Portfolio Performance Review-2012

As we close the books on 2012, it's time to reflect on our year that was in investing and to see if we can gleam a few nuggets of wisdom that we can take into 2013 and beyond. Below is a breakdown of our trades in 2012

Highlights

  • We made 55 trades, 21 were sell trades.
  • Out of the 21 stocks we sold, 14 were sold for a profit.
  • 12 of the 14 stocks sold for at least double-digit gains, 5 were sold for at least a 20% gain.
  • Our portfolios generated a total return of 4.8%, net of commissions%
  • The total realized return (i.e. the return we actually banked) was 6.8%
  • Our portfolios have now generated positive returns for 6 of the past 8 years and 7 of the past 10 years.

 

The number sold is in line with my trading history.Overall I would classify the year as a "meh". Not very good, but not very bad. I didn't destroy capital. I appreciated it and is not too far from historical rates of return for stocks. Bay Street and Wall Street would fire my a%$# because I didn't beat the market. I don't expect to. It's a fools game. It's important to be more practical and realistic.

Takeaways
There are important lessons to take from this past year. The first, I stumbled upon while reading the Economist. A report revealed that the average cumulative return by hedge fund over 10 year period has been 17%. My portfolios have ranged between cumulative 25 to 54% and average annually 5.4% to 7.3%, so it looks like I've more than held my own.

Trading Costs Fall Dramatically
Trading commissions dropped to by Ω to 0.54% (that includes MER's AND trading commissions), which is huge. That means more money is staying in my pocket. The main action I took was moving my portfolios to the iTradeservice which lowered my trading costs by two-thirds in 2012.

My Issues: Too Much In Cash
My portfolios have been very heavy in cash since 2008. The range has been between 40 to 70% cash. It's the primary reason my returns have been low. I just wasn't comfortable with the risk profile of the market. I still dipped my toes, but a lot of times I opened smaller positions and averaged in should the stock go down. In 2012, it was the opposite. I would take small position in a Tiffany as it was getting beaten up only to see it pop back fast. I naturally decided I'd rather bank the profit and the 20+% return. I need to put more money to work.

Improve Reinvesting to Maximize Compounding
I need to do a better job of reinvesting the profits back into the next investment instead of the weighting it to the portfolio. I need to leverage the compounding effect. It's easier and cheaper to do this when you've banked a 20% return than when you get a 1-2% dividend yield. It's one of my little pet peeves with dividend re-investing. It's harder and more expensive to do (DRIP plans being the exception)

Worst Trades
As I've said many times, you can do all the research and analysis in the world and you can still lose money in stocks. Correction. You WILL lose money in stocks. The key is controlling the loss. I've made my share and below are my list of trades that did not pan out. (Note: You can follow all my trades in real-time via our Twitter handle: @sageinvestors

Best Buy -18%
I bought the stock at $28 and sold it at $23. I looked it as a play on retail and also luxury as they tend to sell more upscale products compared to a Wal-Mart. Also they were still generating plenty of cash and a strong Return on Capital, so I thought there was stability. What emerged to me was BBY was entering a Game Changer moment, where the big box electronics sector was being threatened by the Amazon "Showrooming" phenomenon, where people go to a Best Buy to see the product but then price shop online to actually buy. The other element was the company just seemed to be dated. I noticed going into a BBY that the stores didn't stock products nicely, a lot of time they didn't have it in stock. There seemed to be a lot of operational issues in the execution of services. Factoring this in and my 20% sell discipline, I called it at $23 and took my loss. The stock proceeded to test the low $11's.

Trican Well Service -21.1%
Crunching the numbers, there wasn't a lot to not like. Strong Return on Capital and Economic Profit. Strong balance sheet with manageable levels of debt. Oil prices appeared to on the move. It didn't materialize and the stock took a hit on earnings that tracked down. Again, applying my 20% loss rule. I cashed out. The stock has languished since then.

Intel -6%
Bought it at $23 and sold at $21. Dominant company in PC chips. Ridiculous Economic Profit. Pristine balance sheet with no debt. With Windows 8 coming out, there could have been an uptick in PC sales. There was also another potential Game Changer, the emergence of smart phones. Intel's not so dominant there. The trends were showing smart phones and tablets outdoing traditional PC's in use. The big clincher was Apple's thinking out loud that they may abandon Intel's chips and make their own chips for their Macs and iPads. I sold out after that. Intel didn't seem to have a strategy to adapt to the new mobile paradigm and that could be a long-term threat. This won't mean Intel will cease to exist in the near future, it's just they may evolve into a utility type company.

Metro Richelieu +4%
I bought at 51 and sold at 53, only to see it go up to $65. Thought the Target arrival would be a Game Changer for grocery in Canada. It could very much be, but looking at Wal-Mart's Canadian entry, grocers in Canada more than held their own. Could the same be repeating again? I don't think I want to find out the hard way. I'd rather let it shake down.

