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Category: Investment

2009 Investing In Review


Monday January 4, 2010

Reading Time: 2 minutes

At the beginning of the year we set up some hypothetical portfolios. Rather than review them in individual detail, lets just look at some performance.

One S and P 500 index fund, symbol spy, was us up 25.48% for 2009.
Fortune Magazine picked 10 stocks for 2009.

Here is how it did:

 

Name Symbol Last price Mkt value Gain
Altria Group, Inc. MO 19.79 1290.476 289.1662
Annaly Capital Management, Inc. NLY 17.41 1082.293 82.293
Dell Inc. DELL 14.54 1388.325 388.3248
Devon Energy Corporation DVN 76.57 1107.645 107.645
Diamond Offshore Drilling, Inc. DO 101.17 1653.456 653.456
Fluor Corporation (NEW) FLR 46.01 993.5824 -6.4176
Johnson & Johnson JNJ 64.68 1065.986 65.9855
Medco Health Solutions Inc. MHS 65.11 1509.554 508.8442
Pfizer Inc. PFE 18.93 1016.821 16.821
Potash Corp./Saskatchewan (USA) POT 112.2 1466.92 466.92
Cash 397.26 12972.32

So we are 29.72 % which beats the S and P Fund by 4.24% which is impressive. Notice that half of the stocks beat the S and P and half did not. So you can see the risk.

This was the best of our portfolios. The bond weighting in the others pulled them down. International exposure was great.
Now we will see what 2010 will bring.
Reading Time: 5 minutes

One school of thought is that investors should be well diversified. If one investment goes down, then another may go up and things balance out. One tenet of those that preach diversification is that no one can predict movements in individual stocks or sectors, so diversify and reduce your risk. Those that preach diversification also generally think that the at any one time the market is right and future changes are unpredictable. Another concept, which may be a little tough to grasp, is that throughout history a “valuation” of the world has gone up, except perhaps for the Middle Ages. With technological advances one expects the world to get more valuable.

However most who have made great fortunes did little diversification. Suppose Bill Gates had said to himself, when his Microsoft stock was first worth $100,000 had probably represented a large portion o f his net worth, “Gee its crazy to have so much of my net worth in one company, I should sell 99% of it and put the rest in a mutual fund.” And did that repeatedly. You do not read about investors who made fortunes by diversifying, but rather because they made it “oil” or “real estate” or Microsoft. Even Warren Buffet keeps his holdings rather small.

Investors who do not diversify think that they with their brains and hard work can outperform the market over time. They think that the best you can hope for when you diversify well is to get “average” returns and so if they are smarter than average and work harder than average then they should exceed those returns.

The safety aspect of diversification can not be denied. We rarely read about those that had all of net worth in Enron and saw it vanish, or Lehman Brothers etc. Unfortunately there are people who were in that boat.

Diversification has a cost. You either need to pay someone to diversify for you, ie a mutual fund, or you need to pay the transaction costs of buying multiple assets. It took $100 to buy our Fortune Magazine group of 10 stocks but only $30 to buy 3 mutual funds. If you only had $100 then the commissions would have precluded buying the Fortune Magazine group. If you had $100,000 then the commissions would have been a much lower percentage of your assets.

If you think you are really good, then research the 10 companies on the Fortune list, pick 1 or 2, and see how you do against the portfolios.

Reading Time: 4 minutes

Bill Miller is a legendary mutual fund manager. Or, should I say, was a legend.

As this story in the Wall Street Journal reveals Miller certainly was a legend.

Miller managed the Legg Mason Value Trust Fund. From 1991 to 2005 the fund beat the broad averages every year. No other mutual fund manager can claim a streak like that.

Miller is a “contrarian.” He found stocks that he thought had value where others did not. He was usually a step or two ahead of the market. If you had invested $10,000 in his fund in 1991, then in second quarter of 2007 it was worth almost $109,000. A similar investment in the S & P 500 would have been worth less than $64,000. In the 4th Quarter of 2008, the $109,000 had fallen to less than $43,000 while the S & P 500 investment had fallen to just under $40,000.

Miller failed to beat the averages in 2006 when he missed energy stocks. In 2007 he bought stocks of home builders and lost. He thought that other investors were too pessimistic regarding the housing and credit markets and began buying Merrill Lynch, Washington Mutual and others.
He thought that financials had bottomed in the end of 2007 and began buying more. On Friday March 14th 2008 he bought Bear Stearns at $30/share and boosted of the “bargain” purchase of a stock that had been over $150. Over the weekend the weekend Bear Stearns collapsed and it was taken over for $2 per share. And this is a guy who was a Wall Street legend and who beat the aver

I would suppose that almost everyone investor is down this year. (Maybe you rent your home, have no investment real estate, and keep your money under your mattress, then you may not be down but I would not call you an investor.) If you did better than the most and lost less than the averages, congratulations. But don’t think you will do that forever. As Miller showed, even the best can go wrong.