Well, we finally made it! As of the end of February 2011 the Model Shadow Stock Portfolio is 7% above its pre-crash (June 2007) high.
It is scary to see a portfolio drop 60% and difficult to stay the course and not sell. Many investors reduced their equity holdings (beyond the reduction supplied by the market) near the March 2009 low, and I know several individuals who closed out of equities completely a bit before the low.
Ideally, we all should have rebalanced and added equities through the bad time. Congratulations to any of you who had the discipline to do this. I didn’t in my personal portfolio and, in fact, while I kept my equity holdings, I did switch a bit into safer, dividend-paying holdings. Consequently, I am not quite back to even.
The lesson for all of us is that if we violated our general strategy because of the market pressure, then we should adjust the riskiness of our overall portfolio downward. We have been averaging a severe downturn about every 10 years, and nobody knows when the next one will be. So keep a long-term view, but get the short-term violence down to where you can stomach it.
The Model Shadow Stock Portfolio is only up 2.7% year-to-date compared to 5.9% for the general market as measured by the Vanguard 500 Index fund 
(VFINX). In the longer term, we compare more favorably.
Once again we had to sell a stock that had quadrupled since we bought it. Twin Disc, Inc. (TWIN) may find happiness in someone’s growth portfolio, but it is no longer a value stock.
In February 2011, the number of initially qualifying stocks was at 18, and this number has been pretty stable for almost two years. Many of the stocks that qualified for the Model Shadow Stock Portfolio were already owned, and once again I passed over the Chinese stocks because I have no way of separating out those that might have the kind of reporting problems discussed in the financial press. We added Key Tronic Corp. (KTCC) and Kimball International Class B (KBALB). The portfolio changes are summarized here.
CONN’S, Inc. (CONN) went down considerably without an apparent reason. It turns out that sales are down and earnings are likely to be lower than expected. The CEO recently resigned. It is the nature of a portfolio such as this to have surprises. But it is a portfolio, and you get upside surprises like Rocky Brands, Inc. (RCKY) along with stocks like CONN’S.
Earlier in 2011, everything was looking on-target for a good year. The third year in the presidential cycle hasn’t seen a negative market since the 1930s, and the average gain has been 20%. But, along came Libya and a bit of an oil panic, as well as the possibility of U.S. involvement. In addition, both Democrats and Republicans are talking about budget cuts rather than demonstrating the usual pre-election “spend to get votes” mentality. So who knows what will happen? I still have a slightly bullish bias but not enough of one to alter my normal allocations.
The next Model Shadow Stock Portfolio column will be in the July issue of the AAII Journal. In the meantime you can follow the portfolio here.
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