January 2016 VSG Portfolio and Market Update

January has come and gone this year and the investors have been left behind in a sea of red.

For believers in January Effect, this can be foreboding. They say that the month of January is a barometer for how the stock market will perform through the year. This is not really true, but as an investor you do wonder what may be coming.

There are a few main areas of concern for the investors:

1. Volatility: It is becoming very clear that investors are leaving certain names and asset types in droves. Junk bonds have been decimated, so have been the stocks of energy and commodities companies. Biotech, most tech stocks, financials, you name it, have all suffered. When this happens in smaller stocks that do not have enough liquidity in the market, the prices can reach ridiculous levels. Heck, superb buying opportunities are opening up even in preferred stock which tend to be less risky than common. Important to have cash on hand to take advantage of these.

2. China: They think China is slowing down. It is NOT slowing down. So the growth is no longer going to be 7.5% but rather 6%. But it is still growth. The China problem is mostly an inventory problem. China overbought a lot of raw material and commodities based on their earlier growth estimates. Now that the growth is slowing, things have piled up. So China doesn’t need to buy a lot of the stuff they need until the excess inventory of what they already have is used up. Eventually supply and demand balance, this has always been true and will always be true (unless there are irrational actors on the stage, which there can’t be in the long run).

3. Commodities: See China above for the demand side of the equation. On the supply side, you might have noticed the big 3 Vale, Rio Tinto and BHP Billiton raise production in the face of  declining prices and a supply glut. There is a very good strategic reason for this. This kills off less cost efficient competitors faster and will make the recovery in the commodities cycle come faster than it normally would if left unattended. The big 3 will then be even bigger 3 as they would have grown their market share.  But yeah, investors look at the short term impact on these companies and punish their stock. Long term investors should welcome the widespread short termism in the market as that is what makes these once in a lifetime valuations possible.

4. Global Trade: This is a big elephant in the room. The Baltic Dry Index is at 30+ year low and as a leading indicator of the health of the global trade (and therefore the global economy), it will make anyone nervous. Already esteemed publications such as Zero Hedge are raising alarms that there is no ship moving in the waters and international commerce has come to a standstill (which is completely false – they should redact that story for lack of research). But it is true that things are not very good.

A similar scenario is playing out in Shipping as in the Commodities. Financially stronger companies that can afford to keep ordering new vessels amidst an industrywide multi year glut of ships that has pressured the charter rates downwards to record lows. Ultimately the weak will be removed and the strong will become stronger. We just find who the strong ones are and wait patiently, perhaps add to our positions when the rest of the market panics (which they do often).

5. Interest Rates: The Street has forgotten what an interest rate hike looks like and how to handle it. It has been so long since the previous series of rate hikes that most of the bankers today on the street were probably still working on their MBAs the last time rates were hiked.

6. Possibility of a Recession: There might be a stock market crash or there might not be one. This has been raised quite frequently recently. Partly due to the distress in the bond market which can dry up business funding and available credit. There was too much money in the system and that is now being taken away. I think the markets might take some time to adjust, but they will eventually adjust. As a value investor, I would rather focus on individual businesses rather then the entire market.


Portfolio Performance Update




This chart shows the long term performance of the Value Stock Guide Premium portfolio and compares it to investing in S&P 500 or a Russell 2000 index over the same period of time.

Essentially, if you had put 100K each in VSG, S&P500 and Russell200 on July 23, 2009, you would end up with $280K with Value Stock Guide Portfolio, $222K with S&P 500 index fund and $188K with Russell2000 index fund.

Good thing about index funds are that you save a lot of money. Good thing about a great active manager is that you end up with a lot more money over a period of time. It is not always a straight line as you can see from the chart. From the annual performance table below, you will also see that the VSG Premium portfolio, though is correlated to some degree with these market indices, they do not exactly match up. That is common and shows that the portfolio has a different style than just buying everything in sight.

So far this year, we have kept ahead of both S&P 500 and Russell 2000. Strangely, even though the proper benchmark for VSG portfolio is Russell 2000 (due to small cap focus), our performance compared to Russell 2000 is quite impressive.


Total Returns VSG S&P500 Russell 2000
Inception – 2010 70.54% 31.25% 33.04%
2011 -1.26% 0.43% -4.18%
2012 32.44% 16.00% 16.35%
2013 38.30% 32.39% 38.82%
2014 4.98% 13.69% 4.89%
2015 -9.77% 1.38% -4.41%
2016 YTD -4.30% -4.96% -8.79%
Cumulative 179.60% 121.74% 88.30%
Value of $100000 $               279,596 $         221,741 $             188,298


Last year we spent time building up cash in the portfolio to the current 30% or so. This year I expect this cash will be put to very good uses as the prices become very attractive in the smaller companies. We have invested in several cyclical industries, always looking for the strongest businesses that will outlast its competition (and are go0d values). They will all pay off as the markets in these industries recover.

This is probably the opportunity of a lifetime for a value investor, specially if you have cash and can deploy it when rest of the market is fleeing great equities. Staying out of the market in times like this is comfort. Investing at the lows is smart.

Update on the Premium Plan and The Upcoming Fund(s)

So far the plans are on track and there is significant interest from my members. You can see more information about these funds in this earlier article. In short:

– The VSG Premium will be the primary way for someone to participate in the fund unless I know you personally

– VSG Premium will substantially have same holdings as the Funds. It will be a stepping stone for investors with enough capital to participate in the fund directly. For others, VSG Premium will continue to function as is.

Panic situations create unparalleled opportunities. These do not last. Sign Up to Value Stock Guide Premium right now to find these opportunities.

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