Still Winning

 | Dec 02, 2013 | 12:30 PM EST
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It's time again to check in on the Gad Winning Value Portfolio. Every year, I put together a portfolio of 10 stocks that are equally weighted and held in the portfolio for a one year period. Absent the discovery of fraud or other corporate malfeasance, no securities are replaced during the year. By imposing these rules, the portfolio allows me to demonstrate the value of concentration and intelligent diversification.

You can build a well-diversified portfolio with 10-25 securities. Any diversification after that diminishes returns but no longer reduces risk in a meaningful way. And by not buying and selling stocks throughout the year, trading expenses are minimized.

After 11 months and a very desirable market environment, the portfolio continues to crush the market. Heading into year-end, the Gad Winning Value Portfolio is up 49.2% compared with 24% for the S&P 500 and the Wilshire 5000, respectively. Without a doubt, a rising tide lifts all boats, and anytime a market is up 25%, it's inevitable that that some choices will stand out.   

Gad Winning Portfolio Table

The year-to-date champion, Motorcar Parts of America (MPAA) is a textbook example of how patience pays. Starting the year, MPAA was the worst performer in the portfolio, down nearly 20% early in 2013. It's now nearly a three-bagger.

Our worst performing stock remains Potash (POT), one of the largest fertilizer companies in the world. The shares fell 20% in a single day on news that a key fertilizer cartel was disbanding. This will likely cause a significant drop in the market price of potash. Perhaps 2014 will be the year fertilizer stocks return to glory.

Dell (DELL) shares actually no longer exist, as Michael Dell was successful in his buyout of his namesake company -- although he did have to dish out a little more cash to make that happen. While I didn't replace Dell in the portfolio, its annualized return is clearly above 29.8%. I never really accounted for a buyout in the portfolio so the plan is to replace it.

In the coming weeks, I will unveil the 2014 portfolio. I've always said that absolute returns are what count: delivering positive results in both up and down markets. More so, if the S&P 500 was down 25% in a given year, I would consider being down 5% a far superior accomplishment that being up 50% when the market is up 25%.

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