Retirement Investor

Four Strategies for Consistent Investment Returns


We are having a dot-com-like sell-off while the major indices are pushing forward. The pandemic fashion show stocks went to the moon but are on their way back to earth.

Chegg, Vimeo, Peloton, Sam Adams, Zillow, Redfin, Stitch Fix, Lordstown Motors, Zoom, Penn National Gaming, DraftKings, Roku, Pinterest, Teladoc, Beyond Meat and PayPal are a sampling of stocks that have had significant drawdowns in the last six months.

The Renaissance IPO ETF (-17.86%), the Defiance Next Gen SPAC Derived ETF (-31.09%), and the Ark Innovation ETF (-32.33%), are all in significant drawdowns after dramatic rises that ended in Q1 2021.

In the last six months, 43% of the Russell 3000 have negative returns, with some big losses, while only 34% of stocks have exceeded the six-month return of the index. These statistics mean it was more likely that you would pick a stock at random that will lose money than one that will beat the index.

With many investors likely feeling gravity from the positions that flew to the moon in 2020 or early 2021, I’d like to offer some strategies that I believe can lead to long-term performance.

Strategies to Perform

1)     Extend your investment horizon

Over one year, only 22% of stocks in the Russell 3000 with performance data on YCharts have negative returns compared to 43% of stocks over six months. Extending your investment horizon decreases your odds of having a negative returning stock by almost half.

2)     Size appropriately

Despite certain stocks having large sell-offs in the last six months, the index continued to gain 12.8% during the period. That’s because the index is market-weighted where the larger stocks get a bigger weight, and the worst stocks fall out of the index. In your portfolio, you could similarly weigh the stocks by confidence, size, or perceived risk.

3)     Fish where the fish are

When I look at the biggest winners in our discretionary portfolio for the last year, they typically have one of two traits in common. They are in sectors that were disliked a year ago or they have wide moats. When sectors are disliked, the underlying stocks can sometimes be significantly discounted in the relatively short term. In the last 12 months that was the case with energy, financials, retail and semiconductors because there was a pandemic concern, and these are perceived as cyclical sectors. Additionally, buying a superior company at or below a benchmark price should lead to continued and superior performance. The latter is easier than the former and if you can get a wide moat company that’s in a hated sector then you could really have a winner.

4)     Win bigger than you lose

A stock can lose 100%, but it can gain an unlimited amount. That is a nice tradeoff. You can also take steps to control your losses.

A)     Identify a reasonable liquidation value by analyzing the balance sheet because it can help estimate a floor.

B)     If you are buying a stock for the expected growth, ask yourself what would happen if growth slowed, stopped, or declined and the associated multiples changed with it.

C)     Learn the fundamental advantage the company has that will make the cash flows, earnings, and intrinsic value more predictable. Understanding the business advantage can help justify price, provide courage to buy more in a downturn, and the confidence to hold and compound for the long term. The advantage can come from scale, cost advantage, brand, backlogs, customer relationships, favorable financing, superior technology and more.

It’s difficult to beat an index. It’s worth trying if you’re young with little to lose, but also if you have means because the additional value add can have a significant change in absolute dollars. Many retail investors have taken up the outperformance quest in the ‘pandemic years’ as their savings exploded, but I suspect their momentum has slowed lately. I hope these strategies help reevaluate especially if you are feeling the heat as your stocks re-enter the earth’s atmosphere.

Brian Regan, CFA

Brian J. Regan, CFA®, MBA, is the Chief Investment Officer for Asset Management Resources, LLC. His responsibilities within the firm relate to investment research, portfolio design and implementation. He has education and experience in portfolio risk management, asset allocation, fixed income security selection, equity security selection, and macro-economic analysis.

In 2010, Brian started his career at State Street Bank’s Treasury department as a Balance Sheet Consultant for a $110 billion portfolio after completing their highly selective Financial Analyst Rotational Program. He then moved to EMC Corporation where he managed a $15 billion corporate cash fixed income portfolio generating $110 million in portfolio income. In addition to the corporate cash portfolio, Brian maintained the fiduciary responsibilities of EMC for the corporate pension and retirement plans.

Succeeding the Dell a popular toy company. In each restructuring case, Brian helped to save hundreds of jobs, reclaimed capital for lenders, and maintained value for equity stakeholders.

Brian received awards for excellence including the State Street Above & Beyond award and the EMC Gold, Silver & Bronze awards.

In 2015, the CFA Institute and the Boston Securities Analyst Society credentialed Brian as a Chartered Financial Analyst Charterholder (CFA®) through passing a series of tests. The CFA institute promotes good stewardship and high ethical standards.

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