2017’s 48% Return and 2018’s Game Plan

The New Year is here, so it is time to look back at the past year. For us, 2017 was great! How will 2018 shape up? I have a plan for that.

Here is my performance for 2017 in client accounts held at Interactive Brokers, which is about 91% of my assets under management. I hold the balance of my accounts at TD Ameritrade and have mostly mutual fund accounts under $50k.

A few years ago I managed about $30 million for a brief period, but I primarily consult to self-directed investors now. I still manage assets for long-term clients and continue take on investment management duties for select new clients. I anticipate accepting 20-25 new clients in 2018 with $250,000 account minimums.

The following PDF is a “snapshot” of accounts provided by Interactive Brokers using their Portfolio Analyst system. I have no input to it and can not amend it in any way. It is a true composite performance across all of my accounts at Interactive Brokers for 2017, including conservative, moderate and aggressive risk accounts. Conservative accounts in general made less than 48%, aggressive accounts more than 48% and moderate accounts near 48%.

Interactive also provides me with a more comprehensive breakdown of account performance that includes per account performance, trades, allocation by asset class and sector for every day of the year, time period analysis, daily performance, risk statistics and other data. Here are a few items that jumped out at me:

  • The Peter Lynch idea that a few big winners can make your returns outstanding was clearly in play here. My returns for 2017 were 45.26% dependent on Exact Sciences (EXAS) monster returns. That is, 21 points out of the 48 total points of return were due to Exact Sciences. My Exact position grew to nearly 40% at times which required regular trimming to manage portfolio risk. Had I let Exact run to a higher percentage of portfolio asset allocations, we could have made roughly another 20 points on the year. As a regulated registered investment advisor that would have run the risk of breaching fiduciary duty. Individual investors can choose to take on more risk, but in the regulated environment I operate, I have to be cognizant of accepted standards for asset allocation. 
  • The rest of the portfolio returned approximately 27% which on a risk adjusted basis was outstanding as I carried an average weighting to cash of 32.06% this year. I reported to readers several times I was cash heavy for risk management reasons and advised them to move towards about 25% cash. 
  • Small aggressive accounts did the best this year as those were very heavy into Exact Sciences. Often small accounts don’t do as well as bigger accounts because I use a base of ETFs to get investors started, however, the combination of the PowerShares QQQ ETF (QQQ) and Exact Sciences did very well in 2017. My top portfolio performers earned 174.15% and 174.56%. Most five figure moderate and aggressive accounts had returns between 32.73% and 63.09%.
  • The best returns among six and seven figure accounts were for clients active in options. I am primarily a put seller which generates large amounts of portfolio income without having to own the stocks in many cases (which cuts risk by 5-15% in most cases). Larger accounts in my Punch Card Stocks portfolios and Retirement Income Options portfolios (PCS with heavier put selling and more dividends) earned a range from 27.98% to 80.92% with quite a few accounts earning from the 30%s to 60%s for total returns. Individual accounts were influenced by each client’s specific risk parameters. 
  • Performance against benchmarks was outstanding as portfolio returns pulled away throughout the year. You will see that performance started to really pull away from benchmarks in the summer. That is common for my accounts as I employ a minimalistic seasonal approach using options which generates second and third sets of premium that time of year and Exact Sciences went on a run then. 
  • My allocation of stocks to domestic stocks ran at over 95% all year – this is something I anticipate moving towards 75% in the future as domestic growth will be harder to find and several international markets are finally looking promising to me.
  • My other significant overweight other than Exact and QQQ was energy with an average weight of 18.67%, but an ending weight of 34.29%. That is, I added to energy significantly during Q3 when I was writing articles such as: 

Be Absolute, Not Relative

Overall, 2017 was a very, very good year for most investors. However, investors who glom onto media and financial industry narratives only did about as well as the markets. Why, because whether they intended to or not, they largely indexed to the market. 

I do not care much for asset allocation strategies that include somehow mirroring indexes – even if inadvertently. To me that completely defeats the point of intelligent asset allocation that I have talked about. 

When I take equity risk, I am looking for absolute returns. I am not looking to somehow beat the index by a point or two – which is how many dividend growth investors [DGI] seem to think of things now. 

