I'm getting killed in 2016-- and that's OK

I don’t know about you, but my portfolio is taking a beating so far in 2016.

As of this writing, I am down more than 20% in the last 6 weeks. That wipes out my +15% for all of 2015 and puts me at about at the level I was in September of 2014 (net of any additional purchases made since then). Which, I think, is better than most … but it sure feels lousy. I think about my kids’ college money burning like a pile of leaves. The plan to pay for my elderly mom’s future medical bills, circling the drain. My own retirement, receding into the distance.

So this is it. We in the investing community—and that’s by definition with a long-term bias, as opposed to the trading community—we often talk about withstanding the downturns in order to realize the big gains which follow. We talk about adding to our existing positions on the dips, to lower our average per-share cost and position us for future rises. We talk about the grit and strong stomach required to hold, even to buy, in times exactly like this. All the practice, all the articles, the books, mentors, the courage we’ve mustered to get into this crazy sandbox in the first place, it all comes to this moment. Right now is why most people can’t invest for themselves. Right now is what they are afraid of. Right now is the origin of the horror stories.

But here’s the truth of it: we are stronger than they are. We can overlook today and focus on tomorrow. My all-time favorite Warren Buffet quotation isn’t the one about fear and greed. It’s “the stock market is a device for transferring money from the impatient to the patient.” Right now is the moment the impatient are fleeing, and the patient get to keep the money behind.

The irony is that, awful as it is, we knew it was coming. We didn’t know when, or how bad or how long, but we knew it was coming because it always comes. That’s what it is to be an investor: a series of downs and ups, heartbreaks and triumphs. Following the stock market run that began in 2009, we’ve had a helluva ride, turning victory laps as the broader market more than doubled in 7 years (really only 5 years since we’ve now erased any gains made since 2014). So of course this would happen. And in fact it needed to happen to reset the overpriced businesses, to clear out the high-trading speculators and gamblers, to make prices attractive enough again for the rest of us to buy—which sets up the market to rise again to a higher level.

My friend Morgan Housel just wrote a piece this week about how it is that the markets gyrate as they do, and why that is not only normal but necessary. And my friend Ben Carlson just posted an article about how we view bull and bear markets differently, despite our commitments on each cycle not to do exactly that. Finally, if you’re still panicky, re-read my post from last July about when to sell—and when not to sell.

And get your clicker finger ready to hit the Buy button. Because this won’t last forever, and prices are getting more attractive every day.

Drifting to Fifty | Random unrelated nugget of the week

If inside your suitcase you roll your carefully-folded slacks and shirts around a pile of underwear, socks, pajamas, and shaving kit, the folded clothing will be less wrinkled when you arrive.

A Calm Voice and a Steady Hand

In my twenties, at a time when my marriage was new, my career was stalled and my father’s illness was worsening, I was fortunate to get to know a gifted man. He was a spiritual leader and a counselor, and among his talents was a rare ability to soothe, and calm, using only his kind eyes and gentle voice. When he turned to you, for that moment you were his entire world, and he made you feel safe. He must have been an amazing counselor.

The markets this month have been a roller coaster from hell, all big drops and loops and fast hairpin turns, not a single steady climb to be seen. A little soothing and sense of security would be welcome.

As I’ve said in previous posts about studying the market and where investing ideas are born, I like to read about business. Clever and observant writers give me most of my ideas not only about what to invest in, but about how those businesses are performing, who they partner with, what their leaders are up to, how they compete, what products are coming down the pipe, and on and on.

And I’ve mentioned before, at least in passing, who I read. But it’s not just academic: these individuals offer analysis, experience, wisdom and also something else: in difficult market moments, these people are the cool and steady hand on the wheel. They reassure me. They remind me that no matter how far the broader market falls, no matter the beating I take on my positions, it will all come back. That I’m playing the long game, measured not in quarters but in decades. That no market rout which lasts a few weeks can shake my foundational belief that over time, the market rises. Without them, I am lost, sleepless, panic-selling into a dropping market.

In no particular order, followed by links to their work and their Twitter handles where applicable:

Morgan Housel, The Motley Fool, @TMFHousel

With a deep understanding of markets, the economy and history, as well as the psychology of the individual investor, Morgan stands alone. He possesses an uncanny ability to simply reframe complex concepts and turn the impenetrably technical understandable. He posts two or three columns a week and is routinely a guest on the Motley Fool podcast series.

Barry Ritholtz, Bloomberg and The Big Picture, @ritholtz

A seasoned money manager and award-winning journalist, with a terrific 10,000-foot view of what’s happening and why you should care. Barry also hosts the Masters in Business podcast series for Bloomberg, offering excellent long-form interviews with the pillars of finance and the economy today. 

