2014 has been a rough year to navigate. I went against the grain in January and bet big on one macro trend—that long-term interest rates would fall in 2014 rather than rise — and invested heavily in equity REITs and mortgage REITs.
That bet paid off handsomely and my conservative, income-oriented portfolios have had a great year.
But where do I even start on all of the investing mistakes I made this year…
The Emerging Markets
In my more aggressive portfolios, I made large allocations to emerging markets…just in time to see most emerging markets have the worst January in years. My pick in this year’s InvestorPlace Best Stocks contest — South African telecom giant MTN Group (OTC:MTNOY) — was a play on the emerging market theme and it has landed me squarely in last place.
I invested in Russian stocks during the Crimea and Ukraine crises believing that Western sanctions would be mostly toothless and that Russian stocks were too cheap to ignore. Well, that theory sounded great…right up until the price of crude oil collapsed, sending Russian stocks into a tailspin.
Didn't See It Coming
Oh, and while I’m at it, I didn’t see the crude oil collapse coming. My income-oriented portfolios had a large allocation MLP general partners and the collapse in MLP prices eroded most of my outperformance from earlier in the year.
I also recommended Prospect Capital (NASDAQ:PSEC), noting that I believed a dividend cut was unlikely given the strong insider buying patterns I saw. Six weeks later, it cut its dividend.
Sigh…
But my biggest mea culpa of 2014 was getting into Brazilian stocks at precisely the wrong time. The iShares Brazil Index (ARCA:EWZ) rallied 42% going into September of this year. Even after that move, I believed Brazilian stocks to be cheap and underowned. With a new, market-friendly president taking office, I believed Brazil was primed for several years of solid returns.
There was just one problem. The new market-friendly president lost the election. Dilma was reelected and Brazilian stocks gave up all of their gains for the year. EWZ is now scraping along at close to its lows for the year.
Lessons?
No matter how sound your investment thesis looks, there can always be “externalities” that come out of left field. This year, we had plenty of them — the Russian annexation of Crimea, the Argentine debt default, the Ebola outbreak and the crude oil collapse, to name a few — but there will always be something.
When this happens, don’t look for someone or something to blame. Instead, try to keep a level head and approach each trading day as a clean slate. Look at your portfolio objectively and ask the following question: If I didn’t already own the stocks I have in my portfolio today, would I buy them now, knowing what I know?
If you can’t credibly say yes, then you need to consider selling or at least tightening your stops.
It’s not easy to maintain that kind of detachment. I struggle with it constantly, and if I am to be honest I don’t consider myself particularly good at it. But it’s a trait I notice consistently among great investors.
Disclosure: Long PSEC, MTNOY, EWZ
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.