My last two columns have focused on the dogs of 2016. Wednesday I wrote about Nike (NKE) , a distant underperformer in an otherwise buoyant year for the Dow Jones Industrial Average. Yesterday I wrote about six of health-care's "least fine" this year, Mylan (MYL) , Tenet (THC) , Perrigo (PRGO) , Valeant (VRX) , Community Health Systems (CYH) and Endo International (ENDP) . I'll be doing more work on those names as we enter the new year. Not because I am bullish, mind you, but as a deep-value investor I feel that it is my responsibility to take a look at beaten-down names.
You might be reading that list and noting to yourself, "Well, Jim forgot to mention XYZ Corp. that fell 98.6% when the FDA declined its cancer drug," or "I don't know why Jim is focusing on the negative; my ABC Corp. stock rose 357% on June 21 after the company's patent application was approved."
I get it.
I write a newsletter called Microcap Guru, and I deal with smaller, much more volatile stocks every day. The reason I had the best of Real Money's "Best Ideas of 2016" -- Navios Maritime Holdings Series G Preferred -- is because I am willing to take risk. With stock-pickers like Jim DePorre (dba Rev Shark) and Tim Melvin as Real Money contributors, it was hard to "win 2016," and it feels darn good to have done it.
I constructed portfolios for my clients and me that included proportions of Navios' preferred series that would make Peter Lynch nauseous and would make a Wharton finance professor vomit. So much for the benefits of diversification. We exchanged our Navios Maritime (NM) preferreds for the common in November, but we still are major shareholders in the shipping company.
But self-congratulation aside, I have to wonder what would have happened to Navios if 2016 hadn't been such a bulls' paradise. What if Brexit had been the beginning of Europe's apocalypse? Navios is essentially (if not legally) a Greek company, and Europe's demise would not have been a positive. What if Trump's victory had heralded the beginning of a massive trade war between the U.S. and China (based on current valuations the markets clearly do not believe that will occur)? Most of the cargoes on Navios' bulkers are, in fact, headed for China -- although it is rare that they embark from the U.S. -- and anything negative for the Chinese economy would be negative for Navios.
So, that brings me to the last of the dogs if 2016. These are the unloved, somewhat misleading and seemingly forgotten, volatility ETFs. You think 2016 was bad for Valeant? VelocityShares Daily 2x VIX Short Term ETN (TVIX) , the ETF that attempts to replicate 2x the daily move in the VIX Index, is down in the past 12 months 93.94%. That is not a typo. TVIX has its own idiosyncrasies that make it easy to loathe, but even the much more widely-held VIX tracking ETF iPath S&P 500 VIX Short Term Fut ETN (VXX) is down 68% this year.
So, that's the question a value investor has to ask going into 2017. Has the market's lack of volatility (which a CAPM acolyte would tell you will yield a higher valuation for any asset, ceteris paribus) flattered returns in my individual portfolio?
Or ... am I not as smart as I think I am????
You're plenty smart. If you weren't you'd be reading one of any number of schlock-stock websites, not a curated one, like Real Money, whose authors have real industry experience. So, as a word to the wise, put some volatility protection in your portfolio. If you are going to use TVIX and VXX put in an above-market limit order and just know that you are protected for the next market shock. If you trade options, buying calls on the VIX itself is an even more efficient strategy.
Some way, somehow, the market will have a blow-up in 2017. It may be as short-lived as the ones in 2016, but volatility trades are by definition episodic. Believe me, owning the VIX ETFs on a day-to-day basis can be disheartening and sometimes depressing in a market so beset by complacency. But to be protected -- and even to profit from -- that inevitable spike in worry is something that will make your own level of worry much, much lower.
Happy New Year!