Chris Sacca, Lowercase Capital, @sacca

Chris is a former Googler who made some prescient early-stage tech investments when he left, and one thing led to another and he just kept going. He's a venture fund manager, advisor, and entrepreneur, and now appears on Shark Tank. Among his angel plays: Uber, Kickstarter, and Instagram. He spreads his wisdom primarily on Twitter and via his many appearances and interviews.

Tadas Viskanta, Abnormal Returns, @abnormalreturns

An investor, blogger and author, Tadas operates the site AbnormalReturns.com, where you can find one of the best curated daily must-read lists on the financial web. What's pertinent to today's investors. Check him daily.

David Gardner, Rule Breaker Investing, @DavidGFool, @RBIPodcast


David and his brother Tom founded the Motley Fool in the mid-90s following a remarkable stock-picking run, and they continue to run the advisory and wealth-management firm today. David prefers smart, disruptive, low-capital businesses with huge potential, which he buys early and holds for 5 years or more. His personal returns have been extraordinary over the last 2 decades, and his engaging new podcast teaches how replicate it in a fun and approachable way. Tune in.


Chris Hill, Market Foolery and Motley Fool Money, @TMFChrisHill 

I actually don’t read Chris as much as I listen. He hosts two podcasts, MarketFoolery (daily) and Motley Fool Money (Fridays). With the input and analysis of his guests, Chris asks questions we'd ask, distilling daily business news and stock moves into understandable bullet points—so investors quickly learn what’s happening and what do about it.

Jason Moser, The Motley Fool, Motley Fool Money, Market Foolery, @TMFJMo 

A straight up “stock” analyst, and probably Chris Hill’s most-often guest. Jason is not just another business expert: he looks at the market like a consumer, deriving many of his excellent specific opinions and recommendations less from the performance of the stock than by the performance of the business, against its competitors and for its customers— which is a better indicator.

Ben Carlson, A Wealth of Common Sense, @awealthofcs

With keen observation and a wisdom belying his youth, Ben provides grounding to the financial community with his buy-and-hold doctrine and get-rich-slow values. Ben’s blog offers intelligent analysis not of individual stocks but of the current environment, what drives him crazy about his industry and the potholes we all fall into. His book, A Wealth of Common Sense, is the best investing guide I’ve read in years.

Josh Brown, The Reformed Broker, @ReformedBroker

Josh offers a clear-headed and entertaining perspective on the money-management industry as well as on markets and the economy. One recent post related the current volatile bear-market environment to Leonardo DeCaprio's repeated survival trials in The Revenant.

Then there are those who don’t write a column, but who have outsize impact in the capital markets. These investors have sufficient gravity to pull in board members, executives, journalists, and people like us, who watch them for ideas and perspectives. Just by keeping your eyes peeled for news with their names you’ll gain all sorts of useful insight:

Warren Buffett, @WarrenBuffett

You already know who he is, because he’s the biggest of them all. Warren is in the financial news somewhere every day. No one on the planet has more market wisdom or stock-picking expertise, or more patience. Personally I've been underwhelmed with his purchases lately, and I sold shares in his company, Berkshire Hathaway. But there is still no one in the industry more wise, or more worthy of my trust. His instincts and clarity are astonishing. check out his annual letters.

Charlie Munger

Warren Buffett’s 50+ year business partner and number-one counsel, Charlie has long been the more acid-tongued and entertaining of the two. The smarts and experience of Warren but with a good dash of pepper. Find him giving interviews on YouTube.

David Einhorn, @davidein

Hedge fund manager with a mixed record, but dependably well-researched and frequently does a deep dive on one troubled business or industry a year which he then bets against, and presents his findings as a slide show at investor conferences. Always a fascinating perspective. 

Carl Icahn, @Carl_C_Icahn

Phenomenally aggressive and talented activist investor who just about always gets a huge business in which he buys a big stake to cut costs and improve efficiency, thereby driving up the price of the shares owns. An investor could do worse than to routinely follow him in.

Bill Ackman

An activist investor with a lot of losses, but even more wins, Bill likes to stir it up and he’s not shy about going public with it. A great source for background information or just for the viewpoint of a smart man who does what we're doing, but on steroids. See his interview with Bloomberg from last autumn.

Dan Loeb

Like Bill Ackman, Dan will get aggressive, writing public letters to execs and board members when he’s unhappy about returns on his holdings. His research team could win awards: the discovery that then-Yahoo CEO Scott Thompson had padded his resume ousted Thompson and won Loeb a couple of Yahoo board seats. You can find him on YouTube as well.

