Value Portfolio Weathers the August Storm

 | Sep 03, 2013 | 3:00 PM EDT
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Ever since I established the annual Gad Winning Value Portfolio, I've repeatedly said that the real test for this portfolio would be how it handles declining markets. In the month of August, stocks declined by 4.4%, the worst single month in years.

The Gad Winning Value Portfolio, my annual portfolio of 10 stocks, was put to a good test in August. Concerns that the Federal Reserve was getting closer to slowing its pace of securities purchases gave many investors pause. Plus, markets have been on an unstoppable rally in the past four years: The S&P 500 is up more than 125% during that time and has eclipsed its all-time high reached in October 2007.

When comparing returns of the S&P 500, I like to include dividends reinvested. Doing so likely brings the S&P 500's return closer to 12.2% for the year, while the Wilshire 5000, the broadest of indices, is up about 13% inclusive of dividends.

The Gad Winning Value Portfolio returned a very tidy 26.9% so far this year. I would be comfortable saying that if the market continued heading lower for the rest of 2013, our portfolio would comfortably outperform and deliver a very respectable return in 2013.

That being said, our worst-performing stock, Potash (POT), saw its share price drop more than 20% in a single day on news that a fertilizer cartel was disbanding, likely leading to a significant drop in the market price of potash. On the flip side, small-cap Motor Car Parts of America (MPAA) was a losing position until a couple of months ago, when the company announced a restructuring that sent shares up nearly 50% in the course of weeks.

So I suppose our other positions could experience such one-time events that help or harm their stock prices. That's an inevitable risk in all stock-picking, but it's something you try to negate by owning a collection of undervalued securities. I've always felt that a portfolio of 10 to 20 securities is more than enough to diversify all the potential market risk that is inherent in investing. After 30 positions, diversification starts to eat away at your returns.

I will take my chances and stick with this group. The mandate is to hold all 10 names for the year, unless corporate fraud or other malfeasance occurs, and then realign the portfolio. My best-guess estimate is that our year-to-date return puts this simple portfolio in the top 5% of all actively managed funds. Four important months remain in 2013, so the jury is still out on our final performance.



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