Heavy Metal: You Heard It Hear First

The year 2007 left most investors underwhelmed with their portfolio performance and overwhelmed with the market's volatility and day after day of new stories about subprime.

In a year marked by concerns over a slowing economy and financial hocus-pocus, there was one group that turned in a whopping return of over 77% (based on purchasing equal amount of each the securities) over this past year. We call this amazing group the Heavy Metal Portfolio.

Why bother with investment firms associated with collateral debt obligations, credit default swaps, or other arcane financial instruments you can’t explain to your grandmother? It’s immeasurably more satisfying to put your capital to work in companies making things that rumble, clank, and are often capable of crushing small objects.

We’re not alone in this assessment. While many Wall Street observers had been expecting Warren Buffet to put some of Berkshire Hathaway’s excess cash to work by pouncing on one or more distressed financial firms, he surprised them by orchestrating the $4.5 billion acquisition of Chicago-based Marmon Industries in mid-December.

On a more serious note, we are not suggesting that investors limit their holdings to firms selling large, heavy objects that rust in the rain. The strong performance of the Heavy Metal Portfolio is just another example of the importance of broad diversification. The year 2007 was treacherous with sharp declines in shares of widely held firms such as Citigroup (C, down 47.1%), JC Penney (JCP, down 43.1%), and Starbucks (SBUX, down 42.2%). A truly diversified strategy minimizes the impact felt by many this past year with substantial gains from firms investors fail to include in their portfolio.

Broad global exposure with reduced portfolio costs is the approach successful investors take. Knowing that their portfolio will not beat every index every year, but winning through minimizing losses and the compounding of positive returns that the market will provide over time.

Thanks goes to Weston Wellington with Dimensional Fund Advisors for his contribution to this post.