Avoiding Portfolio Surprises

The current Barron's has an article looking at whether healthcare sector stocks might be cheap. The following passage caught my eye.

The reason it interested me is that the managers of the Jensen Quality Growth Fund have owned Stryker for decades. I first heard about it from former Jensen manager Robert Zagunis going back to the 90's. I believe in holding onto stocks and narrower ETFs for very long periods of time when possible, meaning when something bought turns out to be worthy of holding onto for the long term. I view this as a way to benefit from the equity market's ergodicity. 

 

The chart from Morningstar shows Jensen, the Vanguard S&P 500 Fund and Stryker. At the left of the chart, Stryker lagged both. That lag persisted for quite a while. The lag wasn't big enough to cause damage and the thesis for holding the name was neither validated nor invalidated simply because the stock lagged for a while. 

The point is having the correct time horizon, knowing when you need to think in terms of years, understanding the thesis underlying the pick and having patience as an investor. I have no idea what SYK will do going forward, I don't own the stock personally or for clients, but if you are allocating to some sort of healthcare theme in your portfolio then chances are being right or wrong won't prove out in just a few months. 

Over the last 25 years or more, we are collectively getting fatter and unhealthier, an example of a healthcare theme playing out over decades. An exception to thinking about healthcare themes in terms of decades might be betting on a lottery ticket biotech that is due to get an FDA ruling where a favorable ruling sends the lottery ticket to the moon or an unfavorable ruling causes it to implode. 

If you are going to invest narrower than broad based index funds, I think it is important to understand the holding you choose on this level. A healthcare theme might play out over the long term but maybe something like an online retailer might be more about steady or increasing rates of growth over a shorter and ongoing time frame while a company that sells household products might be more about cash flow and dividends. 

Attributes like these help with setting expectations for what holdings might do versus the market. A smaller tech stock might be expected to go up more than the market on the way up and down more on the way down. Put differently, that sort of attribute would add volatility to the portfolio. Maybe you'd expect a beer or laundry detergent company to move less than the broad market in both directions. That sort of attribute would lower portfolio volatility. How you blend those types of attributes hopefully gets you to having a portfolio that doesn't surprise you very often. Avoiding surprises is good.

I have no positions in any of the stocks or funds mentioned in this blog post.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time.