November Portfolio Update: Up 32.27% YTD, Fiscal Cliff Looms

The Value Stock Guide portfolio is positioned for a strong close in 2012. With just one month to go, the portfolio has returned 32.27% so far this year, which compares well with 12.67% return on the S&P 500 index.

In November, we initiated 1 new position and no positions were sold. The following table and chart illustrates the performance of the VSG Portfolio so far.

Returns VSG S&P500
YTD 2012 32.27% 12.61%
Inception 122.74% 48.44%

Inception: Jul 23, 2009, the chart shows the growth of $100

Fiscal Cliff Jitters

What do you do when the markets are jittery about the fiscal cliff?

I have fielded several emails on this topic, and frankly, my position is to be prepared to buy when the opportunities arise. I do take the macro economic issues into account, but it is important to keep them in historical perspective. Great opportunities do not come often so when they come we need to be prepared to move, while artificial economic headwinds such as the fiscal cliff tends to blow over relatively quick (however cataclysmic it may look at the time).

One could argue on both sides of the issue when you consider the impact of the fiscal cliff on your investment. From my perspective, the worst case scenario for investors is if the cliff is averted with no real change. For example, postpone the rollback of the tax cuts by a few months. Or maybe push through a deal that puts a band-aid on the problem without actually attacking the core issue of federal debt and economic growth. The euphoria will be short lived and the investors will be back to fretting about the next fiscal cliff like situation.

If on the other hand, we do fall over the cliff, we will take an immediate hit but it might end up being better for the economy in the long run. There is an urgent need of fiscal discipline in Washington and this might be a way to get it.

The best case scenario is when the Congress makes hard choices on spending cuts and encouraging business investment (for example, increasing taxes on dividends and capital gains is not the way to encourage business activity).

As long as the economic uncertainty is removed, the businesses will adapt to whatever comes down. It may not be optimal, but we always tend to find a way. When this happens, the markets will rally going into the new year.

If you are still planning to trade around the fiscal cliff and expect the stocks to decline further, I would have to say that the markets have already priced in the worst. If you plan to sell your dividend stocks this year  to avoid higher dividend taxes next year, then I am willing to buy them at a good price. I have never believed in including tax considerations in my investing. That is what the tax advisers are for. I do my job of maximizing returns, they do their job of minimizing taxes.

My Advice on Fiscal Cliff

Essentially, do nothing. But given that most of the investors will ignore this advice, keep some cash ready to move as they create new opportunities for you and me.


  1. pbanik says

    Whether or not the fiscal cliff happens, the US government needs to do something about their deficit. The longer the government puts it off, the worse it becomes for future generations of taxpayers and governments. It’s better they take corrective action sooner than later. I know it will be tough medicine to swallow considering what happened in 2008, but I don’t think what this administration in terms of addressing the problem has been successful. The deficit is growing and the unemployment rate isn’t significantly lower than it was when they came into office. It’s about the same (7.8% in January 2009 when President Obama took office to 7.9% in October 2012).  The arrogance of this statement rankles me “If you’ve got a business — you didn’t build that,” “Somebody else made that happen.” Sorry, but the person or people involved with creating that business from financing it, promoting and doing everything else to make sure that business is successful and competitive did build that. The government is built by taxpayers, not the other way around.

    • says

      @pbanik Paul, absolutely agree. The government’s hope, it seems, is that we can grow out of the deficit problem. In theory it is right, given sufficient GDP growth, the deficit can be shrunk to a manageable level. The problem is that most of the policies have continued to be anti-business so it is hard to see where the growth will come from. If it does happen, it will be despite the government’s efforts; not because of it.

  2. AAAMPblog says

    Congratulations on the excellent performance Shailesh.  Also, I think your advice “keep some cash ready to move as they create new opportunities” is excellent. The only item I might disagree with on is whether the worst is priced in on the fiscal cliff. I think the rally from the Nov. 16 low has been based on the belief of most investors that we will not go over the cliff.  I believe there is extraordinary event risk that is not priced into the market. Only time will tell!  :-)   Thanks for another excellent post.

    • says

      @AAAMPblog Thanks Ken! Time will tell indeed. There will be some of the “sell the news” type activity but I think most of the repositioning is done, specially on the institutional side. We shall see.

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