There are many others, of course. I follow dozens of executives, investors, and journalists on Twitter, and their tweets lead me to hundreds of articles a month: I read about my businesses, the industries they compete in, about the larger economic trends, about the day-in-day-out of investing, of searching and questioning, of remaining clear-eyed, and keeping my focus on the horizon. 

Year-End Portfolio Prep

In mid-December, I generally take a little time with my portfolio to prepare for the year's end and line myself up for success next year. There are three primary areas I focus on: harvesting losses, rebalancing, and giving. Let’s have a look at each.

Harvesting gold from losses

Every year, there are stocks in my portfolio which went the wrong way and are now below my purchase price, dragging down my returns and putting red on my statements. It’s normal, it happens every year, and you should expect it of at least say, 30% of your stock picks. But there is one thing you can do to make lemonade from the lemons: you can harvest the loss on your taxes.

All that means is selling the negative position. You’ve then “realized” the loss—remember, stock moves are not taxable events until you sell them for a loss or a gain; all your returns are virtual until you sell. That loss will show up on your tax returns and will offset gains you’ve made elsewhere, both from assets sold for a profit and from regular income. So let’s say you have a stock which you bought for $1,000 which is only worth $600. If you sell by the end of the year, you’ll get $600 (minus trading costs), and the $400 you lost on that investment can be subtracted from your taxable income for that year, which reduces your overall tax bill. There’s no downside, and no catch.

There are, however, two limitations to careful of. The first is that you are restricted to a total of $3,000 in losses against your tax bill. Anything you sell beyond that amount of loss will be disallowed from offsetting your gains (but you can see your CPA about forwarding the loss in later years). The second is called the “wash-sale rule.” Basically, if you sell an asset for a loss and then repurchase the same asset or a nearly identical asset within 30 days, the IRS will disallow the loss. So make sure that, if you harvest a loss on a stock you like and intend to repurchase, you wait a month first. Details on tax loss harvesting can be found here and here.

Another useful annual ritual (I actually do this continually through the year) is a rebalancing of the assets you hold to realign your portfolio with your goals and risk tolerance going forward. The idea is to buy or sell equities specifically to reestablish the asset balance you intended to hold (stocks to bonds to gold, or technology to banking to pharmaceuticals). So if during the year you cashed in or sold a few bonds, and you are now theoretically underweighted in bonds, you would buy some to balance the scales. Or if one tech stock in particular rose dramatically this year (AMZN, NFLX), hypothetically you now hold more technology than you intended (and you have categorically more risk from having so much tied up with just one stock). So you would sell some off, or buy another asset to offset the tech you hold. If you’re not a regular buyer (and if you're reading this I hope you’re not a regular trader), and in fact you don’t look at the portfolio terribly often, rebalancing is good practice to ensure proper a comfortable and adequate allocation in your basket of assets. It will also help you to sleep better. Two great articles and some depth about rebalancing can be found here and here. 

Finally, I like to spend some time with my family choosing and giving to charities at the close of each year. When most people give to a non-profit, for the sake of simplicity they write a check or just put the gift amount on a credit card online. But did you know that many non-profits, particularly larger ones with more developed infrastructure and staff, accept gifts of stock directly? 

If you sell a stock during the year which has risen since your purchase, you’ll pay gains taxes on the sale. You can then use the proceeds from that sale to buy another stock, to pay for a trip or your children’s tuition or just to go shopping. If you use those proceeds for charitable giving, you’ve just paid capital gains tax on money you intend to give away, making your gift that much more expensive. You can still write off the dollar value of the charitable gift itself, but only that amount.

charity: water

If instead you give a non-profit an appreciated stock directly, you’ll pay no gains tax (you didn’t sell it, so you never realized the gain) and you can deduct the entire value of that stock from your taxable income. In other words, depending on your gains tax rate, most of us would save 15% right there. The charity gets a larger total amount, albeit in the form of a stock. And they can choose to hold those stock shares for future gains, or sell it themselves and pay no taxes. (For more on 2015 capital gains tax rates, look at this.)

So take a few minutes this weekend to look things over and make sure your assets are where you want them to be before the tax year closes. A little minor tinkering can save money and headaches later, and put you on the right road going into the new year.

Drifting to Fifty | Random unrelated nugget of the week

Don't fret over those sloppy holiday party guests: Mayonnaise spread thick on a wooden table over a condensation ring will absorb the moisture, clearing the ring. But it will happen slowly.