Why Is My Portfolio Lagging? Blame It on 2015

In my previous column, I acknowledged, with much chagrin, that my Practical Investing portfolio had badly lagged its benchmark, Vanguard Total Stock Market ETF (symbol VTI), since I launched it in October 2011. However, the portfolio is trouncing its bogey so far in 2016, and for much of its history it has run neck and neck with the fund. And that made me wonder where—or when—I went wrong. So I decided to take a deeper dive into the portfolio’s performance.

What happened in 2015? In simple terms, a small group of large-company growth stocks performed spectacularly, masking the much weaker performance of the broad market. The most noteworthy of last year’s super-stocks were the FANGs: Facebook (which gained 34% in 2015), Amazon.com (118%), Netflix (135%) and Google (47%), now called Alphabet. I couldn’t bring myself to buy any of the FANGs. Nor did I own two other supernovas: interactive game developer Activision Blizzard (up 92%) or Nvidia Corp. (64%), a maker of graphics processors.

I’ve shied away from all of these stocks for two reasons: First, although all are great companies with superior prospects and are perfect for growth-oriented investors, their valuations are uncomfortably rich for a value investor like me. And I’ve avoided some of the FANGs specifically because of concerns that management doesn’t treat shareholders fairly. Alphabet, Amazon and Facebook have two-tier stock-ownership structures that seek to keep voting control of the companies in the hands of their founders. The scintillating gains of these stocks are proof positive that disenfranchising shareholders does not necessarily hurt results. However, I view firms with dual voting classes much as I do benevolent dictatorships: You don’t really know when things may become less benevolent. So I generally steer clear of them.

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Unfortunately for me, few energy companies treat shareholders in similar fashion. So I had no grounds, on the basis of this corporate-governance issue, to avoid Chevron and Stone Energy, which I held in 2015. And I owned Dover Corp., an industrial firm that makes, among other things, oil drilling and production equipment. All three stocks plunged last year, along with oil prices, and have yet to fully recover.

I bought the stocks thinking that even if crude prices bounced around over the short term, oil is so vital to our economy that the companies would thrive over the long haul. I still believe that to be true. That said, I sold my Stone shares late last year because of my concern that the small producer could run out of cash. And I unloaded the other two this past summer because I realized that I was, at best, ambivalent about the recovery of oil prices and, more generally, about investing in companies tied to carbon-based energy.

Why? Even as my portfolio was struggling, I was spending $17,000 to put solar panels on my house. The math suggested that I wouldn’t break even for at least seven years—not exactly a brilliant return on my investment. Yet I bought the solar panels because I’d love to live in a world that relies on sustainable and nonpolluting sources of energy. It felt a little hypocritical to do that and still root for Chevron (Go, Big Oil!). I do think Chevron, the nation’s second-biggest energy company, will eventually come back. And the stock, at $103, yields a generous 4.2%. But I didn’t want to question my life goals every time I looked at the portfolio, so Chevron and Dover had to go. Sometimes investing is more about emotion than logic. This was one of those times.

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