Saturday, December 7, 2013

Low P/E – Moderate Dividend Portfolio 2013 performance

I haven’t provided regular updates of this portfolio during the year simply because doing this on a spreadsheet is too tedious a job for me, ‘the lazy investor’.  Then I found the portfolio feature on GlobeInvestorGold and it does it all for me. So here are this year’s results and compared to last year’s they are… Spectacular!  Especially since we had kept $27, 370 of the $109,356.60 investment money intended for BMO and National bank as cash and used options to have positions in both instead. BTW This portfolio is fictional, I may own a similar portfolio, but I won’t reveal its true size (smaller, larger or the same).

The profits for the first 6 months of option trades are not included but were approximately $630.00.  You may ask why only 6 months?  The answer is that by mid-year the market started to act up just like in 2012. Last year, returns on the portfolio were tremendous before May 2012, then the TSX faltered and our final year-end returns were barely on par with the TSX60 (6.3% - XIU). This year I decided to take profits and sell severe underperformer Sherritt while buying TD (for $78) and National Bank (for $70)  outright. The results were even better than that of the low P/E portfolio! ... I think.  You may suspect I would have known better, but after six months the profits in AutoCanada were so good, I took profits; I bought for $15.30 - I sold for $27.27 for an annualized rate of return 255% including dividends. Today AutoCanada is trading at… $42.47 that is close to a 3x the purchase price in one year! So was the 6 months sale premature?
I used GlobeInvestor Gold to track this portfolio
The goal was to test a mechanical method of investing (with minor initial adjustments – yes I can’t keep my dirty little hands entirely off! J). We’re looking at the real performance of the portfolio as show in the figure above (excluding option profits and excluding the profits if BMO and National Bank had be purchased outright at the beginning of the year).

Yes, that is real: a 36% return YTD.  We started out 2 years ago with $100,000 and now the portfolio is worth $135,291. That is a compound annual return of 16.43% compared to Jim O’Shaughnessy’s historical average return of 18.23%.  Jim’s All U.S. stock performance was a respectable 13.26% annual based on 45 years stock market data HIS low P/E and moderate dividend program outperformed the U.S. market by 4%. Now here’s the kicker! We used the low P/E and moderate dividend stocks of the TSX not U.S. stocks and thus we should benchmark to Canadian stock performance over the last 2 year’s (based on iShares XIC = 2.68% per annum and over the last year 3.19%). Now, our portfolio has outperformed the TSX spectacularly.

For 2014, I have created a new Low PE – Moderate dividend portfolio with the shares being re-invested on the first trading day of the year. Rather than augmenting the portfolio with option trades, this year. we’re going to work with stop losses so as not to repeat the mistakes of selling AutoCanada and of selling Sherritt too late (its year-end loss was 40%). 
The idea is that stocks can go up because of momentum way higher than we dare to imagine. So it is better to let profits run and use a 'trailing stop-loss'. Every time the stock price reaches a new 52-week high, the stop loss is set 25% below that price. Thus we can keep the shares as it rockets higher but will sell as soon as we start incurring serious losses (remember a bear market starts at 20% losses from the previous peak). Also, if the portfolio contains an obvious dog, we will this way restrict our downside. Research shows that this stop-loss method can significantly improve our long term returns.  (I learned this year in the real market that stop-loss selling works when I bought and sold Silver Wheaton). I’ll reveal the 2014 Low P/E and Moderate dividend portfolio at the beginning of 2014 once I have built the stock position. Nothing stops you from composing a similar portfolio for yourself, if you can’t wait.

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