Investment Activity Year End Review 2014

Another year has come and gone and with it a time to take pause and reflect on how the year has evolved and how I've done with my investment decision making over the year.

I started the year 2014 with a skepticism that that stocks would continue its runnup after posting 30+ percent returns in 2013. Despite my gloomy assessment, I began 2014 building positions in companies like Coke, Whole Foods, Costco, and IBM and continuing to add to existing positions in Apple. As the year evolved, I added to these positions when the stocks got hit by either bad news or a downturn in the overall market. At one point, my cash position had fallen to the mid 50% level.

By the end of the 2014, my portfolios achieved the following returns:

 Portfolio 1: 3.18%

Portfolio 2: 5.82%

RESP Portfolio: 12.3% (not including the Government Education Grant)

I had done a bit of selling in the last few months to bank profits so I ended the year with my portfolios in about 2/3’s cash. Overall 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 it wasn’t a 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. When I drilled down into the numbers however, I see some things that give me greater comfort.

While overall portfolio performance-meh, performance of equity positions was encouraging

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 2014 I made 13 selling decisions. Below are the realized returns from those decisions.

Oracle Corp +24.6%

Toyota Motors +0.3%

Broadcom Inc +20.3%

Target Corp  +20.1%

EBay +1.4%

Apple +46.4%

IBM +4.8%

Tyson Foods +34.7%

McDonalds +12.1%

VISA +24.6%

Whole Foods +20.8%

Church and Dwight +26.4%

Costco +31.6%

Overall the realized return on these investments in 2014 was 20.6%. In 2013 it was 14.2%. For those people who are all about alpha and beating indexes (I’m definitely not) if you compare it to the returns on various major indexes, this more than reasonable.

Out of 13 stocks I sold, all were for a positive return. 11 out of the 13 sales were for double digit returns with 9 out of those 11 generating a return greater than 20%. This makes sense in that I have setup a threshold to sell stocks when they cross at least a 20% return level. This tells me I appear to be disciplined in executing my strategy. 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.

Exploiting the Consensus

What’s interesting is that many of these stocks are of companies that were not very sexy or popular by the Wall Street/Bay Street crowd during the year. Target, Apple, McDonalds, Whole Foods were constantly beaten up by analysts and so called Smart Money People. Why did I do well with them? It wasn’t because I knew something they didn’t. I was using the same information they were. It comes down to perspective. It involves understanding how wealth is created and psychology of investors. Despite these companies getting slammed as not growing enough, these companies were still creating very healthy returns on invested capital that were greater than their cost of capital. They may have not been meeting the expectations of the analysts (which are usually ridiculous), but they were still creating tangible wealth. The stocks were on sale, and so like any prudent shopper looking for deals, I jumped in and slowly built up positions.  I also won’t kid anyone to say that it is a very easy thing to do. Buying something that is not popular or trendy or cool. We are wired to be associated with being on the winning team. It requires some fortitude to associate yourself with something  that is not popular. The reality is taking the other side of a consensus or conventional thinking position is one of the best weapons an average investor has to generate meaningful returns on their investments. It can be done with proper training, mentoring, and over time.

Trying to stay with the winners longer

In 2014, I tried to make a commitment to run with stocks that were moving up longer in the case of Apple and Tyson Foods. I tried to practice what I was preaching in my article on how tennis can make us better investors, specifically, keeping the rallies going to expose yourself to greater return opportunities. Until late December, I was still holding Costco and eventually sold it to bank a very healthy 31.6% return. I'm still holding my position in NeuLion which is up almost 80 percent at year end so I feel I made some progress there but I think I can do better.

Keeping Costs Low

In 2014 my total expenses paid out in trading fees/commissions and Management Expense Ratios came out to 0.25% which was down about 38% from 2013 where my costs came in at 0.40% . A big reason is a conscious effort of keeping transactions to a minimum. I spent most of 2014 holding stocks so I didn’t really make a lot of trades. In total I made 32 trades in 2014, which may look like a lot, but put it another way, it comes out to almost 3 trades a month, which is not going to win me any volume discounts from the brokerage companies.

Cash still king in my neighbourhood

I started 2014 with a commitment to put more money to work. At the start of the year I was in a stock/cash ratio of  22/78. The highest I went in on stocks was near 50% at the mid-point of the year.  Almost ½ of the stock position is now short the S&P500. As I finish the year I’m back to high ratio of cash (about 2/3’s) as I still remain very skeptical on the near term performance of stocks.

Goals for 2015

My goals and strategy for 2015 will be no different from 2014 and no different from 2013, 2012, 2011, 2010 and so on. I could literally cut and paste the same paragraph from my 2013 year end review. Despite my feelings that the stock market is ridiculously overpriced, I will still continue my 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 2015. Now get out there and create some wealth for yourself!