2006 Year End Performance Report
By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements .
2006 was a much better year for the equity markets than I expected it would be. Here’s how the performance of my portfolios shook out against the major indexes.
Core Portfolio………………….……….……..7.5%
Focus Portfolio……………………….…..……6.1%
S&P (VFINX)……………………………….….15.4%
NASDAQ (QQQQ)…………………………..…6.9%
Benchmark (Couch Potato Portfolio)……8.0%
While I got beat by my benchmark index, it wasn’t by much. It’s important to note than less than a quarter of all money managers beat Scott Burn’s Couch Potato Portfolio. Considering that I see myself in the top quartile of money managers, I’m certainly not pleased with trailing my benchmark. There were two primary causes that resulted in me underperforming.
First, I underestimated the ability of the Yen “Carry Trade”, Hedge Fund leverage and the recycling of petrodollars to continue to push asset prices up in spite of significant fundamental issues. I focused too much on the fundamental weakness in the market and not enough on the technical strength of the market. While this type of risk aversion will help you in the long run, I should know better than to discount technical strength in the market. I take responsibility for not sticking with your equity positions in light of the market’s technical landscape. If I hadn’t prematurely pulled out of my foreign equity positions we would have smoked the averages.
Second, your account lost out on some profit opportunities as I shifted from an equity focused portfolio to a precious metals based portfolio. The market’s technical strength weakened as it pulled back in May and June. At that time, I assumed an equity neutral position. In July and August the technical indicators began to improve but I decided to build positions in precious metals versus rebuilding equity positions in light of my long-term outlook. I’ve stated numerous times that I believe that gold and silver will outperform equities by a significant margin over the next 24 months.
We made money in precious metals, but equity gains outpaced gold and silver in the second half of the year. While I built these positions, a lot of your money was in cash, which was adding little value to your account. Furthermore, there is no way to perfectly time a transition such as this. While this hurt your account in the short run, at some point I would have had to shift your account from equity based to precious metals, therefore we would have experienced the hit at some point in time. From a selfish standpoint, I wish my portfolio could have taken the hit when equity markets were declining so it wouldn’t look so bad. But in all fairness, it really does not matter in the long run. Whether we took the hit last year or this year is of little consequence in the grand scheme of things.
While it’s disappointing to miss out on some market gains, I’m not discouraged about getting out of an ageing bull market. I am certainly not alone in missing out of some late gains in this bull market. In my December update, I mentioned several notable investment icons who felt that the current equity market was not worth participating in. None have changed their outlook and I am adding Bill Miller to the list. Bill Miller is the manager of Legg Mason’s Value Trust, which had beaten the S&P 500 for 15 straight years - until 2006. His value fund only returned 5% in 2006.
I’m very optimistic about the opportunities in the market in 2007. I fear that the US equity markets may see a substantial pullback but there are all sorts of opportunities outside the US equity space. In the next 24 months, there will be a much better time to buy equities than today. In the meantime, we can make money in alternative strategies and asset classes.
