You Can't Own Every Winner

 | Jan 03, 2014 | 11:00 AM EST
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How did your portfolio do in 2013? If you were cautious and underperformed, you are surely kicking yourself for not being more aggressive. If you were fully invested, you also might be kicking yourself for not being more aggressive and making even more money.

Many of us are looking at all those hot names we should have owned but didn't. Every day, we flip on CNBC and listen to various guest PMs and analysts expound on SolarCity (SCTY), Tesla (TSLA), Netflix (NFLX), Facebook (FB), the cloud, the this, the that. No wonder investors can be driven crazy chasing the latest hot thing.

One of the most important lessons I learned early is that you cannot own every winner, and if you spend your days trying to, it will end in misery. The problem is especially acute among institutional portfolio managers, who must go into an investment committee each week and explain why they don't own Netflix or Tesla, and by the way it is up 5% again last week. Institutional pressure to "participate" is incredible, which is why momentum stocks can take on a life of their own.

Whether you are a fund manager (or retail broker, who would also face similar pressures) or an individual investor, the best approach you can take is to ignore everything else and focus on what you owned. I can guarantee that 99% of you will miss the best performing stock, each and every year. Fortunately, missing the great ones doesn't matter; all that matters is how your overall portfolio did. If you outperformed and did not own Tesla, you are still a hero. If you were up 50% this year and never heard of SolarCity -- more power to you!

Below is a list of the 50 best performing stocks in 2013. (I used market caps over $1 billion just to keep the list manageable.) I highlighted some of the darlings of 2013 that everyone was talking about. What you should notice is how many opportunities you had outside of the darlings -- and even outside of the darling groups.

Netflix made you money and may make you interesting at cocktail parties, but you could have made more in Nexstar Broadcasting (NXST) or Media General (MEG). When E.F. Hutton talks, people may listen, but not when he talks about a boring old generic pharma company like Lannett (LCI), except that LCI was up 567% last year. Rite-Aid, (RAD), a Dvorchak favorite,  may elicit yawns, but 272% doesn't. Who gets excited about a coatings company like Ferro (FOE) -- except you made 207% in that one!

The mathematical reality is simple. You can take an average performing portfolio and just one of these big winners would make it an outperformer. You do not need to own them all, and you can certainly do well without the hot names of the day. My best year ever as a PM was 1999, and I did not own a single internet stock (I thought they were overvalued). Despite the heat I caught, I outperformed handily and my investors were happy.

Keep this in mind in 2014. If your analysis leads you to a hot stock anyway, that is great to own it. If your analysis leads you elsewhere, so be it. There is a long, long list of great names that can make you money, even if it causes your cocktail party talk to be diverted to other subjects.

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