See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal Recent articles: • The dark side of the dividend boom, 12/27/2005 • 5 stocks smart insiders are buying, 12/21/2005 • Stocks for the 2006 commodities crunch, 12/20/2005 More... | Jubak's Journal 5 keys to beating the market My Jubaks Picks portfolio gained 33% in 2005, while the S&P 500 rose only 5%. But how I did on these key measures could prove more important than the numbers game. By Jim Jubak How did you do in 2005? By the numbers, Jubak's Picks had a good year. My picks were up 33% for 2005 versus a 0% return for the Dow Jones Industrial Average But numbers aren't the only way to measure a portfolio's performance. (You will, however, find complete performance numbers at the end of this column for Jubak's Picks benchmarked against the indexes for the quarter, year, three years, five years and the life of the portfolio. Also this quarter, I've added a new number: the percentage of closed picks that were profitable vs. those that showed a loss.) The other ways to measure performance are far more squishy and subjective, but I think they're just as important for anyone who wants to make a consistent profit -- in good years and bad years -- in the stock market. They're so important because it's scoring well on these subjective measures that keeps a portfolio on course over the long term and prevents a good year or two (or a bad year, for that matter) from leading a portfolio into dangerous territory.
Here are the other ways that I measure my performance - and my judgment on how I did in Jubak's Picks in 2005. Don't fight the market Did I take what the market gave me or did I try to force profits? Those of you who like sports analogies should find this very clear. A good offense in basketball doesn't keep forcing the ball into the hands of the center when the defense has collapsed on that player. It takes what the other team is giving it and shoots the uncontested three-pointer from the perimeter. Same in football: Instead of throwing an interception deep into double-coverage, the quarterback picks apart the opposition with short passes. In baseball, the smart batter doesn't try to pull every pitch but often goes to the opposite field. Related news and commentary on MSN Money
It works the same way in the stock market. What do you do if you feel that technology stocks must go up, but market trends are telling you that the technology sector is dead money and that energy is where the action is? All investors have a tendency to favor what we know -- to put our next buy order in on the sectors that have rewarded us in the past and that we know better than others. But not all sectors work in all markets. That was certainly the case in 2005, when the energy and utility sectors were far more rewarding over the stretch of the entire year than, say, technology. I'd give myself a grade of good on this performance measure this year: I did a decent job of taking what the market gave me by overweighting the energy and gold sectors. I do wish, however, that I'd put more money in utilities and transportation stocks. Did I keep the wind at my back at all times? Investing, to continue the sports metaphors, resembles batting in baseball. A successful batter still makes an out roughly two-thirds of the time. No investor hits a home run every time up. No investor makes money every trade. A successful investor strikes out at least 40% of the time, I'd guess. The difference between success and failure lies at the margin. Do 40% of your trades make money? Your portfolio is under water. Do 55% of your trades make money? Your portfolio is profitable. (The record for Jubak's Picks since inception in May 1997 shows that 60% of closed picks have been profitable.) With so little separating profit and loss, it makes sense to me to keep the wind at your back as much as possible. To me, that means going long in periods of the year when market history shows stocks have a tendency to go up -- from the end of October to the end of January, for example. It means being invested in specific sectors when history, again, shows these sectors outperform -- natural gas and oil stocks in March, April and May, for example. And it means staying away from even the most attractive stocks in weak sectors. It is, of course, possible for a stock to climb when the rest of its sector is down, but weak sector performance stacks the deck against that stock. I'd give myself a grade of good on this measure. For example, I largely stayed out of financials when interest rates were climbing, and out of technology until the end of the year. Running the risks Did I minimize my risk at all levels? When you buy a stock, you take on more than one kind of risk. There's market risk -- the risk that the market as a whole will go down. There's sector risk -- the risk that all stocks in an industry will go down. And there's individual-stock risk -- the risk that a specific stock will go down even as its sector or the stock market as a whole go up. Many investors who