Monday, January 16, 2017 0 comments

Portfolio Performance in 2016

Since I started seriously investing after a few years of absence, here is how my portfolio performed in 2016. I didn't make any long-term investments and didn't have any from before so it is sort of an unusual portfolio.

I used to use computer software (Microsoft Money and Quicken) but am doing things by hand now. I redid everything by hand and am still tweaking the layout, and working backwards on prior years. I was mostly in cash the last few years so likely underperformed the market (hope to post historical figures in the future). The figures below may be slightly different from final actual numbers.

I have historically measured myself against 3 indexes: S&P 500 Total Return index, S&P TSX Composite Total Return index, and Dow Jones Wilshire Global Total Return index. My goal is actually to earn around 12% per year but I'm not good enough to be an absolute return investor so my current goal is to beat the indexes for now.

The popular S&P 500 represents the US market and influences all other markets. I invest mostly in US stocks so that is a good measure to benchmark. Do note that this is a weighted towards large-cap stocks so if you invest in smaller companies then you may want to pick another index.

Since I live in Canada, I need to benchmark against my basic "equity opportunity cost" which is the S&P TSX Composite. If I was just randomly investing in the Canadian market, I would earn returns similar to this index and my goal is to beat that.

Finally, although I haven't made many foreign investments, I do consider myself willing to invest anywhere so I like to track against a global index as well. In the past I used the Dow Jones Wilshire Global Total Return index, which is the broadest global index and covered around 98% of stocks by market cap (do note that developed countries still constitute most of the market cap). I have had trouble finding easily accessible, free, index data for that so, starting this year, I'm switching to the S&P Global 1200 Total Return index. This covers 70% of the world's market cap.

If you are measuring yourself, don't forget to use total return index, as opposed to price-only index (which leaves out dividends). I also measure in my local currency, Canadian dollars, so I adjust the indexes by the C$/US$ change.

Summary

In 2016, the Canadian dollar gained around 2.9% against the US$ so a Canadian lost some money if  they invested overseas in US$-denominated assets.

If my numbers are right, the S&P 500 returned 9.0% last year, while TSX returns 21.1% and S&P Global 1200 return 6% (all in C$ terms).

The TSX is heavily influenced by commodities and had a massive 21% gain after commodities rallied in 2016. However, the TSX is just recouping from last year after it performed very poorly in 2015 with a return of -8.3% and the C$ declined 19.5% so a US$ foreign investor actually ended up with a loss of 27.8% last year.

The S&P 500 performed slightly above average last year (about 12% in US$ terms) and S&P Global was slightly less than the long-term average.

My portfolio returned around 5.8% in 2016. The return isn't very good and I underperformed the indexes. However, I'm ok with the return since I remain bearish and the strategies were uncorrelated with the market.

I ended the year with around 79% in cash, which was probably down to 25% cash at some point in the year. In any case, such big cash position is definitely a big drag on performance (especially if one can't find enough special situations to invest in).

(Click on image for larger one)


Thoughts

I was exclusively involved in risk arbitrage and liquidations last year. I only started researching stocks for part of last year so didn't do much. Also the market seemed overvalued and didn't find anything attractive so no long-term investments were made. I'll be spending more of this year searching for long-term investment opportunities.

Comdisco were liquidations I entered into several years ago, which finally closed last year. It took way too long and the annualized return was just adequate and less than what I was estimating. The risk with liquidations is that they can run longer than what seems reasonable.

I entered into the liquidation of Khan Resources but had difficulty buying enough shares. I could have paid up to buy more shares but the returns were very low (1-6% with 3% being probable) so didn't want to risk it.

I was satisfied with the risk arbitrage positions. One of them, Syngenta, didn't work out and the deal is still outstanding--deal can still close but probability of European regulatory approval has declined quite a bit in my opinion--but one always needs to be prepared for some deals not working out. I think risk arbitrage will become more risky with the incoming Trump administration in USA and looming trade wars and disputes (already it seems USA will be in dispute with China and Mexico). This increased risk also introduces greater opportunities (depending on how bad the trade wars are, it may be similar to the 2007 risk-arb deals if anyone remembers them from back then).

