A- for 2017 Chicken Little Portfolio performance (self-graded)


I give the Chicken Little Portfolio a grade of A- for 2017. Wrong every day of the year on macro predictions, and still managed to beat out a decent return with disciplined, low-risk approach. Also, made a few bucks buying cryptocurrencies. 

Report Card summary

Absolute performanceA-Solid returns, low risk
Relative performanceC-Missed opportunities
Macro PredictionsN/A(almost) irrelevant

Absolute Performance: A-

The Chicken Little portfolio returned 4.57% in 2017 with low risk. 

Almost two-thirds of the portfolio is invested in cash or relatively short-term Treasury notes. The remaining part of the portfolio is invested in long-term US Treasuries. Long-term Treasuries are riskier than shorter term instruments, but held directly long-term Treasuries remain among the safest assets in the world. In summary, Chicken Little had a low risk portfolio in 2017. 
Chicken Little Portfolio. Solid returns, Low Risk

In addition, Chicken Little sold some Treasuries, and halted new purchases, in 2016. See: Chicken Little sells Treasury Bonds. This decision about Treasury bonds has two positive aspects. First, the timing was excellent. Second, because bond holdings were reduced, and bond purchases were halted, the Chicken Little Portfolio became less risky in 2017. 

2016 was a good time to sell bonds

2016 was a great time to exit Treasury Bonds. 

On August 11, 2016, I wrote, "In the last year, Treasury bonds have returned 16.8%; over the last 10 years, investors have almost doubled their money by earning 93% ...  Future returns on Treasury bonds will be lower than the past returns." Here is the table I published on August 11, 2016. 

Asset10-year returns ending 8/11/20165-year returns ending 8/11/20161-year returns ending 8/11/2016
US Long-Term Treasury Bonds93.18%50.54%16.81%

What has happened since? Bond prices have gone down. In fact, the total return to owning these bonds between August 11, 2016 and today is negative 6.87% Here is the updated table: 

Asset10-year returns ending 8/11/20165-year returns ending 8/11/20161-year returns ending 8/11/2016Total return since Chicken Little Fell out of love with Long-Term US Treasury bonds (8/11/16)
US Long-Term Treasury Bonds93.18%50.54%16.81%-6.87%

The absolute best day to sell long-term Treasury bonds, in the last 30 years, was July 8, 2016. This date had the highest price and the lowest yield (2.11%) on 30-year US Treasury bonds. So the Chicken Little "Sell Bonds" post on August 11, 2016 was almost perfectly timed. 

The Chicken Little portfolio became less risky in 2017. 

Chicken Little Portfolio has lower risk today than a year ago

What does the 2016 forecast (and action) on bonds have to do with the 2017 portfolio? Because I have suspended bond purchases, all of the bonds in the portfolio mature 1-year earlier than they did one year ago. 

For example, the portfolio includes a Treasury-bond that matures on Feb 15, 2023. A year ago, that bond matured in 6-years and yielded under 2%. Today the same bond matures in 5-years and yields 2.3%. So this bond is less risky (because it matures in 5 years rather than 6) and it has a higher return. 

In summary, in absolute terms, 2017 was a very good year. Solid return, low risk, and a portfolio that became better during the year without any trades. 

A-  for absolute performance

Relative performance, C-

Chicken Little could have taken more free cash in 2017

2017 was the year of free cash. Looking in the rear view mirror, Chicken Little missed two enormous opportunities. 

First, Chicken Little could have had a riskier portfolio by holding less cash and fewer shorter-term treasuries. Second, instead of picking long-term Treasury bonds for the risky portion of the portfolio, Chicken Little could have picked almost anything -- stocks, gold, or the booming bitcoin. Every asset rose in 2017, and Treasury bonds rose among the least. 

Asset/MarketSymbolTotal return in 2017
Dow Jones IndustrialsDIA27.72%
Non-US StocksEFA24.92%
Emerging Market StocksEEM37.13%
US Long-Term BondsTLT9.08%

C- : Relative performance

Behavior, A+

During 2017, Chicken Little behaved exactly as planned. In the past, Chicken Little has tended to make impulsive, emotional trades. Almost invariably, those emotional trades were costly. These exploits and related thoughts are included in the 2005 book, Mean Markets and Lizard Brains. (click for book on Amazon.)

Chicken Little has a lizard brain - two species in one

In response to the analysis that emotional trades are costly trades for Chicken Little, a new system was designed. All trades are made during the weekend when financial markets are closed. Every trade has a pre-scripted plan that gets implemented with exit orders entered at the same time as the investment initiation. 

2017 was a very disciplined year. No impulsive trades (and almost no trades at all). Furthermore, the portfolio never shorted a penny of US stocks in 2017. Cannot get any better discipline.

A+ : Behavior 

Macro economic forecasts, N/A, almost irrelevant. 

The bull elephant in the room is that Chicken Little has been negative, and wrong, on the stock market for years. Can one really pat oneself on the back for making a few dollars, while being so wrong on the markets? 

The Bull Elephant in the room: Chicken Little's fears
For example, I recently wrote, "There will be a massive, historic drop in price for all risk assets - stocks, real estate, and (almost) all bonds. Most people will be financially ruined by this bear market."

By some measures, we are in the midst of the greatest bull market for US stocks in history. During this period of time (March 9, 2009 -> today), Chicken Little has made almost zero pennies directly from owning stocks (see post), 

Doesn't 2017 deserve a F for Failure to see the obvious? 

Chicken Little has been wrong for years. 

No. I believe the correct measure of a portfolio is performance. Thus, the macro views are almost irrelevant. In some ways, it is more impressive to make money while being wrong. Why do I write 'almost' irrelevant and not 'completely' irrelevant? 

Macro views are important because it is hard to hold an investment that is inconsistent with one's beliefs. For example, I was among the first to predict a Trump stock market rally, writing within a few hours of the election when most of the world was selling stocks. See Trump trade post from the morning after the election

Chicken Little has been bullish on stocks since 2016 (see Chicken Little buys US Stocks), but has not been able to hold any stocks because of macro views of a pending collapse. Thus, the macro views are relevant, not by themselves, but because they interact with the feasible portfolio positions (see Chicken Little chickens out.) 

2017 in summary

2017 was a good year. Solid returns, low risk, and a portfolio that became better during the year. Also, a profitable sortie into crypto currencies -- see (crypto post 1 & crypto post 2). 

A good year in the rearview mirror, and an exciting time ahead in 2018. 

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