understand how this applies to the downside of a stock investment don't grasp that it applies to the upside as well. You can correctly identify an upward trend in the market, and in a sector, but still pick the wrong stock and miss out on all the profits. The goal is to create a match between the profit opportunity you identify and what you buy to participate in that opportunity. I did only a fair job on this measure in 2005. Buying one of the strongest railroad stocks, Burlington Northern Santa Fe Did I stick to a trading strategy that I'm comfortable with? It's tough to stay in your own comfort zone when buying and selling, but I think it's essential. It's tough because all of us see, from time to time, opportunities to make money that just require an adjustment to our normal investing behavior. This year, in October, I thought I saw a good opportunity to make money twice by short-term trading. First, after the energy sell-off after Sept. 30, I thought adding volatile energy-sector stocks, such as Ultra Petroleum I'm not especially good at short-term trading. I find it hard, as any but the most gifted technical analysts do, to pick short-term bottoms and tops with anything resembling accuracy. But I thought I could force profits from this situation despite my own discomfort with short-term trading. Because of my own discomfort with this trading strategy, I fell back on stop-losses for these positions. It all added up to quick losses of 15% or so when I did, indeed, miss calling the bottom for the stocks. I wound up getting stopped out of the positions before the stocks rallied. If I'd held onto Ultra Petroleum, Dril-Quip and Arris Group through the drop and to the end of the year, I'd be looking at profits of 21%, 33% and 23%, respectively. I'd give myself a grade of poor on this measure. Did I strike an appropriate balance between the long and the short term? This is a tough one. I certainly bought and sold more rapidly this year than in years past. Some of that change was, in my opinion, an appropriate response to the choppy nature of the stock market in 2005. Trends didn't last very long and rallies were rapid and tended to end abruptly. One danger of seeing that pattern and investing to match it is that, as time went on, I tended to get impatient. I definitely sold some things this year -- Joy Global This kind of performance scorecard is less satisfying than hard numbers -- you can't brag about the results at New Year's parties. But it does have one advantage: Last year's performance number doesn't carry over into 2006. The lessons of this subjective rating do. If I can learn from the past, I have a chance to be a better investor in 2006. And maybe the market will reward that. Fourth-quarter 2005 performance for Jubaks Picks Its time for the end-of-quarter, end-of-year and longer-term performance numbers on Jubak's Picks. The portfolio finished the fourth quarter of 2005 about even with all the indexes with a return of 4.3% for the period. For the quarter, the Dow Jones Industrial Average ($INDU) returned 2%, the Standard & Poor's 500 ($INX) returned 2% and the Nasdaq Composite ($COMPX) returned 4%. The 4.3% return on Jubak's Picks for the December quarter of 2005 compares to a 14.9% return for the fourth quarter of 2004. But the relatively modest performance for Jubak's Picks in the fourth quarter capped a very good year. For 2005 to Dec. 30, Jubak's Picks was up 32.8%. That was ahead of the 0%, 4% and 2% returns for the Dow, S&P and Nasdaq indexes, respectively. (Please note that the returns I report here and those calculated by our Expert Picks pages are not equivalent. My returns are for the Jubak's Picks portfolio and include such features as cash balances and re-invested profits during the year. The Experts Picks pages report an average gain for each pick and assume equal holdings, and do not account for reinvested gains.) As in 2004, energy stocks kicked in big time in 2005 to the high returns for the year -- and the ability of Jubak's Picks to outperform the indexes. The shares of energy producers produced realized gains of 85% when I sold Peabody Energy The portfolio also got a sizeable boosts from its exposure to non-U.S. shares with Danone Group
Here are longer-term performance numbers for three years, five years (a period that this quarter begins just nine months after the peak of the bull market in March 2000 and includes much of the bear-market collapse from that peak) and since the inception of the portfolio in May 1997:
**Dec. 31, 2000 through Dec. 30, 2005. ***May 7, 1997, through Dec. 30, 2005. All returns for Jubaks Picks deduct costs of commissions. Returns for Jubak's Picks and the indexes all include dividends. As is my practice, I will update these performance numbers at the end of the next quarter in March 2006. Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Cell Genesys, Goldcorp, and Mitsuibishi UFJ Financial Group. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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