2013 for me personally was not a great year for a variety of reasons. Investing was one of them as I was not able to ride the wave of record returns that dominated global markets. Several years ago, every major index was in the red. In 2013 it was the opposite as only Mexico (-2.7%), Singapore (-1.0%), Shanghai (-8.6%) and Brazil (-16%) took a hit. Otherwise, it was a good year to be an index fund investor and you are going to hear a lot about it in the next few months as RRSP season kicks into high gear. I would characterize this year to be for me personally one of the most frustrating in the 17 years I’ve been investing and I wrote about it in 2013. Many of the fundamental investing principles that I believe in and try to coach other investors just did not hold water. Up was down and down was up. Companies that were generating little or mediocre profits (HP) or had challenging business models (Best Buy) were soaring in 2013. It should not be this way.
In a way 2013 was a bit of a repeat of 2012 in that my portfolios generated very, very low to moderate returns versus the overall market. Overall my investment decisions returned 3.9% in 2013 (net of fees). This is below my minimum personal benchmark of 6-7% that I try to earn on my equity investment portfolios. Historically it is below average but in 2013 the results look horrible compared to what the market was doing globally. Chances are if I was working on Bay Street, I would get fired for lack of Alpha but I don’t work on Bay Street and my goals are multi-year in nature not multi-weekly.
Insert Spin Here
Here is the part where I try to rationalize a 3.9% return in a world where equity indexes are generating 10-20-30% returns:
- It’s still earning above inflation returns. I’m still not eroding wealth which is a fundamental factor in investing.
- A positive return is a positive return. You shouldn’t get penalized or jeered for generating any level of profit. It may not be what the growth addicted, financial smarty-pants set would like, but again, I don’t roll with that crowd.
- I was still able to identify and invest in some companies that turn out to be great stock performers so if anything, my strategy and approach to researching and investing in stocks seems in check despite the sugar induced stimulus hits by Central Banks.
So let’s go to the stats and breakdown the performance:
- Sold 10 stocks at a realized return (i.e. money I actually banked) of 3.9%. 6 stocks were sold for a gain, all of them generating double-digit returns with 2 generating a greater than 20% gain.
- Of the 4 stocks sold for a loss, 3 were sold for less than a 10% loss while the other was sold at a 24% loss.
- I made a grand total of 31 trades which was much lower than the 55 trades I made in 2012. I hardly participated in the market and when I did, it looks like I was just dipping my toes.
- My portfolios have now generated positive returns for 7 of the past 9 years and 8 of the past 11 years. Overall the direction is still positive.
- I finish 2013 with my highest level cash position of 77 percent. I thought last year when I finished with a cash position in the high 50’s was obscenely high. This year it was ridiculous.
So Wha Happened?
At the end of it, I got cold feet because nothing was consistent with conventional wisdom. The economic reality is that the world is emerging from the Financial Crisis of 2008 and the Euro/Greece debacle of 2012 in a meagre state with economic growth tepid at best and so it was very hard for me to justify buying stocks that I thought were overpriced. Unfortunately economic reality got trumped by monetary policy reality thank to the Central Banks around the world printing money at an overzealous pace and flooding the world with an insane level of liquidity. With interest rates being kept artificially low by the Central Banks led by the US and Japan, yield was at a premium and the only place to find it was in the stock market. So the world went all-in on stocks with little regard to economic and business fundamentals. The whole concept of risk seemed to be legislatively abolished. The VIX index which measures the volatility and comfort level with risk was consistently in the low teens throughout the year, which marks a sentiment that investor have no problem taking higher risks.
- I continue to be mindful that you can do all the research you want, and apply all the basic fundamental investing logic, you can still be wrong. It is at these critical times that you need to be ready for your investment philosophy to be challenged and your emotions to be challenged. When it happens, I’ve learned to ignore it and to continue to stay disciplined to my strategy and my long term goals.
- While my returns were meagre, my trading costs continued to fall. In 2013 they fell from 0.55% to 0.40% which means more money is staying in my pocket. In a low return type of year, this can be huge. A big reason is that I made fewer trades in 2013, however I tried to make them with higher dollar amounts.
- I still need to put more money to work. A portfolio that has almost three-quarters in cash is not good at all. While I have remained pessimistic to the current state of the market, I have dipped my toes on opportunities that have borne fruit. I got the return I was seeking, but I needed to have more conviction to hold on. This is the classic tug of war we face as investors. How greedy are you? Are you satisfied with the return you achieved and how much more do you need? My philosophy has been to bank the return when it crossed a 20% threshold, mainly because I feel confident that my approach to researching and identifying companies will allow me to find more companies in the future. I am OK with that level of return. I can sleep at night. For other people I have worked with, the comfort level is higher or lower. It’s all about tolerance for losing AND gaining wealth.
Worst Trades-Leaving Money On The Table
It turns out that a good number of trades I made that in my mind seemed to be good trades in that I did bank tangible, meaningful profits turned out to be bad trades in that the stocks continued to rise and quite significantly.
FedEx: Sold at $121 to bank a profit of 24% only to see the stock go to $143
Tiffany: Sold at $72 to bank a profit of 16% only to see the stock go up to $92
Johnson and Johnsons: Sold at $72 to bank a profit of 20% only to see the stock go up to $93
There were also some stocks that I sold because I had either questioned their business model only to see the stock keep rising. These include Best Buy which I sold when it crossed my 20% loss cap only to see it go down to the low teens but then surged to the high $40’s even though there was still posting quarterly revenue losses and their business model was under threat. Then there was the TEVA, the generic drug company I liked that saw its CEO get canned and who’s strategic direction get totally questioned. What happens? The stock goes to $40 from $37.
The above Money on the Table trades worked for me for the right reasons and I still earned a return that I was comfortable with. As I mentioned before, no one should ever be punished for taking a profit no matter how large or small.
In September this probably could have been notched on the Worst Trades section but it has climbed nicely. The position is up 13 percent at year end despite being at times down almost 20 percent. As everyone was slamming the stock and speaking how the company had lost its mojo since Jobs passed away and should be selling cheaper iPhones, I took the other side and kept buying it on the way down. Take out the noise Apple is still one of the most profitable companies on the planet and has a rock solid balance sheet, and makes products people want to buy. About those cheap iPhones, turns out people want the expensive 5S! What say now smart analysts? So it was not generating 50% growth rates like the analysts were demanding, instead generating 25%. What’s wrong with that? The big question that I will be facing is what to do when it crosses my 20% threshold. Should I hold or bank it?
In the end the headline number was OK in that it wasn’t a loss but it was far below what the market was delivering. Based on that I should be questioning why I should even be bothering with investing, yet when I drill down into the details, there are many positive outcomes which give me some comfort. There is always room to tweak and improve, but the core of the strategy and approach should still be consistent and enforced with discipline and modesty. The market will always test our emotions and as long as you fall back on your first principles, the successes should outnumber the failures. When failures occur they should be managed and controlled and not allowed to spread like wildfire.
And so we close the books to 2013 and like a good defensive back after getting burned for a touchdown or a goalie letting in a weak goal, we acknowledge, forget about it and then move on.