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The V20 Portfolio Week #15

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 ————- The market has continued to decline over the past week as stocks both good and bad sold off. Most of our holdings lost value, mirroring the broad market decline. During the week, the V20 Portfolio declined by 4%, underperforming the S&P 500, which dropped by 2%. Portfolio Update Conn’s (NASDAQ: CONN ) Conn’s has continued on its downward trajectory, surpassing its low in 2015. This is quite strange as the company has hit on almost every single catalyst since the V20 Portfolio took a position in early 2015. The securitization transaction has been completed, more stores have been added, and shares have been repurchased. Of course, we can’t count on the market waking up any time soon, but what we can do is continue to take advantage of this opportunity. MagicJack (NASDAQ: CALL ) Conn’s wasn’t the only casualty – m agicJack was another loser. If valuing Conn’s is like riding a unicycle, then valuing magicJack is like riding a tricycle with two extra sets of training wheels. At the end of the third quarter, the company had $80 million in cash (65% of market cap) and no debt. Furthermore, the company is generating around $5 million of cash per quarter and it has entered into multiple partnerships to expand, which will generate incremental cash flow to shareholders at minimal cost. Of course, there is no guarantee that the company’s partnerships will bear fruit, but the core of the business remains a stable cash generator. Spirit Airlines (NASDAQ: SAVE ) Spirit Airlines held up relatively well, vastly outperforming the broad airline index. Below is a chart of the stock’s performance since the V20 Portfolio took a position. Click to enlarge It’s certainly a crazy world right now. One would expect that lower oil prices (leading to lower fuel prices) will encourage travel and benefit airlines, but clearly something else is on everyone’s mind right now. Thankfully, the market seems to be recognizing the company’s “cheapness” relative to its peers. Growth remains in place and the company is still one of the most affordable airlines around. Looking Forward After exiting one of the positions, the V20 Portfolio ended the week with over 20% in cash. This provided us with plenty of dry powder . Unfortunately (or fortunately), Conn’s remains to be one of our biggest positions. Considering retail’s cyclical nature, there’s certainly room for the stock to fall further purely based on investor sentiment. Furthermore, the company’s complicated business model may continue to obscure its value to investors. However, none of the above impacts its intrinsic value in any way . The V20 Portfolio will continue to monitor the situation and pick up shares at opportune times. Performance Since Inception Click to enlarge

The Stock Market Is Getting More Expensive

One of the most underrated but among the most valuable skills required to succeed in stock market investing is resilience i.e., the ability to properly adapt to stress and adversity – either in the market, or in the businesses one is owning. How easily can you bounce back from a market crash? What would be your reaction to a sharp decline in your stocks’ prices? How many ‘surprises’ can you withstand in quick succession? How safe are your overall finances in light of extreme stress on the equity component of your portfolio? These are extremely important questions you must ask yourself every time you are looking at your portfolio, or looking to spend cash to buy more stocks. Surprisingly, despite its importance, resilience is least talked about by stock market investors and experts alike, and rarely considered an important mental model in investment decision making. Most of the time, we build our lives, our jobs or businesses around today, assuming that tomorrow will be a lot like now. Resilience, which is the ability to shift and respond to change, comes way down the list of the things we often consider. And yet, a crazy world is certain to get crazier. Jobs aren’t steady anymore. The financial market has gotten more volatile. The Earth is warming, ever faster. And the rate and commercial impact of natural disasters around the world is on growing exponentially. Hence the need for resilience, for the ability to survive and thrive in the face of change. Stock Market is Getting More Expensive Certainly I am not talking about stock valuations here. Because, if that were to be the case, the BSE-Sensex’s valuation – if you go by P/E – is now cheaper at 18x trailing 12-months earnings as compared to 23x just six months ago. Noted financial writer George J.W. Goodman – who used the pen name of Adam Smith – wrote this in his wonderful book, The Money Game – If you don’t know who you are, this is an expensive place to find out. By “this”, Smith meant the stock market. The people who bought commodity, infrastructure, or real estate stocks in 2006 and 2007 because they thought they had a high tolerance for risk – and then lost 95% over the next one year (some such stocks are down 95% even after eight years) – know just how expensive the stock market can be. While speculating on such stocks, they seemingly failed to answer the questions around their levels of resilience. And thus many ended up betting their houses and other people’s money on stocks that were destined to go down the drain. Something similar has happened to the guys who were utterly charmed by “moats” and forgot the subtle difference between paying up and overpaying over the last two years. A lot of such moated darlings are down between 30% and 50% over the past six months. Those who would have borrowed money to invest in such stocks are sitting on even bigger losses and much bigger dents to their egos. You see, knowing more about who you are as an investor can make you a fortune – or save you one. Knowing how resilient you and your portfolio are to severe market downturns also solves that purpose. Can You Handle Mr. Market Well? If you have been glued to financial media or online portfolio trackers, fixated on the sight of falling stock prices over the past few days and weeks, then this should tell you something about yourself that has enormous long-term importance – you probably have too much in stocks even as you don’t have the resilience to see your portfolio value declining (and that’s why you are checking stock prices so frequently). If you feel distressed by a decline of a few hundred points on the BSE-Sensex, then you are kidding yourself if you think you can withstand a drop of a few thousand points when it comes. Benjamin Graham, the father of value investing, divided investors into two types in his book The Intelligent Investor – defensive and enterprising. The defensive investor, Graham wrote, wants to avoid “serious mistakes or losses” and seeks “freedom from effort, annoyance and the need for making frequent decisions.” On the other hand, the enterprising investor, as per Graham, is willing “to devote time and care to the selection of securities that are both sound and more attractive than the average.” So, if you are an enterprising investor, then you should observe the stock market carefully in the hope that a substantial fall will present bargains. But if you are a defensive investor, you should observe yourself carefully. If you are not nearing retirement and have many years to invest and thus ability to see through a few big downturns; If you are not investing on borrowed money; If you are investing your own money, not other people’s money; If you do not owe a lot of money by way of loans, and have sufficient disposable income that prevents you from selling your stocks to meet your needs; and If you have seen through past market crises without much psychological upheavals… …you have adequate resilience to manage any major stress that the stock market may present you now. However, if you do not meet any or most of the above criteria, then beware. Reconsider your decision to be in stocks directly. Else, maybe, trim back on your stocks to create the much needed financial cushion so that any big decline does not become an even more expensive way for you to find out who you are. Remember what Keynes said – Markets can remain irrational longer than you can remain solvent.

Long/Short Equity Funds: The Best And Worst Of December

Long/short equity mutual funds and ETFs posted average returns of -1.23% in December, making it the third time in four months that the average fund in the category failed to post positive returns. This compares to a return of -1.58% for the S&P 500 Index and -5.02% for the Russell 2000 Index. The three top-performing long/short equity funds had monthly gains ranging from 1.74% to 2.01%, while the worst performers suffered losses of at least 5.65%. Top Long/Short Performers in December The three best-performing long/short equity funds in December were: KZSIX led all long/short equity funds in December with one-month gains of 2.01%. The $160 million fund launched on August 3, 2015, and thus did not have one- or three-year returns available, but its three-month returns through December 31 stood at +3.40%, ranking in the top 26% of the category. GURAX, with $106 million in assets and an inception date of March 2014, was December’s second-best long/short equity fund, in terms of returns, as it gained 1.88% for the month. The fund’s 3.59% gains in 2015 ranked in the top 12% of the Morningstar long/short category. Finally, SSPLX’s 1.74% gains in December ranked third among long/short equity mutual funds. The $22 million fund, which launched in October 2014, returned +0.47% in 2015, ranking in the top 31% of Morningstar’s Long/Short Equity category. Click to enlarge Worst Long/Short Performers in December The three worst-performing long/short equity mutual funds in December were: CIAXX, which returned -7.33% in December, was the category’s worst performer for the month. The $5 million fund launched on October 28, 2010, and through the end of 2015, its three-year returns stood at an annualized -4.70%, giving it a 1.43 beta (relative to the S&P 500) and -23.87% alpha for the three-year period. Its three-year Sharpe ratio stood at -0.15, with a standard deviation of 19.28, compared to respective category averages of 0.68 and 7.92. SLSAX lost 6.01% in December, making it the month’s second-worst-performing long/short equity mutual fund. The $63 million fund launched in December 2013 and returned -14.24% in 2015, ranking in the bottom 5% of the category. And the $644 million FMLSX, which lost 5.65% in December, rounded out the category’s bottom-three performers for the month. It launched way back in 2003 and generated 10-year annualized returns of +3.85% through the end of 2015. Over the past three years, however, FMLSX has lost an annualized 0.89%, ranking in the bottom 8% of its category for that time, with a beta of 0.79 and -12.03% alpha. Its three-year Sharpe ratio and standard deviation stood at -0.04 and 10.41, respectively. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.