Investment Activity Review - 2015 Year End Review

Seriously 2015 is over? Already? This year has definitely flown by. It’s been a busy one. With having 2 little kids and selling and buying a house and moving twice, it’s taken a lot of out me personally. Somehow I managed to find some nuggets of time to put some of my hard earned savings to work. As we close the books on another year, the time has come for my annual keying in of how my investments faired and any major new learning's I’ve gained over the year.

I started 2015 with very much the same mentality as I started 2014. I had and continued to remain quite skeptical on stocks. I started the year with a pretty sizeable short position on the S&P 500 and over the course of the year, I added to the short position 6 times. I ended the year with the short position almost representing 50 percent of one of my portfolios. I agree that it is not the best example of diversification, and I’ve wrestled with this all-in approach with it during the year, however I feel strongly in my thought process that at some point the pendulum will swing the other direction.

Despite my pessimism, I have continued to implement my investment ideology of continuing to buy well-run, well managed businesses that are market leaders in their industry, generate tangible wealth (Returns on Invested Capital that are greater than their Cost of Capital), have clean balance sheets and are selling at a discount. The pickings continue to be slim as the continuous low interest rate policies have juiced returns for many stocks. In 2015, I added new positions in Coach, Southern Copper Company, Visa, Wal-Mart, Potash Corp. I’ve also includeda few ETF’s (one investing in water companies, and ETF investing in Canadian and India equities). Over the course of the year, I documented my rationale and process of framing those investment decisions. I also used pullback in the market to add to my existing positions in companies like Imperial Oil, Las Vegas Sands,  and General Electric.

By the end of the 2015, my portfolios achieved the following returns:

 Portfolio 1: -5.20%

Portfolio 2: +5.25%

RESP Portfolio: +8.20% (not including the Government Education Grant)

Portfolio 1 contained my short position which made up more than 50 percent of my equity allocation and so contributed handily to the loss. I ended the year with my portfolios in about 2/3’s cash. Overall, besides the RESP portfolio, the results were not great mainly because of my very high cash positions. I’ve said many times that a good year is where returns for stocks are at or greater than the long term performance of stocks which is in the 6-8 percent range so based on this benchmark I would say it wasn’t a very good year. If I was working on Bay Street, I probably would get scraps for bonus or just outright pitched. On the other hand, I did achieve returns that were greater than inflation, which I’ve commented many times is the minimum you should try achieve as an investor, so I was at least at a high level preserving my purchasing power. On the surface it’s still meh. Then again the overall stock market in 2015 was meh and uninspiring, which is actually a good thing considering the Red Bull induced returns the market was cranking out the last 3-4 years.  

So on the surface, not exciting, but when I drilled down into the numbers however, I continue to see some things that give me greater comfort. 

Evaluating Investment Decisions: Realized Returns

The metric I focus most when evaluating my portfolios and just as importantly, my decision making capability, is realized return. This is a return generated when I actually sell a stock. When you sell a stock you are tangibly getting cash in your pocket and hopefully you will have made some investment decisions that will enable you having more cash in your pocket than when you started with. To me if I’m making a decision that results in me having more money at the end, then I think I’ve make a good decision. In 2015 I made just 6 selling decisions. Below are the realized returns from those decisions.

NeuLion +11.7%

Gilead Sciences  +8.2%

Blackberry -19.3%

Coca-Cola+23.7%

Freeport MacMoran +22.9%

iShares Emerging Market ETF +25.14          

Overall the realized return on these investments in in 2015 was 7.7%. In 2014 it was 20.6% and in 2013 it was 14.2%.  Considering how flat the returns have been in stocks (even though it was setting records on a daily basis at various points during the year), I’m OK with this. The decisions I was making was yielding tangible returns that were well ahead of inflation. So my purchasing power is being enhanced.

Out of 6 stocks I sold, 5 were for a positive return. 4 out of the 5 positive sales were for double digit returns with 3 out of those 4 generating a return greater than 20%. One of the disciplines I have continued to maintain is to sell stocks when they cross at least a 20% return level. This tells me I appear to be disciplined in executing my strategy.  Conversely I also set maximum loss thresholds when stocks are falling below 20 percent. This occurred with Blackberry. I bought the stock as a pure speculative play on the hopes that the company has the means to reinvent themselves. I still think they have a shot but when the stock fell over 20 percent, I disciplined myself to cut ties so that I can preserve capital so I sold.

