Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Strategy Lab celebrates its fourth anniversary this month. The lab features four fundamental investment strategies and it has been my pleasure to head up the value investing effort, which is devoted to stocks in the market's bargain bin.
Each strategy comes with its own model portfolio. The value portfolio is displayed in the accompanying table and will be the focus of discussion today.
The rules governing the model portfolios are simple. Each hypothetical portfolio was started with $50,000, which was invested in five to 12 Canadian, or U.S., securities. The positions could then be changed as often, or as little, as each of the lab leaders desired.
The returns generated by the different portfolios have been quite good. I've been particularly pleased with those of the model value portfolio, which advanced 79.1 per cent since it was launched on Sept. 13, 2012, through to the end of August of this year. That's equivalent to an average annualized compound return of 15.8 per cent over the period.
While I'm always happy to report good news, I hasten to add that it's easy to look like a genius during a bull market and then play the fool during a downturn. As a result, investors would be wise to moderate their return expectations.
The model portfolios haven't changed much since they were launched, which points to the laudable long-term attitude taken by the lab leaders. The value portfolio is no exception in this regard.
The first big change for the value portfolio came with the sale of Dell when the computer company was taken private by its founder in a leveraged buyout in 2013. The portfolio also gained a small holding in Crimson Wine Group (CWGL) in the same year when it was spun out of Leucadia (LUK).
Crimson Wine makes its home in Napa, Calif., and owns wineries in California, Oregon, and Washington State. The firm is devoted to the ultrapremium and luxury end of the wine-making business.
It is a fairly small enterprise with revenue of $63-million (U.S.) over the past year and a market capitalization of just more than $200-million. The firm currently trades near book value and at a price-to-earnings multiple north of 60 due to earnings weakness in recent quarters.
Given the limited number of positions allowed in the model portfolio, and the firm's weak earnings trend, I decided to give the stock the heave-ho this week. The sale brings the number of positions in the value portfolio down to seven.
The value portfolio also continues to hold a great deal of cash. After the initial stock purchases, $15,000, or 30 per cent of the portfolio, was left in cash. That has grown to about $25,500 thanks to stock sales – including Crimson Wine – and dividends. As a result, cash currently represents about 28 per cent of the portfolio.
Holding a large cash position has depressed the portfolio's performance. But the allotment was included as a reminder to investors to follow the conservative path set by money manager and famous value investor Benjamin Graham. He advised investors, in The Intelligent Investor, to hold no less than 25 per cent, or no more than 75 per cent, in stocks with the remainder in bonds.
Unfortunately, cash, even when stored in "high interest" savings accounts, doesn't earn much these days. But it does provide a simple hedge against bad times and frothy market conditions. It's easy to become too aggressive in bull markets only to panic during downturns. Wise investors set aside money to weather such storms.
It has been an honour to be your value-investing guide over the past few years and I hope to continue for a few more. But be sure to investigate all of the Strategy Lab portfolios to find the one that best fits your investing personality.