Megabloks -84%, Patheon -69%
With the exception of Mega Brands and Patheon which I view as "legacy" trades as I made them almost 5 years (and I've learned a lot from these trades with respect to loss management), I've kept my loses in check, essentially selling off if they reach 20 percent or if a significant game changer moment has arisen that make cutting ties more palatable.

Best Trades
The numbers show I've realized a good chunk of trades that turned positive for my portfolios.

Claymore Global Water ETF +19%
I believe that the next great conflict in the world will not be over oil, but water. There's less of it and by that I mean clean water. As the population continues to grow, there will be strains to the water infrastructure. Add to this climate change and the reality is we could have less of it. I thought the best way to get exposure is through an ETF and the Claymore Global Water ETF seemed to fit the bill. Despite the economic uncertainty the ETF held it's own. I decided to bank the profit, but I still believe in the story and would be willing to build up a position again.

PetMed Express +28%
At the start of 2012, there was a great deal of pessimism by various market analysts. Despite the malaise there are still businesses that were doing some good things. One company that jumped up in my screens was PetMed, the Shoppers Drug Mart for pets. The company had always generated consistent Returns on Invested Capital. It appeared to be one of those "bath water" stocks that got tossed overboard.

Tiffany (Twice) +22% and +20%
With all the talk and discussion about the middle class being threatened, it dawned on my that if this is the case then from a retail perspective, the dominant sectors to be in are either the uber discount segment or the high-end luxury segment. In 2011, I put a good chunk of cash into the overlooked discount retailers like Wal-Mart, Ross Stores and Big Lots and profited nicely. In 2012, I took position in Tiffany as on several occasions the stock was being punished severely because of weak sales in Europe and the US. The reality was Tiffany's bread was being buttered in Asia and it was still doing very well despite the slowdown in China. On two occasions, I was able to hold positions after a pull-back only to see the stock pop back up.

Cisco Systems+17%
In the later half of 2012, there was a lot of pessimism on tech (Apple not included). It was the second time I had owned Cisco and I locked in a similar gain in 2011, so when the stock returned to its low price and after looking at the fundamentals of a business that was streamlining itself and was still retaining its dominant position as the caretaker of the Internet, it seemed like a reasonable investment to take.

ProShares UltraShort FTSE/Xinhua China 25 ETF, +17%
Over the course of the year, enough evidence was mounting that China was slowing down. You would never know it if you followed the mainstream media, but Twitter served as a useful tool to get field level perspective. I used the ProShares China Short ETF to take the other side of the Consensus view. I went in knowing it would be a short-term trade and my return expectations were lower. Sure enough, word got out. The Shanghai index started to take a hit. I reached my return level and cashed out.

Gildan Activewear +23%
Another company that scored high on my screens. Solid Economic Profit, great balance sheet and significant player in what is a pretty dull industry. The stock got hit because of a rise in cotton prices impacting earnings, however from what I read, the rise would be short-lived. Sure enough it was and the stock popped back up.

Siemens +15%
This was a play on Europe and also on China.As the concept of the European Union self-destructing gained traction in 2012, many European stocks became quite cheap. One that jumped out was German engineering conglomerate Siemens. What I found interesting was how the company has been positioning itself to take advantage of the next phase in the evolution of the Chinese economy. As China transforms from an infrastructure/export oriented economy to a consumer economy, there will be different types of industries that will see tremendous growth. This includes areas such as healthcare technology, alternative energy, and engineering technologies, areas Siemens leads on. While the stock did tank through the year thanks to the Euro concerns, I still liked the long-term strategic story and I added to my positions. Finally with European tensions easing (at least for the short-term) the stock popped, so I decided to bank some profits.I wouldn't hesitate to revisit Siemens down the road if the stock became cheap.

Vanguard S&P500 ETF, +13% As the Soothsayers became Debbie Downers on the US stock market in late 2010, I decided to open a position to gain exposure to the broad US market because the Canadian dollar was strong, and S&P500 companies were generating more and more revenue from outside the US, so by investing in the US you are getting greater global exposure through some great brands at a cheaper price and minimal commission. It's a much more profitable form of Cross-Border Shopping.

In some of these cases, the stocks continued to move higher so I did leave some money on the table, however I'm thinking more long-term in that if I can stay disciplined and not get too greedy, I can find enough 20% winners to churn that will get me to where I want to go without taking on risk that I may not be comfortable with. I'm happy to lock-in profits and play for another day as the stock may come back again, in the case of Tiffany and Cisco.

So while the overall performance did not look great, there were some positive progress made in terms of keeping disciplined to my strategy and philosophy. Again there are no guarantees that because it worked in 2012 that will work in 2013. I will lose money in some stocks and I will gain, but as long as I stick to the core principles of investing and take an open mind to what the market is presenting, I still like my odds of continuing to make progress in my personal investment journey. Bring on 2013!