My Portfolio: Bashed by Banks, Cleaning Up in Commodities

NOTE: This post refers to my personal portfolio, a real-money collection of the stocks I own. These aren’t stock recommendations: The stocks you buy should be a reflection of your net worth, your age, your tolerance for risk, your liquidity needs and a host of other factors. The only reason I put my investments online is that I believe those offering financial advice to others should be willing to put their money where their mouth is. I do, and I am.

The stock market recently reached levels it hasn’t seen since the financial crisis hit in the summer of 2008, thanks to a host of factors: an economy that continues to recover, the recent Republican victory and the Fed’s announcement that they were going in for a massive dose of “quantitative easing“: a technique used by governments to keep interest rates low by essentially going on a government bond-buying binge.

My overall stock portfolio is doing great: up better than 60 percent overall, at least as I write this. (That’s not an annual return – I’ve owned many of these stocks for more than one year.) But I’m not writing this post to gloat. I know better than that – what the market gives it can take away, and gloaters are the first to lose. I’m writing this because of the interesting things we can learn by looking at what’s hot and what’s not: even if you’ve never owned a stock or intend to.

Here are a few of my winners, along with the percentage gain:

• Cliffs Natural Resources: purchased July 2009: up 230 percent
• Caterpillar: purchased March 2009: up 175 percent
• Freeport-McMoRan Copper & Gold: purchased May 2009: up 90 percent

Now check out a few that haven’t done so well:

• Citicorp: purchased April 2010: down 6 percent
• Huntington Bancshares: purchased May 2010: down 2 percent

Why the winners are winning

The three big gainers above have something in common worth noting: they benefit from a recovering world economy. While the economy remains tepid here at home, things are much better overseas, especially in developing countries. The best performer above, Cliffs Natural Resources, is a company that sells iron ore, and one of their biggest customers is China: a country that’s dominating the world economy and one that suffered relatively little during the recent (some might say “ongoing”) global recession. Developing economies gobble up natural resources. That’s why Cliffs is selling lots of iron ore, and Freeport-McMoRan is selling lots of copper. It’s also why Caterpillar is doing well. Wherever you see construction – and there’s tons of it going on in places like China and India – there’s probably a yellow tractor sitting nearby.

These stocks are called cyclical stocks – so named because they follow economic cycles. When times are tough, they go down. When the end of a recession is in sight, they start going higher. To make money in cyclical stocks, you buy at the depths of a recession, when there’s virtually no positive press and no sign of a turnaround. That’s why I was able to buy these so cheap last Spring and Summer. When will I sell? At the top of the cycle – when the economy has fully recovered, all’s right with the world, and there’s no place for the economy to go but down. We’re not there yet, however – not even close. Because the world’s largest economy, ours, has yet to fully participate in the recovery.

Why the losers are losing

If I had a crystal ball, I wouldn’t have bought Citicorp or regional bank Huntington when I did. I bought them last Spring because I thought the worst of the housing crisis was behind us. What I didn’t know, however, was that many of our nation’s largest lenders had been screwing people with improperly executed foreclosures, thus potentially extending the housing recovery and in all likelihood costing the offending banks a ton of money. We’ve done extensive coverage of the foreclosure fiasco: see

• How Countrywide Profited on Foreclosures
• Next Bank Scandal? Forced-Place Homeowners Insurance
• Fannie, Freddie Yank Foreclosures From Firm Investigated by Money Talks
• Foreclosure Mess: More Shoes to Drop?
• The Mother of All Foreclosure Mistakes
• The Foreclosure Freeze – What It Means and Why It Matters

I still believe that sooner or later the housing market will recover, our economy will improve and these stocks will go up. So I’ll wait patiently, and may even add to these positions. Stay tuned.

What can we learn?

The obvious lesson to learned here is that diversification among stocks is critical. We’re encouraged to think of the stock market as one investment: every night the news anchor tells us how much the Dow went up or down. But as you can plainly see from my investments, some stocks do better than others: way better. As is often said by those in the know, it’s not a stock market – it’s a market of stocks. That’s why owning a bunch of different companies isn’t just desirable: it’s critical. If you can’t afford to buy a diversified portfolio, invest in mutual funds or Exchange Traded Funds (ETFs), where you can put down a small amount and own a slice of a large group of stocks.

And even if you’re not interested in the stock market as an investment, it’s still useful to see what’s happening on Wall Street. For example, the out-performance of commodity-based cyclical stocks tells you that a world economic recovery is well under way. The relative under-performance of US Bank stocks tells you that it hasn’t arrived on our shores – yet.