The next paragraph I wrote in my 2014 review and it still applies…

“I’m also not going to kid myself into thinking that their performance was pure stock picking talent. The low interest policies by the Federal Reserve have forced investors to pour money into stocks as it has been the only game in town for yield. Stocks have had a nice Jetstream behind them to propel them higher in 2014.”

I will add one element that did play heavily into these returns this year. Currency. The Canadian dollar got pounded as a result of the collapse in commodity prices. That collapsed juiced the returns of many foreign stocks that I sold and currently own. When the dollar was at par, I instead decided to a little different type of cross-border shopping and used the opportunity to by US assets. Even with the Canadian dollar down, I will still buy US stocks because they involve some of the best run businesses in the world. It’s just instead of buying 50 shares, I might buy 40 shares.

 

Exploiting Market Psychology

I can definitely say that the way I make investment decisions now when it comes to buying and selling stocks is much different than when I started in 1996. It’s not totally about the quantitative side and the numbers game. I’ve become more in tuned with the qualitative, emotional, and behavioral aspects of investing and that I think has made be better.

I continued to utilize market psychology more and more in framing my investment decisions. I am always looking for great companies that are on sale, and often those companies go on sale when either the overall market sentiment is tanking or the professionals are trashing the stock. As I look at my portfolios, I can see these type of companies are well represented (Coach, Southern Copper, Las Vegas Sands, Imperial Oil, Potash). All of these companies have been talked down by experts or are operating in a weak business cycle within their industry. What’s interesting is that despite these takedowns, these companies are still creating tangible wealth and have very clean balance sheets so they can withstand the storms. From this perspective, I would consider these companies as less financially risky than a company that is at the altar of dependency on hyper growth (See Exhibit A-Chipotle). At some point the pendulum will turn and these companies will positioned for a ramp up in values. When will this happen? I have no idea but I’m prepared to be patient and wait. When we make investment decisions, we are in essence making an educated guess on the long term performance of a company and the outcomes of those guesses take time to come to fruition.

 

Trying to stay with the winners longer

In 2015, I continued to try to make a commitment to run with stocks that were moving up longer specifically with the case of NeuLion. In the middle of 2015 the stock was up almost 100 percent, but then suddenly the stock tanked when it announced it lost the streaming rights to NHL games to Major League Baseball. To me I decided it was a negative game changer moment and I decided to sell the position. I still made about 11 percent overall. There were some scars and swearing there. NeuLion was test case for me to see how long I could hold on to a stock like that. It was well past my 20 percent return threshold but I held it and it was a good move until it collapsed. My learning is that there is no defined playbook for these type of situations. This will always be a work in progress for me and very much a case-by-case challenge.

Keeping Costs Low

In 2015 my total expenses paid out in trading fees/commissions and Management Expense Ratios came out to 0.144% which was down about 43% from 2014 where my costs came in at 0.25%. A big reason is a conscious effort of keeping transactions to a minimum. Like 2014, I spent most of 2015 holding stocks so I didn’t really make a lot of trades. In total I made 28 trades in 2015 down from 32 trades in 2014. This may look like a lot, but put it another way, it comes out to almost 3 trades a month, which is still not going to win me any volume discounts from the brokerage companies.

Cash still king in my neighbourhood

My pessimism on the overall stock market and the difficulty in finding cheap value stocks has continued to force me to hold more cash than I would like to. I ended the year with about same amount of cash as when I started which is about 67 percent. I really want to put more money to work as my investment horizons are getting shorter and at some point I will need to take out some risk in my portfolios as I get into the golden age of my years. At the same time, I don’t want to invest in assets just for the sake of it.

Goals for 2016

My goals and strategy for 2016 will be no different from 2015 and no different from 2014, 2013, 2012, 2011 and so on. I could literally cut and paste the same paragraph from my previous year end reviews. Despite my feelings that the stock market is ridiculously overpriced, I will still continue applying my ideology and discipline of working to identify opportunities to invest in great, well-managed companies that generate tangible economic profit and are being sold at a discount. One’s investment strategy and ideology should not change very much as deviation from the strategy is a recipe for trouble. 

All the best for 2016. Now get out there and get wealthy!