How Investors Can Make Money in this Lousy Year

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
[happy investor up arrows]

It is turning out to be a tough 2015 for stock market investors.

The U.S. S&P 500 is trading where it was back on March 31. Fundstrat’s Thomas Lee recently noted that this has been only the second time since 1904 (!) that the S&P 500 has closed the first two quarters of the year with 0% gains. The one strategy that has made diversification look bad over the past five years — staying “dumb and long” in the U.S. stock market — has also run out of steam.

There seem to be few other alternatives.

After all, the Chinese market crashed, just as I predicted. And who knows how low it would really be if most of the stocks on the Shanghai exchange were actually trading. And back in the United States, even formerly red-hot bullish sectors like biotechnology and cybersecurity have petered out.

So What’s Worked in this Market?

I follow a lot of different investment strategies, often through various “smart beta” strategies I invest in both personally and on behalf of my clients.

Among these strategies, only a few have generated satisfying returns. The First Trust US IPO ETF (FPX) is up 9.34% in 2015. And that’s thanks largely to the strong performance of Facebook (FB), up 20.7% this year, in which FPX has an 11.86% weighting. The AlphaClone Alternative Alpha ETF (ALFA) has also performed reasonably well, up 6.47%.

Among asset classes, private equity is having a solid year, with PowerShares Global Listed Private Equity ETF (PSP) up by 10.28%, boosted by its 8.56% yield.

Exclusive  Fed Chair Serves Up a Surprise

Tough Time for Hedge Funds

The smart money across the globe is faring no better.

As an average, hedge funds aren’t having a terrible year. But it’s nothing to write home about. The average hedge fund has been up 3.36%, according to Barclay Hedge, while the S&P 500 was up 3.25% over the same time period.

But that average hides a multitude of poor performances among the biggest names in the business.

Although not technically managing a hedge fund, Carl Icahn, hailed in 2013 as Wall Street’s richest investor, has seen shares in Icahn Enterprises (IEP) tumble 12.7% this year.

Hedge funds in my neighborhood of Mayfair in London are having a tough time, as well. Odey Asset Management, one of the few remaining “old style” non-institutionalized hedge funds, is down 14.8% after a handful of concentrated bets in small-cap stocks have gone south.

The dirty little secret of hedge funds is that most of today’s trading is done by computer. The algorithms of the rocket scientists have squeezed out every last bit of alpha, or superior risk-adjusted returns, in the market. You see that in the performance of trend-following hedge funds, also known as managed futures or commodity-trading advisors, which just suffered their worst month since July 2008 by falling 2.4%.

In my view, the only way to make money in this market is “the old fashioned way”: bet big, swing for the fences and hit the lottery (to mix not just two but three metaphors).

And that recalls one of my favorite quotes about old style hedge fund investors:

Exclusive  American Exceptionalism: Why Wall Street Outperforms All Other Markets

“Some people are born smart. Some people are born lucky. Some are born smart enough to be lucky.”

And in today’s market, it’s better to be lucky than smart.

Buffett’s Lousy Year

While the latest round of articles predicting Berkshire Hathaway’s imminent demise have yet to appear, Warren Buffett is having a lousy year, with Berkshire shares down 6.28% in 2015. That trails the Standard & Poor’s 500 index, which has gained a mere 1.55%.

All of this has analysts scratching their heads. After all, Berkshire trades for less than 1.5x its book value. Barclays has a price target of $259,500 on the stock — 22% above current levels. And after all, Buffett has a reported $16 billion profit on the Heinz and Kraft private equity deals during the last two years.

So why the lack of love for the stock?

Well, Berkshire’s four largest and highest-profile publicly traded stocks aren’t doing too well.

Among American Express (AXP), Coca-Cola (KO), IBM (IBM) and Wells Fargo (WFC), only Wells Fargo has beaten the S&P 500 over the past three- and five-year periods. IBM is worth less than Berkshire paid for it and has lagged behind the S&P by 60%. Coke is still below its 1998 peak.

Here’s another irony.

My top Buffett clone — Markel Corporation (MKL) – a recommendation in my Alpha Investor Letter newsletter, is hitting the ball out of the park with an investment strategy closely modeled on Buffett’s.

And Markel is up a remarkable 28.33% in an otherwise ho-hum 2015, outperforming its model by close to 35% over a mere six months.

Exclusive  Private Equity Tax Break in Danger

So how is that for confusing?

Psychology: The Small Investor’s Only Real Edge

Truth be told, times like these are my favorite times to invest.

With CNN’s Fear and Greed Indicator standing in single digits at a mere 7, this is as close to an ideal time to put my own money to work as I am likely to find (though the index did hit “0” last October).

In the absence of infinite gobs of computer power, and with a strong personal aversion to risking too much on any single idea, my only sustainable edge on this market is psychology.

That’s why over the years, I’ve trained myself to gain distinct pleasure from investing against Mr. Market’s mood swings.

And having had a chunk of cash just waiting on the sidelines, I just invested in several of the worst-performing and technically oversold investment strategies in my own 401(k).

Will I have caught the bottom of the market?

Maybe… or maybe not.

But I’m expecting the bets I placed yesterday to be profitable by the end of 2015.

Disclosure: I hold FPX, ALFA, PSP, IEP, BRK-B and MKL.

In case you missed it, I encourage you to read the e-letter column from last week about the ‘soft power’ of Donald Trump. I also invite you to comment in the space provided below my commentary.

Like This Article?
Now Get Our FREE Special Report:
Alternative Investing: Investing in Timber

Stock Investor editor Paul Dykewicz reveals why investing in timber may be one of the best long-term portfolio strategies you'll find today.

Get Access to the Report, 100% FREE


img
previous article

Heading into earnings season, Wall Street analysts’ views were very mixed as to how America’s leading multinational corporations would fare against a macroeconomic backdrop where the Fed is chomping at the bit to tighten rates at least once before year-end while the U.S. dollar index is turning back up in correlation with the Fed rhetoric and a weaker euro post-Greek deal.

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE