The Winning Value Portfolio of 2014

 | Feb 02, 2014 | 10:00 AM EST
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This is the first monthly installment of the Gad Winning Value Portfolio for 2014. For those of you reading Real Money for the first time or who otherwise may be new to my column, I started this annual tradition back in 2012.

At the beginning of each year, I handpick a portfolio of ten securities to create an equally weighted portfolio. The only restriction is that there are no changes made to the portfolio – unless corporate fraud is detected – during the entire year. There are no other restrictions with respect to industry or market cap. So far the businesses have all been U.S. based but international stocks are welcome.

The portfolio is built on valuation. More so, while a 10-security portfolio represents extreme concentration for some, I feel a carefully selected portfolio of 10 securities offers adequate diversification. I come from the school of thought that once a portfolio exceeds 20-25 positions, the benefits of any further diversification are gone. In addition, you will see that most of the portfolio holdings are not positively correlated with each other. A bank, for example, shares little correlation with a technology company, which in turn shares little correlation with a restaurant.

The purpose of not making any further trades is to create patience. By my standards, a one-year holding period is not long, but many market participants today have a hard time holding stocks for more than a month. Because my portfolio is held for a year, the return numbers are quite accurate given that there are no frictional trading costs.

In 2012, the portfolio was up 16.4% vs. 11.2% for the S&P 500 -- thanks to a strong performance from names such as Bank of America (BAC). The class of 2013 was up 57% vs. 26% for the S&P and 27% for the Wilshire 5000. The 2013 portfolio benefited from names such as Bank of America (again), General Motors (GM) and small-cap Motorcar Parts of America (MPAA).

The past two years were aided enormously by a very strong market. Readers of my columns know that I construct the portfolio with the intent of it holding its own in any market environment but especially a declining one. Also, I care about the annual results, not the month-to-month gyrations.

So far in 2014, we have a more volatile market, and below is how the class of 2014 has started off:

Thanks to small-cap distribution company Lawson Products (LAWS), the group is just positive against a 3% drop in the S&P. Apple (AAPL) was the big laggard as a result of an earnings report that was solid yet unpleasing to the analysts. Apple's shares dropped 8% on the news.

I believe this group of stocks will in fact hold its own in 2014 and perhaps additional volatility will truly put it to the test.

I will follow this portfolio every month and track its progress. Stay tuned.

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