Wednesday, January 2, 2008 2 comments ++[ CLICK TO COMMENT ]++

2007 Performance Review

Well, 2007 wasn't a good year for me--either in investing or life in general. Here are my thoughts on my performance this year.

I'm a Canadian who invests primarily on the US exchanges. This makes my investments vulnerable to currency fluctuations. I benchmark myself against Dow Jones Wilshire Global Total Return index (ticker: DWGT). A more popular alternate index is the MSCI All World Total Return Net index. Although less popular, I went with the Dow Jone index because it is a larger universe (I just hope they don't discontinue the index in the future :( ). DWGT is in US$ and adjusts for foreign witholding taxes.

Historical Returns

I started investing seriously back in late 2004. After graduating from school and saving up money, I had enough to open an account and start to dabble in the markets (I actually owned a stock and Canada savings bond before but I wasn't really investing and didn't have much money). The table below shows my returns since inception. The numbers aren't great (sucks to be underperforming the market during a bull market) but they are fine with me given that I'm more concerned with learning than making money right now. My investment time horizon is 20 to 30 years so it's important I pick up some skills for the long term. My investing has also gone through stages where I dismiss strategies that don't suit my personality.

Needless to say, 2007 was a poor year for me :( The biggest story for me was the appreciation of the Canadian dollar. Since most of my holdings are in US$-denominated assets, the roughly 15% decline in the US$ was hard to overcome. Most of the broad indices, like S&P 500, posted negative returns in C$ terms.

The other big mistake was to short the Canadian index (by investing in an inverse ETF). I did this because I was bearish on commodities but either it is a wrong move or it is too early. The verdict is still out and I'm holding on to it for the time being since my investment thesis hasn't changed. However, I'm never shorting anything ever again. It just doesn't suit my style.

There were also some mistakes with impatience. If I'm to do well as an investor, I need to master patience. Impatience led to some rash moves early in the year--including buying something well after it ran up on takeover rumours.

Thoughts on 2007 Investment

Since this is my first review on my blog, here are all my transactions since I started investing a few years ago. The portfolio started off basically near zero so things have been getting more complicated by the year.

You can see the change in strategy from sector rotation (primarily commodity stocks) to an eclectic, concentrated, portfolio. My goal in the future is to only hold 4 or 5 investments with around 15% to 20% in each.

Apart from the Canadian dollar strengthening, which is a good thing even though my portfolio is taking losses (since my income is in C$), the big mistake was the TSX inverse. What saved me was the Tribune risk arbitrage deal (I had quite a big chunk of my portfolio in that).

My History

Here are some thoughts on my performance over the years. I am learning as I go.

Early on, some of the portfolio drag was due to high commissions (portfolio was too small) and inefficient allocation of cash (cash sitting around too much). I think I have eliminated those two issues for the most part.

I used to be primarily into a strategy called sector rotation but am moving towards being a full-time contrarian investor with a value tilt. I gave up sector rotation, not because it didn't work (Marc Faber and Jim Rogers would probably fall into that category), but because I didn't know what to do after becoming bearish on commodities. I also came to the realization that if one were to master a strategy, some sort of value investing is the way to go. Based on performance of value investors over time, that seems like the only foolproof strategy over varying market conditions. Value investing worked in the 40's, in the 50's, 60's, 70's, 80's, and so on. A lot of the other strategies seem more flaky so I thought I should try to do something that will work, not just for the next 5 years but, for the next 20 years.

I also used to speculate more before but do less of that now. I still speculate but now I make sure certain value investing criteria can be hit. For example, in the past, I used to speculate on, say growth stocks (my watch list would have a lot of growth stocks). Nowadays, I speculate more on value stocks, fallen angels, and distressed companies. It's still risky but if one can develop some skills, the latter is more foolproof. True value investors do not speculate but since I can't pin the value of a firm (i.e. figure out its intrinsic value), I have to consider a chunk of what I do to be speculation rather than investment.

As for becoming more of a contrarian, well, I came to the conclusion that it suits my personality. If anyone knows me, they would realize that I'm kind of a loner who does things his way, irrespective of society's actions. Such a personality really hurts when it comes to career or looking for love, but it suits investing. Even from the earlier days, I was somewhat of a contrarian with my bets on PetroKazakhstan and GM bonds (I consider GM bonds to be my best investment ever, even though others have done better percentage-wise or in absolute dollar returns).

My goals for the future are:

  • Pay more attention to currency fluctuations: I do take currencies into account when making an investment decision but I need to streamline that process more.

  • Minimize taxes: Since my portfolio is small and I'm in one of the lower income tax brackets, this isn't that big of a deal yet. However, as my portfolio grows, I need to watch this more carefully.

  • Be more patient: Every investor should master this emotion, along with greed & fear. I tend to be patient but sometimes I succumb to it

  • Develop targeted returns: Right now I'm not sure what my returns should be. For instance, I have no idea if something that is expected to return, say, 15% is worth taking a position in, or if 12% is worth it. I need to develop some comfort with returns and sell anything that doesn't hit my goals.

I need to start looking into optimizing taxes. I have practically all my savings invested (I have zero assets outside this; yeah, dumb I'm sure), and most of it is not in a tax-sheltered account (since my income bracket is low, my retirement tax shelter limit is lower than my savings).


2 Response to 2007 Performance Review

January 4, 2008 at 2:08 PM

I have to be more patient as well.
I had Apple when the Jobs' issue of "back-dating options" came to the fore. I got scared and bailed.
I had USO at a very low price. I listened to some talking heads and went against my instincts my own analysis.

January 4, 2008 at 4:21 PM

I think half of investing is psychology. Everyone needs to master the two big emotions: fear & greed.

For me those aren't a problem (due to my nature), but impatience is a big problem. Even now I'm tempted to do something--anything--because I haven't done anything in a while.

I'm bearish on commodities but in any case USO is a risky pick. I don't know how good it is now but too much tracking error and shifts in the futures curve can kill that. Try plotting USO versus the price of oil and you'll see some serious underperformance in 06 (?? or maybe in early 07?).

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