You've Got Questions


Very little about the investment world is black and white.

With that uncertainty in mind, here are the answers to some actual reader questions you might have wanted to ask us yourself:

Q Your performance record over the last decade is pretty good, but why did you lag the S&P 500 Index by so much in 2016?

A Our disappointing 2016 performance stemmed in part from our take on the low-volatility dividend stocks that did so well during the first nine months of the year. We considered them overvalued, and our Quadrix system downgraded them for that reason.

While the low-volatility stocks did trade at unusually high valuations, last year they managed to hold onto those valuations for an extended period. Expensive stocks often become more expensive. But our experience suggests that paying up for stability is usually a mistake. Last year proved an exception to that rule.

In the last quarter of 2016 and the first quarter of 2017, the market shifted to favor cyclical value names, which before then had been underperforming for us. So far this year, our Focus List has gained 13.8% excluding dividends and transaction costs, versus 9.0% for the S&P 500 Index.

Please check out our historical performance at We don't beat the market every year, but all three of our core lists have outperformed by a wide margin over the long-term.

Q Why did you sell Nvidia ($152; NVDA)? It's up big since you dropped it.

A While our reasons for selling Nvidia made sense at the time, that stock haunts us a bit. We more than tripled our money in Nvidia, and at the time we downgraded it, the shares traded at 25 times trailing earnings, close to a record high for Nvidia and 29% above the industry median.

Both academic research and our own personal experience suggests that betting on stocks that pricey is dangerous. Most of the time, they lag the market. We dropped Nvidia because of its valuation, not because of any expected slowdown in operating momentum. Yet somehow, Nvidia not only maintained that valuation, but grew even more expensive. Today, the shares trade at 43 times trailing earnings, more than double their five-year average P/E ratio.

In September, when we sold Nvidia, the stock's risk-reward profile had skewed too far toward risk to suit us. We tip our cap to anyone who held onto the shares, but much of our success over the last several decades stems from not taking those kind of risks.

We're not going to get all of them right. Sometimes we'll buy stinkers. Sometimes we'll sell too early or hold on too long and give up some gains. However, our history of outperformance suggests that our good decisions will more than outweigh any bad decisions. We hope you'll consider the whole body of evidence when assessing our performance.

Q As a new subscriber, I'm not sure what your cash/short-term bond fund allocation means. How should we interpret that number?

A At the moment, our recommended lists contain 94.8% equities, with the rest in a short-term bond exchange-traded fund. We tend to use similarly stock-heavy allocations during most bull markets. You can expect the recommended cash position to rise and fall over time based on our reading of the market and our ability to unearth reasonably valued stocks with solid growth potential.

Please keep in mind that our allocation advice applies only to the equity portion of your portfolio. Most people should probably own some fixed income, and our percentages have nothing to do with any bond holdings.

Suppose you use a 50% stocks, 50% fixed-income allocation for the long haul. Under our system, you'd keep 5.2% of the equity half of the portfolio in cash or a short-term bond ETF, equating to 2.6% of the entire portfolio.

Q I've been seeing a lot of insider sales at Southwest Airlines ($62; LUV). Have you been watching this, and does it concern you?

A Insider selling dwarfs buying at almost all companies, as so many insiders already own large blocks of stock. As such, the fact that a company has more sells than buys is not, on its own, a bad sign. Insiders sell for a lot of reasons, ranging from portfolio rebalancing to tax-loss harvesting to simply needing cash.

While selling at Southwest was unusually high in February, not much has happened over the last few months. We're not too concerned about Southwest's insider sales.

Q Should an investor sell a stock when you remove it from the Long-Term Buy List?

A When we drop a stock from the Focus or Buy List, investors following that list should sell it, even if it retains its Long-Term Buy rating, while investors following the Long-Term Buy List should hold it. However, once we sell a stock from the Long-Term Buy List, we mean all subscribers should sell it and move on.

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