{"id":24143,"date":"2011-09-29T07:00:15","date_gmt":"2011-09-29T11:00:15","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/09\/29\/whats-working-in-2011\/"},"modified":"2011-09-29T07:00:15","modified_gmt":"2011-09-29T11:00:15","slug":"whats-working-in-2011","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/09\/29\/whats-working-in-2011\/","title":{"rendered":"What\u2019s Working in 2011?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

2011 has been a rough year for investors.\u00a0 Stocks, as measured by the S&P 500, are down nearly 8% for the year and down 14% from the April highs.\u00a0 And while 14% may not sound like all that much in the grand scheme of things, investors felt <\/em>every point in a surge of volatility that brought back discomforting memories of the 2008 meltdown in which the major stock indices lost half their value.<\/p>\n

Still, some market sectors fared better than others.\u00a0 Let\u2019s take a look at Figure 1.<\/p>\n

\"\"<\/a><\/p>\n

Figure 1<\/p>\n<\/div>\n

Three sectors are in the black year to date\u2014utilities ($<\/span>XLU<\/a>), consumer staples ($<\/span>XLP<\/a>), and health care ($<\/span>XLV<\/a>).\u00a0 (Note: these figures do not include dividends.)\u00a0 Consumer discretionaries ($<\/span>XLY<\/a>), technology ($<\/span>XLK<\/a>), and telecom ($<\/span>IYZ<\/a>) are down for the year, though less than the broader market.\u00a0 After that, it gets ugly.\u00a0 Energy ($<\/span>XLE<\/a>) industrials ($<\/span>XLI<\/a>) are down 10% and 14%, respectively, but the real losers for the year have been materials ($<\/span>XLM<\/a>) and financials ($<\/span>XLF<\/a>)\u2014down 18% and 23%, respectively.<\/p>\n

Investors who underweighted the highly-cyclical sectors and focused instead on the less-sexy, dividend-paying value plays haven\u2019t had a bad year.<\/p>\n

\"\"<\/a><\/p>\n

So WHAT if I bet the farm on banks and gold?<\/p>\n<\/div>\n

But what is remarkable about this year\u2019s correction is that so few investors seemed to see it coming, and this included high-profile professionals.\u00a0 John Paulson, the hero of 2008 who used the subprime meltdown to make the most successful trade in history, has had an abysmal year.\u00a0 Due primarily to his overweighting to financials and materials\u2014the two worst-performing sectors by a wide margin\u2014Paulson\u2019s flagship fund was down by as much as 40% this year. (See John Paulson\u2019s portfolio holdings <\/em>here<\/em><\/a>.)\u00a0 <\/em>And over the past two weeks, his largest single holding\u2014gold\u2014has taken a tumble and may have much further to fall. (see \u201cIs It Time to Call a Top in Gold?<\/a>\u201d)<\/p>\n

No investor should be judged by a single nine-month period, and perhaps Paulson will ultimately prove to be \u201cright\u201d about financials.\u00a0 Many banks appear cheap on paper, and sentiment is almost universally bearish towards them.\u00a0 It\u2019s entirely possible that he will eventually recoup the losses he took this year.<\/p>\n

Still, Paulson\u2019s heavy losses on his leveraged, concentrated portfolio should stand as a warning to investors.\u00a0 Paulson ignored low-hanging fruit that was ripe for the picking\u2014such as telecom and pharmaceutical shares trading at multi-decade lows based on earnings and dividends\u2014and instead swung for the fences with a massive leveraged bet on an inflationary expansion.\u00a0 Paulson risked his career and the wealth and livelihood of his clients without ever asking that all-important question: \u201cWhat if I\u2019m Wrong?\u201d<\/em><\/strong><\/p>\n

\"\"<\/a><\/p>\n

Sir John Templeton<\/p>\n<\/div>\n

There is nothing wrong <\/em>with betting big on a concentrated position.\u00a0 Great value investors like Warren Buffett have made careers of doing so, and over-diversification is a recipe for mediocrity.\u00a0\u00a0 As the great Sir John Templeton<\/strong> said, \u201cBy definition, you can’t outperform the market if you buy the market.\u201d <\/em><\/strong><\/p>\n

But the second half of Sir John\u2019s quote is also quite illuminating: \u201c<\/em>And chances are if you buy what everyone is buying you will do so only after it is already overpriced.\u201d<\/em><\/strong><\/p>\n

If you\u2019re going to take a large, concentrated position, two conditions should be met:<\/p>\n

    \n
  1. You stand to make a bundle if you\u2019re right.<\/em><\/li>\n
  2. You won\u2019t lose your shirt if you\u2019re wrong.<\/em><\/li>\n<\/ol>\n
    \"\"<\/a><\/p>\n

    Mohnish Pabrai<\/p>\n<\/div>\n

    Value investor and financial guru Mohnish Pabrai<\/strong>\u00a0 compares the investment decision to a coin toss in which \u201cHeads I win; tails I don\u2019t lose too much.\u201d<\/em><\/strong>\u00a0 I tip my hat to Mr. Pabrai, and I only wish I had thought of that quote first.<\/p>\n

    Unfortunately for his investors, Mr. Paulson did not apply the same logic.\u00a0 He loaded up on gold after <\/em>it had already been in a bull market for the better part of a decade and had become trendy.\u00a0 And he bet big on financials even after watching what happened to them in 2008.\u00a0 He swung for the fences\u2026and struck out.<\/p>\n

    If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

    By The Sizemore Letter 2011 has been a rough year for investors.\u00a0 Stocks, as measured by the S&P 500, are down nearly 8% for the year and down 14% from the April highs.\u00a0 And while 14% may not sound like all that much in the grand scheme of things, investors felt every point in a … <\/p>\n

    Continue reading “What\u2019s Working in 2011?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-24143","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24143","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=24143"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24143\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=24143"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=24143"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=24143"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}