The Gone Fishin’ Portfolio: The Right Way to Invest

by Alexander Green, Chairman, Investment U
Oxford Club Investment Director
Thursday, January 22, 2009: Issue #920

At our Oxford Club Chapter Meeting in Managua last week, I offered members a few suggestions on how they can improve their returns with our recommendations.

The first suggestion was not to cherry-pick one or two stocks. It’s better to diversify widely. This doesn’t just reduce your risk. It also gives you more opportunities to have a big winner. Diversification is an offensive tactic, not just a defensive one.

Another suggestion was to stick with our discipline. Don’t just note that we recommend trailing stops, for example. Use them. Enter the orders with your broker. If you don’t, you’re prone to start rationalizing that your stocks will “bounce back eventually.” (Not always. Ask any Wachovia shareholder.)

Yet another essential component of successful investing is realistic expectations. This is especially true in tough markets like these.

Last week, for instance, I received an e-mail from a member who said he was disappointed that our Gone Fishin’ Portfolio “didn’t work last year.”

If by that he means we didn’t generate a positive return, there’s no disagreement. But it sounds like he has a more fundamental problem: unrealistic expectations…

The Gone Fishin’ Portfolio: A Long-Term Capital Appreciation Strategy

The Gone Fishin’ Portfolio is a long-term capital appreciation strategy.

How do we achieve this? By asset allocation – and rebalancing once a year – among large and small stocks, foreign shares, real estate investment trusts, gold stocks and three different types of bonds: high-grade corporates, junk bonds and inflation-adjusted Treasuries.

The system is straightforward. There is no economic forecasting, market timing or individual stock selection. Its genius is an unusual asset mix, broad diversification, rock-bottom costs and high tax efficiency.

How has it worked? Like a charm. The Gone Fishin’ Portfolio has beaten the S&P 500 every year – including last year – since its inception in 2003. Importantly, it did this while taking much less risk than being fully invested in stocks.

How does our portfolio stack up against active money managers? For starters, history shows that three-quarters of all equity managers cannot outperform an unmanaged benchmark. Over longer periods, more than 95% of them can’t.

The Gone Fishin’ Portfolio: Beating the Market For 6 Straight Years

Over the past six years, The Gone Fishin’ Portfolio hasn’t just beaten the market every year. It has outperformed 99% of the nation’s equity funds, as well as Berkshire Hathaway.

Although our methodology is fairly simple, a lot of smart investors still don’t understand it.

For example, a prominent economist who reviewed my book “The Gone Fishin’ Portfolio” for The Wall Street Journal – and recommended it – asked in his review: “But one has to wonder: If he were to set up the GFP today, might Mr. Green be more likely to choose oil stocks instead of real estate investment trusts?”

His question is meaningless in three different ways:

• First, asset allocation works precisely because it has absolutely nothing to do with predicting which industries will perform best.

 

• Second, oil stocks are a market sector, not an asset class.

 

• Third, The Gone Fishin’ Portfolio already owns every major publicly traded oil company from Houston to Shanghai.

Despite its many advantages, the portfolio will not go up every year. In my book, I back-tested the portfolio and showed readers that it would have declined slightly each year in the 2000-2002 bear market. But it would have declined far less than the broad market each year.

The Opposite of Bernie Madoff: The Right Way to Invest

Some investors complain that’s not good enough. They want a system that gives great returns in good years and bad.

Ironically, that’s exactly what Bernie Madoff was promising.

These investors remind me of an old college buddy who used to insist he wouldn’t get married until he met a brainy Victoria’s Secret model who owned a Ferrari dealership. (To which I would always reply, “But why would she want you?”)

Perhaps market commentator Richard Russell put it best: The winner in a bull market is he who makes the most. The winner in a bear market is he who loses the least.

By that realistic standard, our returns have been more than satisfactory.

The only other criticism I’ve heard of The Gone Fishin’ Portfolio – almost exclusively from brokers who have nothing to gain from clients who use this system – is “there’s nothing new here.”

Hmm. If there is another growth strategy out there that has beaten the S&P 500 by more than 600 basis points a year (with far less risk than being fully invested in stocks), that allows you to do a complete end run around Wall Street and its mountain of fees, and takes less than 20 minutes a year to implement on your own, I’d sure like to hear about it.

More importantly, the notion that you don’t want to use timeless principles to manage your nest egg, that you’d somehow be better off entrusting it to someone offering something exciting and new… well, all I can say to these folks is:

“Good luck. You’re going to need it.”

Alexander Green

Editor’s Note: The Hulbert Financial Digest, the industry’s top independent watchdog, has consistently ranked Alex’s stock selections for The Oxford Club in the top 10 of the nation overall, based on their five-year, risk-adjusted return. Sign up and get all of his newest picks from The Oxford Club.

Today’s Investment U Crib Sheet

David Fessler takes a look at healthcare stocks to see if they really are recession-proof. Depending upon who you talk to and what area of the health care sector, they’re either great or dismal. Here’s the characteristic David recommends your health care companies should all have, and more than a few that fit that bill.

Our Senior Analyst for The White Cap Report has been covering a unique situation in oil called “Contango.” He was one of the first to break the opportunity to our IU subscribers. Now others have followed his lead.

Yesterday, Lou Basenese showed us how to take a page out of legendary investor John Templeton’s playbook. He cherry-picked companies like these to build his fortune, and you can, too. Here’s how you can “Profit From Maximum Pessimism.”

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