Did Your Portfolio Return 4,200% in 2016?

marginofsaving
Aug 25, 2017 · 4 min read

Did your portfolio return 4,200% in 2016? 4,200% is the best possible return in 2016 you could have had if you picked the best performing stock in the S&P 500 each month. This compares to a 10% return for the S&P 500. If your portfolio didn’t generate these kinds of returns, you should be ashamed! I’m joking because this level of return would have been impossible. It’s like being upset that you’re not billionaire because you didn’t predict all the numbers to the lottery. Or that you knew the roulette ball would land on 30, 14, 7, 18, 6, 5, 27, 24, and 1, in that order!

Best Possible Return in 2016

Speaking of that 4,200% return, if you were to randomly pick one stock in the S&P 500 each month, the odds of picking the best performing stock each month would be around:

1 in 240,000,000,000,000,000,000,000,000,000,000.

That makes winning the lottery look like a near certainty.

Best Monthly Returns in the S&P 500 in 2016

Worst Monthly Returns in the S&P 500 in 2016

Instead of being a totally useless exercise, there are some interesting takeaways from this analysis. Here are the 5 things I learned:

1. Winners Keep Winning, Sometimes

If you look at these 11 stocks (NVDA was the best performer for two months), six had a higher 2016 return compared to its best monthly return. That means about half held those strong monthly gains while the others didn’t.

Winners don’t always keep winning. I’ve talked about momentum helping index stocks because of the shift to passive, but at least for these 11 names, it doesn’t appear to be the case, although the sample size is small.

This is why it’s important to understand why a stock is up and whether it’s justified. If the move is not justified and it’s an over-reaction, the stock will eventually go lower. But if it’s a fundamental shift in how investors view a stock, it can continue to work.

2. Energy Outperforms the Market

This shouldn’t come as a surprise. Energy massively underperformed the index in 2015, bottoming out in January of 2016. Tech also accounted for five of the best performing stocks.

There’s money to be made in looking for value. When a sector isn’t doing well, investors will flee, expecting the worst. When things start to moderate or investors realize it’s actually not so bad, they’ll come back. It’s tough buying when everybody else is selling, but it can be worth it if you can get the timing right.

3. Valuation is Important

None of these stocks (except NVDA), trade at high multiples. And NVDA is only trading at a high multiple now. Expectations for 2018 EPS at NVDA has almost doubled compared to where it was at the beginning of 2016. Back then, it was trading at a mid-teens forward EPS multiple.

When expectations are low and a company surprises to the upside, a stock can move up quickly. Short interest in NVDA was high in early 2016, peaking around 12 days. Shorts can only take so much pressure before they capitulate. This is why short interest is now under a day.

4. It Pays to Stomach Volatility

SWN, URI, STX, and MUR all show up as a best and worst monthly performer. All of these stocks significantly outperformed the S&P 500 for the whole year, even with large monthly losses.

If you sold all your stocks in 2008 because of huge losses, you missed out on one of the longest bull markets runs of our lifetime. The same would have happened if you owned one of these 4 stocks and sold when it was down a lot. Of the 10 worst performing monthly stocks, only 3 were down more for the year compared to its worst month.

5. Buy the Dips

Again, four of the worst monthly performing stocks were also the monthly best performers. Stocks over-shoot to the upside and the downside. Of the four stocks, two had their best month before their worst month. The other two had it the other way around. Yet all of them outperformed the S&P 500 for the year. So big declines are opportunities to take advantage of over-corrections.


Originally published at www.marginofsaving.com on August 25, 2017.

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marginofsaving

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Margin of Saving was created by an analyst at a multi-billion dollar hedge fund. Find out what he's learned about investing and saving.

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