Keeping a cool analytical head in a volatile market

Last year was a happy time for investors who were fully, or mostly, invested in the stock market last. Here is what I wrote in the early weeks of 2013:

“For 2013 I expect markets to continue to climb but at a slower, perhaps less erratic, fashion than in 2012.  Dividend stocks will continue to benefit from the contribution of dividends to total return but, more significantly, by the lack of compelling income generating options for an expanding retirement population.  Significant growth will continue to found in the technology, healthcare, and consumer discretionary sectors but profiting from it will require careful stock selection. At some point interest rates will start to rise and this will have a negative effect on bonds but not stocks.”

I certainly did not predict the S&P 500 Index (SPX) to be up over 30%. Hardly a slow climb! So raise a glass to 2013; it was indeed a year to remember in the market.

My own philosophy of protecting capital means I almost always have some cash and/or some form of hedge in my accounts. In my opinion, a significant cash position contributed to my Covestor portfolios beating the market and to doing so on a risk adjusted basis.

In 2013, both the PWP Growth and Income portfolio and Global Growth Brands portfolios posted solid returns, considering they held cash positions of roughly 10-20% and 20-30%, respectively.

It’s important to keep one’s head and stay alert, both in bull or bear markets. So now is not the time to become exuberant and jump into the market with both feet. Nor is it time to rush for the exits.

I expect the market will continue to climb as more people sitting on the sidelines join the parade. However, the level of market risk has gone up along with the market itself and I remain cautious. I will continue to monitor the macroeconomic environment for warning signs including changes in global social, political, and economic conditions.

I will also continue to monitor the market itself – primarily relying on the analysis done by Jim Stack and his team at Investech Research – for warning signs.  And I’ll repeat my prognosis from last year and look for the markets to continue to climb in 2014, albeit in a slower, more erratic way than 2013.

The focus of the PWP Growth and Income fund will continue to be dividend paying stocks with a mix of growth stocks added to boost returns. I expect my selections and market weightings will become more conservative as the year goes on.

However, I will always have an eye out for special situations. I will also stay the course with the Global Growth Brands model by focusing on brands with secular growth prospects.

In the middle of last year I added IAC/Interactive, Liberty Interactive, Inter Parfums (IPAR), and Volkswagen. With the exception of IPAR, they have all outpaced the market and I believe that they still have room to run. I will continue to look for good global brands and invest where the risk/reward is favorable.

DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

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Leif Eriksen
Leif Eriksen
I am a long term investor with experience in both good and bad markets. My success is the result of a sound intellectual framework and an unemotional approach to decision making. I'm an engineer and consultant, focusing on the benefits of using information technology, and I incorporate this knowledge in my investment decisions.