Saturday, January 5, 2013

LOW PE and Moderate Growth Portfolio - 2012

We have reached the end of the portfolio’s first year and it is time to review its performance and rebalance it. Here are the numbers. Just click on the table at the bottom of this post to enlarge.
Overall portfolio performance, including dividend income, was 6.3% for the year compared to 7% for the TSX60 (ishares-  symbol XIU). Not bad but not stellar either. We performed as well as the Canadian market which is our benchmark. Cervus (CVL), Rogers Sugar (RSI), Corus(CJR.B) and Bird Construction(BDT) were great performers. Churchill(CUQ) and Cannaccord (CF) were big disappointments.

Sherritt(S) was the most volatile and because of its Madagascar mining project and sensitivity to China through its coal and other energy holdings, I felt that its upside potential ($9-$10) warrants keeping it for another year. We sold the losers and the winners that no longer met the portfolio’s criteria in order to restack the portfolio for 2013 with companies that do (next post). For tax reasons, we sold the losers and an equal amount in winners before year’s end the remaining winners were sold in early January to defer capital gains taxes by another year.
Brookfield Properties (BPO), Bird Construction and HZN (HZN.A - formerly Canadian Helicopters) still met our portfolio criteria and stayed in for 2013. Currently I am constructing the new 2013 portfolio. Since I made the commitment to have this as a real life portfolio (putting my money where my mouth is) I am currently in the process of buying the new portfolio with a twist about which I’ll talk in the next post.
This may be a good time to recap our investment philosophy.  Investing is a lifelong learning experience that starts with living below your means (how else can you save?) and by buying your residence which is not only your home base but also your financial base.  What I learned as a real estate investor, a business owner and former retiree is that Cash Flow is NUMBER ONE. You may have all the investments in the world but if you don’t have cash flow what are you going to live of?
Our goal is to be financially adult, i.e. we have enough cash flow to live of – your other income including salary from employment is extra! This way you will never be forced to sell your investments at rock bottom prices – you'll have the financial strength to wait things out and to buy and sell on your terms. Thus no more panic selling during stock market crashes. This does not mean that you hold onto an investment all the way to ground zero; later this year we’ll dive into 'trailing stops'.
Cash flow is NUMBER ONE and the most reliable part of our investment profits. Investment appreciation is the second component of our profits but that will come when it comes and it is the least reliable.
We want to diversify. The big problem with investing in stocks and bonds lies in that you do not control the investment – it is passive. Thus you have to trust others such as governments and management to look out for your interest which they usually don’t.  That is why it is so important to diversify and as a rule of thumb you should have not more than 5 to 10% of your stock and bond portfolio invested in a single company. Also, you have to be investing internationally – just compare U.S. versus Canadian stock market performance as far back as 1980 and you will see why. 

It took me a long time to see this because it is a long term thing.  The Canadian markets outperformed the U.S. in the 1970s up to 1982 – the end of the previous commodity boom. Between 1982 and 1998, the U.S market outperformed the Canadian (especially when taking the U.S. and Canadian Dollar into account); then between 1998 and 2008 Canada outperformed the U.S. big time and right now things are reversed once again.
My three core investment regions are Canada, the U.S. and Europe. I don’t like emerging economies – they are too risky and provide poor cash flow. Besides most commodity investments and multinationals provide plenty of exposure to emerging economies such as China, India and Brazil (BIC). Sorry but for me Russia is the perpetual loser and Putin… let’s not go there.

There are many ways to invest in the stock market. Typically I look for value and income; yet I am not a classic 'value investor' - I don't have the patience nor is my outlook long enough. So, I recommend to have a 'portfolio of strategies' as well. For me that is:
1. Invest in market index ETFs of Canada (40-60%), the U.S. (30-50%) and Europe (10%).
2. Invest in Canadian Low P/E and moderate dividend companies (Jim O’Shaughnessy: "What works on Wall Street).
3. Invest in high quality and dividend paying stocks both in Canada and the U.S. and re-invest the dividends
4. Invest in energy (today invest in infrastucture (e.g. TransCanada Pipelines, CalFrac); from 1990 to 2008 it was in producers (CNRL, Canadian Oil Sands).

Real Estate and my own business are the other 50 to 60% of my portfolio -  my 'active investment portfolio'. Those investments I control to a large degree.  Rental properties have vacancies and thus I like to mitigate this risk by having modest loan to value ratios (50% max), participating in and sitting on the boards of rental pools and condominium corporations. If you have more than 10 rental properties then you have a lower vacancy rate risk than with one.  If it is not rented, with one property, your vacancy rate is 100% and that can be problematic (it reduces cash flow big time!).
There are people who swear by stocks; others by real estate – me, I like both and more. One final thought: if you really would be immortal, how are you going to live a decent lifestyle if you don’t know how to live of your investments? Ooh and think of the effect of compound returns! When you are 200 years old and using compound returns, I bet that you’d be able to afford a cute 25-year old nurse. Oh Godfried… you’re gross! J

Click table to magnify

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