During November the portfolio rose 1.78% vs 2.45% for the S&P 500. Performance was dragged down by Gamestop (GME) which dropped 12% month-on-month as guidance was reduced and earnings missed on delayed game releases. Alaskan Air (ALK) added another 11% after October’s 22% gain and I’ve started taking profits. Hewlett Packard (HPQ) gained 9% with the spin-off of the company into two as a tailwind. Something interesting I noticed was that for the second consecutive time HPQ sold off after hours during the earnings announcement, only to rally when the stock opened for trading the next day…
The portfolio is on track to outperform the S&P 500 for the 11th consecutive quarter. Regardless of headwinds (i.e. geopolitics, global growth, etc) the S&P 500 has continued to record new highs, and this strength has also helped the portfolio which is net long. Investors should not fight the market but remain long. We must keep an open eye for bearish catalysts that will not only emerge but affect the market in a direct and obvious way. This I believe will be reflected in the fundamentals and technical. In other words when we not only have the reasons for a change in the market but also see it happen then we take action.
I’ve been asked way too many times this year, why I haven’t hedged to protect my returns. My answer remains it is because we continue to be in a bull market. While I take on a few shorts, the portfolio is net long. Shorting the market or individual overvalued stocks on a large scale could hurt returns without necessarily reducing risk. The time to increase your short position is not when you have great returns but when the market weakens. Please see my article for Seeking Alpha found here: http://goo.gl/8E5pyd If you can’t access it then e-mail me and I’ll send you a copy, however if you are involved in the US markets then I recommend you become a member (it is free of charge).
My research shows that a consistent long-short strategy underperforms a long-only strategy. However a dynamic long-short strategy which is long during bull markets and long-short during bear markets will not only producing better returns but also significantly reduce the downside. (See the article for more details). The largest decline of the dynamic long-short portfolio was -11%. Until my research tells me otherwise, this is how I intend to manage my portfolio. And at the end of the day it makes perfect sense. The market goes up most of the time and carries with it all types of stocks, and value stocks even more. During bear markets, investors get picky and look for reasons to trash any stock. Why make your investing difficult?
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