I ended the year with very high cash levels (79%) and this will be a drag on performance for a while. If I don't find anything attractive, I might pull out some money and pay down the home mortgage or something (this is one thing worth considering if you are bearish on markets and have mortgage or some other loan--interest rates are low but they may be rising soon.)


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Sunday, January 15, 2017 0 comments

Sunday Spectacle CCIX

Real Oil Prices

If you are looking at long-term trends with commodity prices, one should always look at the real prices (i.e. adjusted for inflation). Real commodity prices have actually trended down over the last few hundread years (only exception is something like gold, which is a currency and not really like other commodities). Over a medium time period of, say, 20-30 years, they have tended to cycle around an average--these cycles are massive and you can make a lot of money (or lose a lot) if you can capitalize on them. I turned bearish on commodities around 2007 because the prices were way above long-term real averages.

Given the big sell-off in commodities over the last few years (decline in 2014 and 2015 with rally in 2016), the question is whether they are attractive now. Each commodity is slightly different but they trend together for the most part. Crude oil has been the most important commodity in the last 50 or so years so it's worth looking at that. The chart below plots real and nominal crude oil prices in US$--I'm using USA import prices from EIA (other sources may show slightly different numbers but trend should be same)--from Jan 1974 to Dec 2016 (with 2017 and 2018 EIA forecasts).


(source: EIA real and nominal oil prices, downloaded Jan 15, 2017)

Most pure value investors typically don't invest in commodities or commodity businesses (Warren Buffett, for instance, has a mixed record with success with PetroChina but a disaster with ConocoPhillips). But if you are more macro-oriented, they are worth investigating because they have such big upside compared to most other business out there (on top of wildly fluctuating prices, commodity business also tend to have high operating leverage (can be ok if profitable company) and financial leverage (generally not good)).

The average monthly real price for the period above is around US$56 while it is around $52 if you use annual prices that go back to 1968 (not shown above). Right now the price is around $49 so we are essentially within 10% of the average for the last 40 years.

You can easily see how crude was around $30 (real price) during the bear market that lasted from mid-1980s to early 2000s. I think the risk for commodity investors is that prices can still fall to those levels (it did in early 2016) and stay there for decades. If you are investing in commodity stocks, I think you need to factor in such a scenario*. I'm researching commodity stocks and if I find anything attractive, I'll write them up (I started looking at them last year but didn't like what I saw).


(* The bearish reasons that could lead to further commodity price declines include: overcapacity in many industries, potential decline in demand if we enter a recessions (we haven't had one in almost 8 years), potential decline in demand and trade disruption due to USA-China trade war; offsetting bullish factors that support current prices include increasing demand from developing countries (less so China and more from others), rising inflation due to improving economic growth and possibly high inflation from central bank actions.)

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Sunday, January 8, 2017 0 comments

Sunday Spectacle CCVIII

Interest Rates & Inflation

(source: Trading Economics, downloaded Jan 7, 2017)


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Wednesday, January 4, 2017 0 comments

Newbie Thought: When Should You Look Overseas?

If you were strictly investing in your local country's stock market, would you be missing out on anything? Ever wonder whether one should look at foreign markets?

Well, assuming that your country's local stock market valuation isn't extremely high--if the whole market is high and expected to remain high, one has reason to look overseas (or to different asset classes)--and ignoring macro factors--you have reason to invest overseas if you have an opinion on future currency exchange rates, political risk, global economic secular themes, etc--there is really one big reason one should consider foreign markets.

The single biggest reason (except for macro and overvaluation reasons) to consider foreign markets has to do with the composition of your local market. For most countries, certain industries or sectors may constitute a big chunk of the market. If your circle of competence is not in those dominant sectors, you may have limited choices and have a hard time.

