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The V20 Portfolio Week #17: It’s Difficult To Be Different

The V20 portfolio is an actively managed portfolio that seeks to achieve an 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 ! Current Allocation *Only available to Premium Subscribers Planned Transactions *Only available to Premium Subscribers ————- In the first weekly update of 2015, I stated that history may be repeating itself. Now that a month has gone by, it is evident that the V20 Portfolio is again experiencing the pain it had to endure in January 2015. Over the past week, the V20 Portfolio declined by 5.2% while the S&P 500 appreciated by 1.7%. Year to date, the V20 Portfolio declined by 16.3% and the S&P 500 declined by 5.0%. This compares to a 15.5% loss and 1.3% decline in January 2015 for the V20 Portfolio and the S&P 500, respectively. Portfolio Commentary Despite the ongoing volatility in the portfolio and the broader market, our holdings (for the most part) have been incredibly boring. There were no surprise developments or unexpected setbacks (at least on a company level). Last week I talked about how the meltdown in the junk bond market affected Intelsat (NYSE: I ), these things are completely out of our hands, but unfortunately, we must live with the short-term consequences. Despite the lack of excitement, the V20 Portfolio dramatically underperformed in the first month of 2016. While I am not very concerned, I am sure some of the readers may not feel the same way. While investing in the most undervalued companies will deliver the best return over the long-term, investors will inevitably face periods like the one we are experiencing today. Despite their transitory nature, there is no easy way to deal with short-term losses. It may be disheartening to see your holdings decline in value after spending so much effort doing research, but when you come to terms with the fact that the market can be irrational (and stay that way), the “losses” become more digestible. As I’ve mentioned in the introduction to the V20 Portfolio, the portfolio seeks to achieve long-term gains . Whether a stock goes up or down in a particular month, day, or even a year, is irrelevant to us. Most of the time, undervalued companies eventually converge to their fair value as temporary negative sentiment fades away. Unfortunately, there is no set timeline for this convergence. Ultimately the valuation of the business is not impacted by the stock price. If a business is well-run, it will continue to create value even when the stock price is declining (cyclicality aside), meaning that the discount will grow larger, making it more attractive. There is no telling where the market will trend in the coming months. But irrespective of the result, the V20 Portfolio will continue to have an unwavering focus on the fundamentals. Performance Since Inception Click to enlarge

How Much Will China Affect Your Portfolio?

When Apple (NASDAQ: AAPL ) reported its fourth quarter earnings earlier this week, Tim Cook, the company’s CEO, noted signs of “economic softness” in the greater China region . Apple’s stock fell by more than 6% the next day. While China wasn’t solely responsible for this decline, it highlights how economic conditions on the other side of the world can affect US investors. How much will China’s financial travails affect your portfolio? You can have direct exposure to China by owning stock in Chinese companies (for example through mutual funds and exchange traded funds). As Apple shows, you can also have indirect exposure to China through companies based in other countries. The iPhone maker gets almost 25% of its revenue from greater China (meaning China, Hong Kong, and Taiwan). Apple is something of an outlier, however; overall only about 2% of large US companies’ revenue comes from China . The Chinese economy can also indirectly have an impact on companies around the world in other ways, such as by affecting commodity prices. So which countries are most closely tied to China? The graph above shows the correlations between the movements of Chinese stocks and many of the world’s other large stock markets during the past three years. Correlation is a statistical measure of how closely two things move together, where a correlation of 1 means they move in lockstep and -1 means they move exactly opposite each other. Other countries in the Asia Pacific region—South Korea, Taiwan, and Australia—have the highest correlations with China. Interestingly Japan, China’s neighbor across the East China Sea, has the lowest correlation of the countries examined. The US is in the middle of the pack. Perhaps the most striking aspect of these correlations, however, is that they’re all fairly closely bunched together. By contrast Chinese stocks have a correlation of only 0.35 with commodities, and a correlation of -0.14 with US investment grade bonds. That’s probably not because Chinese itself has a large effect on all the different countries’ stock markets, but rather that the same factors that affect Chinese stocks (such as the outlook for the global economy) affect stocks all around the globe. So while some particular companies (such as Apple) and some particular countries (such as South Korea) may add some additional “indirect” China exposure to your portfolio, it’s important not to lose sight of the bigger picture. No matter what happens in Chinese markets, your investment performance is likely to be driven more by your broader exposure to different asset classes than by particular companies or countries.

There’s The Time Value Of Money – And There’s The Value Of Your Time

An underappreciated benefit of low-cost, index-based investing is the modest time involved. That is, in comparison to the time commitment associated with individual stock-picking or some other variant of active investment management. The low-cost, index-based approach gives an investor more time to enjoy other pursuits. Such as time with family and friends, a good book, music, charitable and civic activities, hobbies (what’s a hobby?)… and on occasion a nice glass of wine. Active investment management in contrast goes hand-in-hand with consistent if not constant dedication to general economic news, industry-specific business news, and company-specific news. Attention to all the topics, risks, and developments described in detail in Securities and Exchange Commission filings or other disclosure documents that few investors read in time-consuming detail. Attention that’s paid by oneself or by compensating another to pay that attention. (It’s commonly forgotten that the word “pay” in the phrase “pay attention” is literal. One pays with one’s time, a precious, perishable, and irretrievable item. A costly item.) “Found time” via indexing has value of course. Value that may be hard to quantify, but quantification matters little. Please remember this: the average human life span is less than one million hours. Concern yourself not with Chinese export trends and currency manipulation, Midwest factory capacity utilization, Janet Yellen’s disposition, Vladmir Putin’s territorial ambitions of the month, Apple’s iPhone sales during the most recently concluded quarter, the price of oil, or the like. Or whether that company of which you hold many shares of stock will successfully bid that contract, win that lawsuit, or get that drug approved. Instead, relax. Yes, index-based investing consumes time – just not much. For example, a little time is involved in prudent rebalancing. That’s time well spent. As is time taking advantage of opportunities to reduce one’s investment costs, as cost pressures on investment managers of all stripes continue to lower costs. And with “robo-advisors” and their increasingly sophisticated auto-pilot portfolios sprouting like weeds these days, the time commitment to be a responsible low-cost, index-based investor decreases even more. Unless an investor consumes the greater part of daily economic news for enjoyment or as a hobby – and seems that’s a tall order with today’s information proliferation – what’s not to like about time saved? Especially when coupled with low-cost, index-based investing that can be expected, as empirical studies time and again show, to yield higher risk-adjusted net returns.