For the first eight months of 2016, our Winning Value Portfolio continues to disprove many market myths that are often viewed as truisms, including:
- To be properly diversified, a portfolio has to hold dozens of stocks. It is our view that 10 to 20 securities provide all the diversification one needs.
- Buying cheap, out-of-favor or misunderstood businesses is the most effective way to outperform the overall stock market.
- Patience creates a twofold advantage: elimination of trading expenses and a disregard for volatility, both of which do most investors more harm than good.
For the eight months ended Aug. 31, our Value Portfolio was up 15.9% compared with 6.6% and 0.6% for the S&P 500 and Wilshire 5000 indices, respectively.
If you look at our 10 securities, not a single one was considered a stock with a favorable or strong outlook, according to analysts. IBM (IBM) was considered lost in the era of Google (GOOGL) . Dinosaurs like Alcoa (AA) were considered relic businesses in the era of mobility and social media. Both are doing better than the S&P 500. And in both cases, value was not in sexy growth but in attractive prices for the underlying assets as well as a spinoff in the case of Alcoa. (Alcoa is part of TheStreet's Action Alerts PLUS portfolio. Google is part of the Trifecta Stocks and Action Alerts PLUS portfolios.)
Banks are not considered market favorites today, but Towne Bank (TOWN) shows that doesn't matter. And our best-performing stock is Sanchez Energy (SN) , arguably the "riskiest" place to invest at the start of 2016. Some might argue that Sanchez is a classic case of "high risk, high return" investing, but we wholeheartedly disagree. An evaluation of Sanchez's financials, cost structure and balance sheet indicated the bargain opportunity, although we acknowledge the speed of the gain was faster than we anticipated. But then again, that is why successful investing requires both a bargain price and patience.
We still believe General Motors (GM) , and the warrants we own, represents one of the great bargains in the market today. My opinion has been tested for a couple of years, but I am not wavering. When the underlying company is trading at 4x earnings and expected to grow profits over the next few years, odds are high that your capital is well preserved while you wait.
And wait we will as the long-term results of our portfolio demonstrate that a simple, rational investment philosophy can beat the market and thus, the vast majority of investment professionals.
