If only 2014 had ended on Labor Day. As of that seemingly late date, with two thirds of the year gone, the Energy Sector Select SPDR ETF (NYSE: XLE) was outperforming the S&P 500. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP), more representative of small-cap energy stocks, had nearly doubled the S&P’s return with a 14% gain year-to-date, and our portfolios were doing even better.

The Energy Strategist’s recommendations had already racked up an average return of 13% as of late June, and over the next two months that performance improved as recent picks like Energy Transfer Equity (NYSE: ETE), SemGroup (NYSE: SEMG) and Pacific Ethanol (NASDAQ: PEIX) continued to surge.    

The winning streak had me convinced that energy stocks had passed some sort of summer test “with flying colors.” And the only color energy investors have seen since is red, as the price of oil crashed.

Our year end portfolio numbers reflect the downdrafts in crude and oil equities as well as the consequences of that misplaced confidence.

The nice mid-year lead turned into an average loss of 10.1% for all of 2014. This compares with the 8.5% setback for the large-cap XLE and a 29.2% drubbing for the riskier XOP.

As that disparity suggests, our portfolios also saw a significant variation in performance, with the Conservative basket producing a positive return of 4.3% that handily outperformed the XLE. It was helped by the strong first-half performance of many of our favorite master limited partnerships, and the merciful absence of big losers other than offshore driller Ensco (NYSE: ESV).


The Growth Portfolio, in contrast, was afflicted with multiple major drags. One of the worst was the infrastructure builder Chicago Bridge & Iron (NYSE: CBI), which started the year as our top overall pick but fell from grace on questions about earnings quality well before the oil price disaster.

It’s hardly a consolation that CBI also left a mark on Berkshire Hathaway (NYSE: BRK.B), or that the average Growth Portfolio loss of 8.4% was a shade better than the XLE’s, despite the fact that defensive giants Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) account for a combined 30% of that ETF’s weighting.


In retrospect, we should have never reloaded on Whiting Petroleum (NYSE: WLL) and WPX Energy (NYSE: WPX) after recommending partial profit-taking in these names in April, and of course would have been better off steering clear of Penn Virginia (NYSE: PVA). On the other hand, partial mid-year profit taking in big first-half winner Targa Resources (NYSE: TRGP) worked out a lot better, as did the pending buyout of Dresser-Rand Group (NYSE: DRC) by Siemens. Energy Transfer Equity was another bright spot, and the late October bet on filling stations operator CST Brands (NYSE: CST) has so far proved timely.

Combined, our Conservative and Growth picks handily outperformed the top-heavy XLE. Unfortunately, we also recommended no fewer than 24 Aggressive picks for some portion of the year, and these averaged a loss of nearly 23% while we backed them.


None was more painful than the near-total wipeout of Bakken driller Emerald Oil (NYSE: EOX), with far too much of its decline coming after I wrongly picked it in November as one of the biggest bargains among shale drillers. 

Another Bakken outcast, Oasis Petroleum (NYSE: OAS), didn’t fare much better, and longtime winner Seadrill (NYSE: SDRL) fell apart as well after starting the year as a Best Buy. My misjudgments were not confined to the oil patch: diversions into uranium mining, ethanol and solar energy also proved mistimed, though at least the ethanol stocks started strong before cruelly caving.

In general, the best moves in this portfolio and overall were those early-year profit takings in the likes of American Railcar Industries (NASDAQ: ARII) and GasLog (NYSE: GLOG). On the other hand, bargain hunting during the crash last fall typically proved ill-advised with the exception of Bonanza Creek Energy (NYSE: BCEI), added near December’s lows.

We’re not going to hide behind the sickly benchmarks or the occasional big winner. Nor are we much comforted by the relatively cautious commentary we provided in April and again in June. Like our all-too-brief self-imposed moratorium on bargain-hunting in October, these premonitions proved grossly inadequate to the risks the sector faced and the punishment it subsequently suffered.

And while very few predicted the extent of the plunge in oil prices or the resulting market fallout, those who did not, ourselves included, can still profit by extracting the right lessons from those disappointments.

One takeaway is that Aggressive Portfolio recommendations must be considered speculations rather than investments and treated accordingly. In the future, that will mean somewhat less patience with losses, a greater willingness to take partial profits and almost certainly a higher turnover in that portfolio.

The ethanol names are a good illustration of recommendations that were explicitly pitched as trades but through inaction after early gains turned into a losing longer-term entanglement. Uranium could have proved less poisonous had we acted as soon as we knew we’d fallen for one of that commodity’s many head fakes.

Another lesson learned, reinforced by those examples, is that we ended up spreading ourselves too thin despite resolving not to back in April. No investor is well served by overseeing 67 portfolio positions, as we were until today. That’s far too much distraction from top choices and the largest positions.

Yet most of us are prone to such portfolio creep. New things are shiny and interesting, and subscribers expect a constant stream of new ideas. Selling old ones, whether they’re up or down, offers less immediate gratification. Yet it must be done or one is liable to end up with 120 stakes one day the same way one has stumbled into the first 60. In 2014, we fully let go of just six portfolio holdings, while adding 29.

In the next article, we’ve begun the process of pruning our portfolios once more to a more manageable size. And we’ve taken a fresh look at all our picks in light of the altered industry circumstances. Some of the recommendations that looked promising six months ago are now unacceptably risky even at their much reduced price. They simply cannot be defended even as a speculative part of a sensible energy portfolio any longer.

The start of a new year is an excellent time to take another look at the old decisions still shaping our lives and decide if we’d make them again knowing what we now know. Investors might usefully think about what investments they might make if they were starting out 100% in cash and had no prior history with any particular position. If you’re invested in something based on conditions and assumptions that no longer apply, that’s obviously a problem.

The costly lesson of the past few months is that investors — professionals and amateurs alike — are often too slow to change course when circumstances warrant. And it’s harder to muster the proper focus and resolve while holding a little bit of everything.

It doesn’t mean that we’ll stop covering new opportunities or adding portfolio picks; but we might also write about a stock without recommending it or recommend it in place of a different portfolio position.

The goal is to gather more timely information and make better decisions about the investments that matter most to us and to you. If we can make this work, we can still turn the lemons of 2014 into lemonade.