Sunday, November 1, 2009

Returns for week ending 10/30/09

Model portfolio, hypothetical returns for past…
1 week: -3.0% (S&P500 declined -4.1%)

Value of $10,000 invested at inception in 2003: $54,853

This was an unusually tough week for growth stocks and the indices. Fortunately, our portfolio's losses were buffered somewhat by the large amount of cash being held, and the portfolio's partial hedge against the broad market.

The model portfolio has been "out-of-phase" with the market for several months now, since the March lows. This is reflected in the smaller than normal number of stocks that are passing the model's screens, and the higher than normal amount of cash being held in our portfolio.

For what it is worth, I am reading that other hedge fund managers managing with a similar long/short style are experiencing the same dynamic. Fortunately this dynamic represents the exception since the market doesn't normally decline 55% in a panic driven cascading failure such as we saw last year.

In hindsight, the nature of a snap back rally following a generational decline doesn't favor high quality growth stocks and therefore our stocks didn't outperform the market off the bottom. Unfortunately I don't have the luxury of selecting a strategy in hindsight and so will continue to allocate our capital in accordance with our long-term statistical edge.

The good news is that the model portfolio has retained a large portion of its bear market gains, while the broad market remains significantly below its 2007 peak. It's a good reminder that there will be periods where the model is out-of-phase, and the best we can hope for during these periods is to protect our capital and accumulated gains, which the model portfolio has done.

Many mutual fund managers are reporting significant gains in 2009, but upon closer inspection it is clear that they have not come close to regaining the investor money they lost during 2007-08. It is amusing to see fund marketers hype their short term results now as though their 3 and 5 year returns no longer matter. They really have NO shame!

Fortunately, this endeavor is a marathon and not a sprint. During times like this patience can be a virtue.

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