The V20 Portfolio Week #2: Underperformance
Summary The portfolio declined 3.5% versus a gain of 0.9% for the S&P 500. Additional shares were purchased for one of the major holdings. The largest position may be trimmed in the future. The V20 portfolio is an actively managed portfolio that seeks to achieve annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read last week’s update here ! No one wants to admit that he or she lost money. Of course, I didn’t invest in the V20 Portfolio so I can see my holdings dwindle in value. Unfortunately, you can’t count on the market to recognize the value of your portfolio all the time. Considering the V20 Portfolio’s concentrated style and historical volatility, it shouldn’t be surprising to see the portfolio tick up or down 5% on a weekly basis. Last week we were riding on the market tailwind, this week however, we were not so fortunate. While the S&P 500 eked out a minor gain for the week (0.9%), the V20 Portfolio gave away much of its earlier gains, having fallen 3.5% over the same period. Handling The Laggard Last week I talked about some negative news affecting one of our major holdings, Conn’s (NASDAQ: CONN ). The stock continued to disappoint this week, with shares sliding more than 13% from $24.48 to $21.24. At the end of last week, Conn’s constituted 23% of the entire portfolio, so this position alone accounted for over 2% of the portfolio’s decline. I think this is an excellent opportunity to illustrate my investing principle. Not many people would be happy when one of their holdings slide two weeks in a row, but this is where discipline comes in. Were there any news or events that materially affected my view of the company? The answer is no. In fact, this week presented us with the opportunity to accumulate more shares at a lower price. Why does this make sense? It seems to go against the conventional wisdom of “don’t try to catch a falling knife.” However, Buffett disagrees: When stocks go down and you can get more for your money, people don’t like them anymore. If your view and valuation of a company have not changed, there is no reason why you should not be buying more as the price declines. This was exactly my course of action. As Conn’s shares declined, I added more to the position. By the end of the week, Conn’s made up 28% of the entire portfolio, up from 23% a week ago. As Conn’s declines, the upside increases. By expanding our exposure to the stock, we can hope to capture a larger upside. There is a catch to “buy the dip” however: the money has to come from somewhere. Fortunately for us, there was some cash leftover in the portfolio (see the allocation chart here ), so we did not have to sell any other holdings. However, suppose that we were fully invested already, what could we have done then? This is where it pays to be diversified. While the market may not recognize one stock’s value, hopefully sentiments are more positive of your other holdings. In our case, one of the market’s favorites is MagicJack (NASDAQ: CALL ). Due to its continued appreciation, the holding constitutes a whopping 38% of the V20 Portfolio. While I believe that the company still has the potential to continue this nice run with catalysts in place (share repurchase, expansion), we could trim this position in order to purchase more shares of Conn’s. If Conn’s stock continues its decline, this is definitely something that could be on the table. The Week Ahead As we near the Q3 results from our holdings, don’t expect too many pieces of news over the coming week as companies tend to keep quiet prior to earnings release. However, there may be worthwhile updates from Dex Media (NASDAQ: DXM ), as the company recently hired a chief restructuring officer to lead the ongoing efforts to stave off bankruptcy. While the portfolio is going through a rough patch, it is very important to have discipline and stick to a plan. For us, Conn’s is our biggest “problem” right now, so we should carefully monitor the stock’s movements and evaluate opportunities should a big enough price decline materialize.