Yesterday's laggards turn leaders

Source: WSJ

After being the best performing asset class in 2016, Natural gas futures have fallen 15.52% YTD. As pointed out in an earlier blog, best performing asset classes of one year can deliver the worst returns the next year and vice versa. The example given of was Natural Gas and it was stated that it was quite possible that Natural gas would significantly underperform.

On the other hand, Cocoa, which was the worst performing asset class in 2016 (-33.8%) has so far outperformed Natural Gas, Crude Oil and Sugar (some of the best performers of 2016).

As has been pointed out by Benjamin Graham and subsequently by Seth Klarman, overperformance generally leads to overcrowding the market and consequently diminished returns. By comparison, underperformance will generally lead to diminished competition and subsequently higher returns.

This trend seems to repeat itself in the stock markets too. As the below chart shows, in 2011 Financials were the worst performers only to emerge on top in 2012. Utilities, after being the worst performers in 2012 and 2013 emerged out on top in 2014. The only sector which remained in the middle was S&P 500. So, investors looking out for stable returns would have been better off invested in an index fund. 

Yahoo Finance

It would help Investors not to get too caught up by high growth figures and future expectations but also rely on Margin of Safety as professed by Benjamin Graham.