2014 so far has been marked with volatility. If you have invested in large stock indexes, this volatility has largely left you untouched. However, portfolios with small and mid capitalization exposure have felt this quite tangibly.
We started the year on the back of a 38% gain in the portfolio in 2013. The early part of 2014 saw the portfolio continue where it ended. However, when the flavor of the day changed to shunning small cap stocks, the VSG portfolio cooled down a bit. Generally we have stayed with our investments as there have been no compelling reasons to tinker around much. The valuations are comfortable and our performance has been very satisfactory (better than satisfactory, if you benchmark it against small cap indices).
Many have asked me often to benchmark against a small cap index to account for asset exposure. For the first six months of this year, the Russell 2000 index returned 4.32% including dividends (the returns in the table and the chart include dividends and are net of commissions. S&P500 returns include dividends and assume 0 commission to buy the index).
Generally the volatility in the portfolio is well managed. However, since the portfolio is quite concentrated (we have 13 stocks in the portfolio today), any significant moves in one or two names might show a disproportionate change in the overall portfolio compared to the indexes. A few of our companies reported earnings during the time period when the investors had gone into “small cap is bad” mode, so even while the earnings performance was strong, these stocks sold off with blind abandon. Some semblance of rationality is returning to this sector.
Portfolio Transactions in 2014
During the first 6 months of this year, we purchased two new stocks in the portfolio. There were no exits. We did not have many transactions, since there was no need. Majority of the gains in my experience come from standing still. Two stocks did hit my sell price target and the targets were revised upwards, which is quite rare at Value Stock Guide, and reflects the improvement in the business these companies are witnessing.
We have also witnessed a 50% decline in one of the portfolio stocks. This stock is now a small allocation in the portfolio so future impact on the overall portfolio performance is minimized. Although the stock today presents incredible value, I have stopped recommending it for new positions due to a new business risk that has presented itself. When this risk is mitigated, this stock may be opened up for future investments. For existing positions, there is no compelling sell argument that can be made yet.
You can view the restricted (depending on your membership status) portfolio here
Looking Forward to Rest of 2014
I am quite optimistic about the portfolio for the rest of the year. I will not make the same judgment about the stock market as a whole. The 2nd half will likely be much busier in terms of the transaction volume, with a few existing positions being set up for exit, which means new positions will be established. We do have a comfortable lead over the market this year so far (again) and would like to grow this lead in the remaining 6 months while staying true to our well proven investment process.
Note: The website features a new look now and has been well received so far. This much better aligns with my investing philosophy (keeping it simple, ignore the noise). Hope you like it as well.