expectations.  Just see what the numbers say.  Then you can begin to interpret.

Don’t make excuses in advance for stocks.  If a holding has, say, declined by a third during the correction and isn’t rebounding,  chances are that something is wrong.  Facebook (I don’t own it), on the other hand, did better than the market on the way down and continues to outperform.  Other social media stocks appear to be doing the same.

More tomorrow.