Salem Abraham’s Abraham Fortress Fund has beaten 96% of opposing funds this year. Managing downside risk through diversification has been his key to success. Here are Abraham’s favorite investing ideas and four stocks that are among his largest holdings. At first glance, it might seem like the city of Canadian, Texas would be an odd place from which to run an investment management firm. The tiny North Texas town has just two stop lights, a population of less than 3,000, and is about 45 miles from the nearest Starbucks.
But it’s where 34-year market veteran Salem Abraham grew up, met and married his high school sweetheart, and has since raised eight children of his own. It’s hard to imagine, then, why his eponymous firm, Abraham Trading Company, would be headquartered anywhere else.
Besides, it’s not like being over 1,600 miles away from Wall Street has hurt Abraham’s performance. The long-time investor’s flagship mutual fund, the Abraham Fortress Fund (FORTX), has beaten 96% of competing funds so far in 2022, according to Morningstar.
The last thing Abraham would do though — other than move away from Canadian — is give himself a pat on the back.
“We wake up every day not smug, but paranoid,” Abraham told Insider in a recent interview. “It helps to wake up paranoid every day.”
Brace for downturns by diversifyingAbraham, who’s a self-described math geek with decades of experience running a hedge fund and trading futures, uses a simple motto to guide his decisions: “Downside risk is always likely.”
With that in mind, the mutual fund manager limits risk by prizing diversification above all else.
What Abraham called the “bedrock principle of investing” is the secret to his fund’s success — and the reason why the market veteran said he sleeps easy, even during steep stock market selloffs. The Abraham Fortress Fund is down just 0.5% year-to-date while the S&P 500 and Nasdaq Composite have fallen by 16.2% and 25.4%, respectively.
“It’s like wearing your seatbelt,” Abraham said. “Is it likely you’re going to have a wreck today? I don’t know. But I’m going to wear my seatbelt, and I’m going to have an airbag, and I’m not driving too fast.”
Abraham illustrated the importance of diversification with the following example. Imagine a coin that, when flipped, makes investors money 60% of the time and loses them an equal amount of money 40% of the time. Flipping that coin once would be profitable 60% of the time. However, Abraham said that flipping 100 coins with that same 60-40 positive-negative outcome split would yield money about 98% of the time since the downside risk gets minimized over time.
The takeaway from that example is that Abraham believes it’s best to have many small positions in a portfolio instead of a handful of large ones — even if the large investments are promising.
Diversification has been widely accepted as one of few no-brainer investing strategies for decades, ever since it was championed by Nobel-prize winning economist Harry Markowitz. However, while the practice is common sense, it’s not too common in practice, Abraham said.
“What makes me laugh is when people have this diversified bucket of stocks, and they think that’s diversified,” Abraham said. “And I’m like, ‘OK, tell me: If you told me to make a fruit salad, and I brought a fruit salad to your house with 20 types of apples, you would say, “Salem, this is an apple salad. This is not a fruit salad.”‘”
Abraham’s point is that owning stocks across sectors or even factors — like growth and value or large-cap and small-cap — isn’t real diversification. That’s because during downturns, stocks tend to all “go in the toilet together,” the Abraham Trading Company founder said. Such has been the case lately, and Abraham doesn’t see the selling pressure letting up anytime soon.
With that said, Abraham still believes that stocks are a vital part of a balanced portfolio. He simply derided the notion that “there is no alternative” to stocks, given his thesis that alternative investments and bonds, to an extent, are worth having exposure to.
“If you’re worried about stocks, it’s probably because you got too big an allocation to stocks,” Abraham said.
4 of the biggest opportunities in stocksInvestors who have a reasonably sized allocation to stocks in their portfolio may want to add exposure to the following types of companies, Abraham said: airlines, oil and gas firms, and utilities. Select blue-chip technology names also make up a large part of his mutual fund.
The case for airlines is straightforward, in the fund manager’s view: People have returned to the air, as evidenced by Transportation Security Administration data on checkpoint throughput. As the summer nears, passenger levels are within 5-10% of their pre-pandemic levels, Abraham noted, adding that the high fuel prices that hurt airlines’ profitability are priced in to the stocks.
“For the next six months, I think airlines really take off — literally and stock-wise,” Abraham said.
Energy stocks, specifically those in the oil and gas industry, have more room to run because supply shortages won’t catch up to resilient demand for years, the market veteran said.
“I’m seeing a lack of investment in oil and gas,” Abraham said. “And I know everyone wants to go green, but most people still go fill up their car full of gasoline and their house is being lit with natural gas.”
Similarly, demand for the energy that utilities provide is inelastic, meaning that it doesn’t fade in recessions. Though utilities are anything but sexy, they’re a simple, no-nonsense way to have exposure to stocks and protect a portfolio from price surges without taking on much risk.
“They’re a good inflation hedge, and they make you a decent rate of return, and they’re not such a wild ride,” Abraham said.
Lastly, Abraham confirmed that blue-chip tech giants like Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN) are core holdings of his mutual fund. Not only does Abraham like these stocks, but he said that owning these them allows the Abraham Fortress Fund to have broad exposure to some of the largest names in the S&P 500.
Insider compiled a list of exchange-traded funds (ETFs) that offer exposure to the three industries that Abraham said he liked: The US Global Jets ETF (JETS), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and the Utilities Select Sector SPDR Fund (XLU).