For example, the Canadian stock market is generally considered to be commodities and natural resources-oriented. Over the last few decades, financials is another big sector. Both the natural resources sectors (oil & gas, mining, etc) and financial services can be 70-75% of the market. The chart below of the S&P TSX Composite index, which is the most popular wide market index in Canada, clearly shows the dominance of those sectors.

source: S&P Dow Jones (data as of Dec 30 2016)

If you didn't want to invest in commodity industries, and didn't understand or like financials, your choices in Canada are pretty limited. For instance, the tech industry and the healthcare industry in Canada are almost non-existent on the stock market.

So, if you were in a situation like that, you may want to consider overseas markets.

The interesting thing to note is that the stock market may not be representative of the economy--this is certainly the case for Canada. For instance, the natural resources sectors actually don't contribute as outsized a portion to the economy as the stock market might imply. There are more people employed, and a bigger chunk of the GDP, in non-financial services, technology, consumer discretionary and various other areas. The thing is, most of the companies in those areas are foreign companies--mostly American--so they don't show up in the Canadian stock market.


Sometimes the country's stock market may be quite diversified but the few sectors you are interested in may not be large enough. For instance, the United Kingdom market is large and fairly diversified. However, some sectors are severely under-represented. S&P UK index--I'm just sticking with the S&P data since it is freely and easily available--is as follows:

source: S&P Dow Jones (data as of Dec 30 2016)

If you live in the UK and feel that you are really good at understanding technology companies, you won't have much luck finding great technology companies. There are so few technology companies listed in the UK that it is doubtful that there are many truly dominant companies that can create high shareholder wealth.


If you live in America, none of the above really apply to any large degree and you really don't have to look overseas. American market is diversified with nearly all sectors and industries represented. Furthermore, the US market is so big and deep that even under-represented sectors have large number of publicly listed companies.


To sum up, one should consider foreign markets under certain circumstances. There are downsides to investing overseas including higher commissions, higher/unfamiliar taxes, different securities procedures/laws and potential macro issues (currency fluctuations, unfamiliar political risk, etc). So it involves higher level of complexity. But if some of my thoughts above apply to you, it may be worth it for you to consider investments beyond your local market.

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Sunday, January 1, 2017 0 comments

The Year That Was... 2016

2016 You Say?

Last time I did a recap, which is sort of when I stopped blogging and seriously investing, was in 2011. Seems like a long time ago. Now for something different from the usual investing stuff...

I like lists and the following lists capture 2016's top articles, book suggestions, photos, and various miscellaneous items. I only link to freely accessible sources but some items may provide free access a few times per month. Nowadays it seems that everyone is putting out lists. There are enough to last the next year ;)

(* anything marked with stars are recommended and worth checking out *)




* Google Year in Search 2016 (click for search trends)*






Business & Investing


 * 20 Best Reads of 2016 *
Financial Post (Canada)

* The Economist’s editors pick the ten covers that define 2016 *
The Economist

The Year in Technology: 2016 in Charts
Bloomberg

Economist's 2016 in charts
The Economist

* Longform.org Articles - Best of 2016: Business *
Longform.org; various



A Picture is Worth
a Thousand Words

The Big Picture - Boston.com

The Big Picture - Boston.com

Maclean's (Canada)


A Big, Big, World

* Flipboard Year in Review *
Flipboard; various

 * The Verge: 2016 Yearbook *
The Verge

* The 21 Best New Words of 2016 *
Wired

The Most Innovative Objects of 2016 (That You’ll Actually Want to use)
Wired

Best Gear & Gadgets of 2016
Wired




For the Literate
Bloomberg

The New Yorker
Essays to Sooth the Mind
Longreads; various

Longreads
 * Longform.org Best of 2016: Top Ten *
Longform.org; various

 * Longform.org Best of 2016: Most Clicked *
Longform.org; various

Longform.org Best of 2016: Essays
Longform.org; various

 * Longform.org Best of 2016: Crime *
Longform.org; various

 * Longform.org Best of 2016: World *
Longform.org; various

Longform.org Best of 2016: History
Longform.org; various

 * Longform.org Best of 2016: Science *
Longform.org; various

Longform.org Best of 2016: Media
Longform.org; various





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Sunday Spectacle CCVII

Happy New Year!

Here's to a
Joyful
Healthy
and
Prosperous
2017
for you & your family!






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