As we near the end of 2016, the "Winning Value Portfolio" shows how an intelligent, patient, value-oriented approach to investing can best not only the market, but the majority of investment professionals as well.
For the uninitiated, each year, I select a group of 10 securities that will make up an equally weighted portfolio. Those securities are held for the entire year, regardless of market volatility or price performance. The only exception is if we uncover any presence of fraud or other form of corporate malfeasance. These simple but firm rules create an investment scheme that is defined by patience and meticulous security selection.
And most of all, portfolio expenses are infinitely low. Once the analysis is done, the securities are purchased and there is no more trading friction for the year. With the flurry of news surrounding hedge funds that charge 2% management fees and the effect such fees have on returns, this approach gives us an incredible edge.
Some may take the view that a 10-security portfolio is not properly diversified. I would argue that diversification is not based necessarily on the quantity of securities, but on the correlation among them. In that regard, our correlation is quite low. Towne Bank (TOWN) , for example, has very little correlation with our energy holdings, which have little correlation with our biotech holding, Kindred Biosciences (KIN) .
And while low oil prices might not be great for our energy stocks, they are favorable to our automotive holding in General Motors (GM) and even perhaps our restaurant holding in Meritage Hospitality MHGU.
Of course, when markets freeze like they did in 2008, correlation goes out the window and everything goes down. But those occurrences are simply a by-product of market bubbles. That being said, the best defense against such occurrences is to own undervalued securities and have a degree of patience.
At this juncture, it's hard to see how our portfolio won't significantly outperform Mr. Market in 2016. Even if the markets were to take a dive during the fourth quarter, we believe the strength of our holdings will prevail and achieve our singular goal: delivering positive absolute returns in up or down markets.
