John Doe’s Portfolio – August 2010

Excited!  That’s the word I would use to describe how I feel about John Doe’s portfolio results for the month of August.

But taking a look at the dashboard below, you may wonder why I chose this word…

  

Dashboard John Doe 1008

To be sure, even a quick glance at the dashboard shows that August is basically a continuation of the same lackluster performance that has been exhibited throughout the year so far.

Furthermore, I am 3 weeks late in providing this update…  Why wait so long to share my ‘excitement?’

By way of explaining, I’ll start by admitting that John’s portfolio performance in August (and in September as well, as you’ll see in a few more weeks) was negatively impacted by a series of 3 events that came together in a kind of “perfect storm” in his portfolio.  Rather than go into significant detail as to the nature of these 3 events, let’s just say that it was a “once in a lifetime occurrence” that caused these events to occur simultaneously.

…But haven’t we been seeing a rather large number of independent, but nonetheless damaging, “once in a lifetime occurrences” in the financial markets over the past decade or so?  In case you’ve lost track due to the sheer volume, only a few of these are:  Asian financial crisis (1997), Russian financial crisis (1998), collapse of Long-Term Capital Management (1998), bursting of dot-com bubble (2000), Chinese market ‘correction’ (2007), U.S. subprime mortgage crisis (2007), Countrywide Financial failure (2008), Lehman Brothers failure (2008), Wachovia failure (2008), Washington Mutual failure (2008), failure of CIT Group (2009), General Motors bankruptcy (2009), and, more recently, the ‘flash crash’ (2010).   

So although I was able to satisfy myself that the set of circumstances that were responsible for John’s less-than-stellar portfolio performance in August would never again occur, this doesn’t rule out some other unrelated, but nevertheless damaging, confluence of different events occurring in the future… perhaps even near future.

If so, and particularly in view of general market volatility over the past couple of years, will I be offering in the future nothing more than a series of reasonably-sounding monthly explanations as to why John’s portfolio continues to lag well below target performance levels?

If the answer to this question is indeed ‘yes’, then over the long run the performance of both my own and my clients’ portfolios can hardly justify the tremendous investment of time and effort I put into managing (or attempting to manage) them.

Against this rather dismal scenario and prospect for the future of Johnson Harper LLC there came yet a 4^th event that, while totally unrelated to John’s portfolio results, nevertheless occurred at a most fortuitous moment.

That 4^th event was my having developed a severe case of (as my ophthalmologist described it) “wall to wall keratitis” in each eye.  I can’t remember having come down with anything as debilitating as this in my… well, let’s say, many years of existence on this earth.  It was as though someone had taken sandpaper to the inside of my eyelids (that ‘sandpaper’ was, in fact, a roughness of the cornea resulting from the infection).  Open or closed, the pain was present anytime I experienced eye movement.

The good news is that relief came very quickly once I paid a visit to the ophthalmologist.  Some antibiotic ointment, something to keep the pupils dilated (to prevent spasms), and various moisturizing drops made the pain go away.  But between the condition itself, the ointment, and the dilated pupils my vision was pretty much shot for the better part of a couple of weeks.

So how is this relevant to portfolio management?

Essentially my entire convalescence was spent flat on my back in the dark with cold compresses over my eyes and just…. thinking.  I drew probability distribution curves in my mind.  I solved (at least intuitively) Black Scholes options pricing models in my head.  I ran Monte Carlo simulations in my mind trying to think 6-12 moves (i.e., months) into the future.  I pondered the nature of Black Swans and how the possible occurrence of such events is managed in the chemical industry. I thought of PID controllers and SQC/SPC techniques and how to further refine these concepts in terms of smoothing capital market returns under conditions of high volatility.

… And I thought of all of these things in the context of John Doe’s portfolio and the Johnson Harper LLC investment process.

Perhaps by now you are getting the idea that my current state of excitement is the result of one or more epiphanies that came to me in the imposed isolation of my recovery.  And that is exactly what did happen.

I discovered the final piece that needed to be added to the Johnson Harper LLC investment model to make it generally applicable across the widest possible market conditions.

For me and (by association) my clients this is truly exciting.

Will the passage of time validate this discovery?  I can only wait and see.  I will say that, due to existing capital allocations in the portfolios I manage, the improvement is not likely to be seen until November or December.

…But if it’s there, the dashboard will show it.

I hope you’ll stay with me to see the outcome.

As usual, please note the following:

1. Should you wish to have a copy of the Excel-based dashboard file and/or any of the accompanying brokerage statements related to John Doe’s portfolio history please let me know.  I can make them available for inspection on a limited basis.
2. Readers should not try to replicate this portfolio by purchasing the ETFs in the same percentages as shown in John’s portfolio.  The overall ETF valuations shown in the dashboard include the sum of any long holdings of the ETF itself as well as the sum of both long and short options positions in the ETF.  Also please see the disclaimer at the right for important information about this website and Johnson Harper LLC.
3. You can automatically receive email alerts of future posts on this website by entering your email address in the “Email Subscription” field near the top of this website.

Full disclosure: At the time of this writing the author holds both long and short positions in the ETFs shown on the dashboard (TLT, SPY, GDX, EEM, EFA, USO, IYR) as well as other ETFs not shown.

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