What went wrong in 2013
Each year I try to do this same post. This year the answer is simple: Just about everything went wrong! My value portfolio, what I write about here, was up a measly 5% when the overall market was up over 30%! The only word to describe this is pathetic. OK, so now the humiliation is over, let’s dissect what exactly happened.
For starters my overall portfolio positioning was wrong. I took a macro view (something I have to keep reminding myself not to do) that the market was overvalued at the end of 2012, and thus I held a large cash position of 25%+ as well as S&P 500 puts throughout most of 2013. This was a drag on my returns, but not necessarily the cause of my egregious underperformance. That can be largely attributed to my choice of investments.
My largest position, AIG, was up a comfortable 45% or some 15% more than the S&P 500. So how did I screw up? Three countervailing losses; Fortress paper (down 50%), NovaGold (down 43%) and, of course, the S&P500 puts (100% loss). Furthermore, my second largest position at year-end, Bank of America warrants, was up only 19% in 2013 and my third largest position, MFC Industrial, was down 6%. So what are my conclusions? and what should I do for 2014?
- No macro positioning: There should be no macro slant to my portfolio. I don’t know whether the market will go up or down in 2014 and therefore I should take no position that depends on market direction, i.e. no puts or calls on the indexes. By year-end I plan to be 90%+ invested.
- I have a number of deep value plays that could take time to work out (MFC, Fortress Paper and Resolute Forest Products fall into this category). Perhaps I am ‘trying too hard’ and need to find investments that fall into the category of ‘shooting fish in a barrel’. It’s time to reassess my investment rationale for each of these positions in light of potentially ‘easier’ investments.
- It is also time to reevaluate my stock picking skills; perhaps they are not as good as I thought they were. I have been reading Quantitative Value by Gray and Carlisle and am considering a change of strategy back to a more probabilistic portfolio construction approach such as they propose. However, with the market at or near all-time highs and the possibility of a decent sell off this year, I will not be making the change until there is a market pull back of at least 20%; quantitative value approaches tend to have significant drawdowns during market retreats. (but am I gaming myself on market timing here?) Also acknowledging that one’s investing abilities are below average is a hard fish to swallow! Might take some time to digest this one.
So, concretely, what are my first steps for the new year? I think I will just be looking to harvest my portfolio further, especially reducing my stake in AIG opportunistically if and when shares begin to trade above 80% of book value ($55). I am looking to be out of that position entirely if shares were to trade between 90-95% of book ($60-65). Further, I will be reassessing each and every other position I have over the next couple of months to see whether we are near my estimate of intrinsic value (revised from when I first made the investment) or whether management simply is incapable of realizing what I thought was intrinsic value (MFC???).