If I am going to take equity risk, which let’s be very clear here, is to accept that you can wake up 50% or 100% down on any given day, then I want a high level of certainty in what I am doing. 

My demand for taking individual stock risk is that I want a very high level of confidence I will double money on a position within 5-7 years (so, 10-15% minimum return) with a good chance the double will actually occur within 2-4 years (18-36%), and that there is a chance the stock triples within 5-7 years (16-23% returns or better).

To me, if I can’t shoot for those numbers, what is the point of equities. I can grind out an upper single digit return using bonds. And, before commentators say that’s not the case today for bonds, it’s ignorant to think upper single digits can’t be had with bonds for people with enough money to buy actual bonds (not funds). 

For ETFs, which I use for asset allocation, I am looking for returns that will handily beat the S&P 500 (SPY) (VOO). The PowerShares QQQ ETF (QQQ) is the only large cap diversified ETF in that realm. None of the dividend ETFs cut it as they essentially mirror the S&P 500 index. Besides, QQQ, to beat the S&P, we have to use sector, small cap and international ETFs to overweight what we feel are undervalued growth situations. 

Why do I seek absolute returns instead of relative? I don’t want to lose 30% when the stock market loses 40%. Do you? That would be great relative performance, but I’d still be down 30%.  Repeat after me: screw relative returns. One more time: screw relative returns. Rinse, repeat: screw relative returns and all the garbage strategies that take you there. 

Abbreviated Game Plan for 2018

Clients and subscribers will be getting a fuller look at this tomorrow afternoon, however, here is my 2018 game plan in short. 

Because I believe everything in the economy, equity and bond markets are in a topping process right now, I am preparing for a disappointment in the not to distant future. I am no doom and gloomer just yet, but as I discussed in this article – The Futility Of Forecasts And My Forecast For 2018 (which is an important read imo) – the markets make little sense right now and things that people believe to be true just are not. 

The stock market is set up in multiple ways to be disappointing to investors in the coming years. Economic growth will struggle to be what politicians hope for. The tax cuts will have little to no impact on changing the “slow growth forever” scenario that I’ve laid out before: 

Understanding The ‘Slow Growth Forever’ Global Economy

Investing In The ‘Slow Growth Forever’ Global Economy

‘Slow Growth Forever’ Keeps Dropping Hints

Brexit Was A Reaction To ‘Slow Growth Forever’

You Must Accept Economic ‘Slow Growth Forever’

What If Janet Yellen Is Doing A Good Job But It’s Not Enough?

How I Prepared For A Flash Crash In An Overvalued Market

Reducing financial regulations are also a recipe for disaster down the road. Bond holders are seeing this and reacting. Equity markets won’t be very far behind once the first disappointment hits. 

Rising energy prices have also coincided with recessions. While not an imminent threat to cause recession, it is an important factor that could easily offset tax cuts quickly, causing the economic growth and corporate earnings disappointments that I anticipate in H2 2018 or H1 2019. 

I am once again going to hold around 25% cash this year. I am overweight energy. I am looking for select growth opportunities trading at value prices, as well as, opportunities to bet against overbought, overvalued stocks – getting to be easy pickings due to the financial dogma followers out there.

My very simple message for the next three years is this. 

Over the next 3 years, there will be some opportunities to make great returns, however, the broad market rally is about over and we are at risk for at least one bear market (20% loss over a time frame), probably two bears and maybe three bear markets. 

When those bears hit, that will time to buy super high quality stocks like Alphabet (GOOG) and Lockheed Martin (LMT), high growth ETFs like QQQ and tomorrow’s growth stocks like SunPower (SPWR) and other companies that are changing the world. 

Happy New Year, 



New Year’s Eve is the LAST DAY to get my “Margin of Safety Investing” for only $365 per year. On January 1st, the rate rises to $499/year. I use access to multiple top research and analysis services, and a growing staff of analysts, combined with my “Core 4 Investing Method” and insights of 25+ years of experience, to find some of the best growth and dividend income opportunities with reduced risk. See my top-ranked history on TipRanks and read archived articles at MarketWatch where I was named “The World’s Next Great Investing Columnist.

Disclosure: I am/we are long EXAS,SPWR,QQQ.

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