The Dangerous Portfolio

If you were one of the lucky few to have an amazing 2016 in the market, you might be inclined to revisit the nature of your retirement investments.

A couple years ago I was joking around with a friend about setting up a fund that could short itself. Meaning the worse it performs, the more money the investors make. We would pack the fund with companies with the worst money-losing characteristics imaginable, the type of stuff you’d never want to see in your retirement portfolio. We would isolate companies with negative return on equity, negative earnings growth, lots of debt, and high valuations. Well, it turns out someone beat us to it…

Although you can’t actually invest in it (and who on earth would want to to?), a group called Morningstar CPMS has been tracking what they call the “Dangerous Portfolio” since 1986. And as you’d expect, the Canadian Dangerous Portfolio has been earning an annual average return of -9.1% per year. Truly scary stuff!

Now here’s where things get really interesting. Every once in a while, Canadian Dangerous outperforms. Surprisingly, about 26% of quarters since 1986, it has beaten the TSX Index. It has outperformed the Index in just two years since 1986, one of them being 2009. Even a blind squirrel finds a nut now and then.

Over the first half of 2016, Canadian Dangerous saw one of its largest increases, a gain of 17%, driving up the Index as well. Meanwhile, most high quality value strategies (the type that produce 14-16% over the long run), underperformed by a wide margin. In a classic “junk rally”, investors rewarded the worst types of companies, while ignoring stocks with the most promising long term characteristics. We were not immune to this unusual circumstance, and many of my clients were left wondering “hey, what happened?!”

Predicting what the market is going to do is never something I spend a lot of time on because it’s impossible to get right. However the good news is that according to Morningstar CPMS data, junk rallies do not last. The average shelf life seems to be about six to nine months before the market returns to normalcy and people realize you can’t make long term gains chasing bad companies around. Nine months along since the TSX bottom, the junk rally seems to be fading on cue. Not only that, those high quality value strategies are pulling themselves together once again. And that’s great news for those of us who prefer some safety in their long term portfolios.



What I’ve been reading this week:

The pros are scared, and that’s great news!:

You don’t make money buying and you don’t make money selling, it’s the waiting in between that builds wealth:

One of the largest asset managers is weary about bonds:

Deal with “what is” and not “what should be”:

Overcoming your behavioural bias to chase return is one of the greatest investing hurdles:

Some data on presidents and markets:

Good companies are not necessarily good stocks:

Champions do not give up, but almost-champions do:

Be careful where you devote your energy for learning:

Building relationships are more important than completing transactions:

A bright spot on climate change:

Understanding the future is about process:

How has changing government legislation encouraged monopoly behaviour?

The relationship between cashflow and physical assets:

Video interview with Howard Marks, one of the best living investors:


Video interview with Bruce Berkowitz, one of the best living investors:

Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc offering investment management and planning for high net worth Canadians. Ben focuses on the Growth and Income Portfolios and reducing tax.