Argo Group, Baker's Dozen, binary outcomes, catalyst, Foo Fighters, FTSE 100, FTSE Eurotop 100, Granville, Hamlet, hedge funds, inflation, ISEQ, junior resource stocks, Livermore Investments, performance appraisal, Petroneft Resources, portfolio allocation, portfolio performance, Richland Resources, risk management, S&P 500
Righto, another quarter’s done, time to check in on performance again. First, my Q1 and H1 performance reviews will provide you with some handy background & context. Second, it’s always fun to pose some questions before hitting the stats:
- Of the US/Europe/UK/Ireland, which do you think has had the worst year to date?
- And the best?
- So, did you predict your best stock winner year to date?
- Ever notice how much easier it is to predict your worst stock loser?
- Is there any lesson, or story, attached to your losses?
- Why has the average hedge fund under-performed so badly this year?
Well, hopefully I cover some/all of those questions here..!
Some notes: For simplicity, an equal weighting’s assumed for all stocks. No attempt’s made to calculate FX gains/losses either – depends on your base currency anyway! Base prices are either yr-end 2011 prices (for stocks written up in ’11), or the price noted when I did my 2012 writeup. If a stock has been subsequently sold (marked**), the price noted when I reported the sale (via blog post, comment and/or tweet) is used. So, without further ado, here’s my complete Q3 2012 YTD performance:
And it’s a one-two punch – here’s the performance of my 2012 Baker’s Dozen (pretty much a subset of the above):
And how about the indices, by comparison?
If only it was year-end, it might be a Hamlet moment... Hmm, then again, year-end is just another day when it comes to investments. But I’m delighted with an absolute return performance of +10.9% and +14.3%. Even better, that represents an out-performance of +1.6% and +5.0% vs. the indices!
But, like every despicable charade of a performance appraisal one’s ever endured, let’s quickly switch to what’s holding me back. Much the same as last time, actually, young Gr-Granville:
Sector: My Baker’s Dozen benefits again from a lighter weighting in resource stocks (inc. Russia in that definition). In fact, overall, inflation plays (if I also include real estate) are the main detractor – sorry, should say the main source of f**king pain. It wasn’t how I arrived at my conclusion, but it’s pretty bloody intriguing to see inflation plays perform so poorly in such a quantitative easing environment – seems like a good endorsement of my recent post: So, Where’s the Bloody Inflation..?!
The only real loss outlier here (ignoring a tasty divvy recd.) is Argo Group (ARGO:LN). A reminder of how useful a catalyst can be, even with such an ultra-cheap stock (profitable & trading well below cash/investments!). In the absence of a sale/takeover, there’s no specific catalyst in place for Argo currently, and no obvious step-change in terms of news-flow or profitability. The share price has drifted lower in this vacuum – a rather unwarranted setback, as I believe there are some operational & financial remedies possible/available. I hope to return to this topic in greater detail, but clearly the most obvious remedy is a re-activation of their (previously aggressive) share buyback programme.
Weighting: This is really a problem more of measurement, rather than loss, thankfully. When I scan above, I definitely suspect my portfolio under- & over-weightings have helped – I still need to figure out the best way to calculate a weighted average return..! Ah well, maybe I’ll finally get around to that by year-end.
But it’s obvious my smaller weightings in Petroneft Resources (PTR:LN) & Richland Resources (RLD:LN), for example, have saved me some skin in my real portfolio. And I’ve avoided any real disasters with my over-weights. All a great reminder you really just need to worry about your losses…the gains will take care of themselves! Take that in two ways:
i) I’m not opposed to high risk stocks, even junior resource stocks (?!), if there’s a truly decent risk/reward on offer. Quite honestly, there usually isn’t – if you analyze them in true (expected) value fashion. [For example: To decide - in true muppet fashion - that 10 mio bbls of prospective oil resources are worth up to a $1 billion...well, that's just like believing a lottery ticket's actually worth the jackpot two minutes after you bloody bought it! Expected value analysis really helps ;-)]
With stocks that do make sense, an attractive range of expected values (and loads of research) still inevitably turns into a binary outcome – win, or lose..! Limiting, and spreading, your bets with this type of investment, esp. junior resource (& other irrationality-infested) stocks, is the only sensible way of dealing with that inherent risk. So yeah, I could have guessed Petroneft, or Richland, might turn out to be my worst stocks… But I made sure to limit the potential pain accordingly – and hopefully we’ll see some upside potential another day?!
ii) I’m also reminded of the debate over concentrated vs. diversified portfolios. As one’s confidence (or ignorance!) grows, so usually does the temptation to become more concentrated. And yes, there’s a lot of sense in that – after all, it certainly seems to be the way many of the most aggressive/successful investors position themselves. But I guarantee they too, just like the rest of us, would have precious little chance of guessing their best stock of the year..!? It’s an impossible, always surprising, challenge! Sure, I see plenty of upside for my stocks, but could I really have picked out Livermore Investments (LIV:LN) (who just delivered a lovely set of results) as the winner in such a short space of time? Most definitely, no!
This definitely suggests a happy medium – concentration is good, but this inability to pick the winner is a great reminder that a greater selection of stocks may just yield more pleasant surprises… To put it another way, I’ve seen v little correlation between my rankings of upside potential vs. the rankings of actual near-medium term performance. In fact, once you exceed a certain upside potential threshold, I think it’s probably a much better idea to increase a relative weighting based on (superior) safety, rather than increased upside.
Dividends: Leaving out dividends probably doesn’t matter much in terms of relative performance – i.e. if I include dividends received, vs. total return indices, I suspect the level of out-performance would be similar. But it certainly would make things look that much better on an absolute return basis :-) It should really be on my yr-end to-do list also..!
Markets/Indices: OK, c’mon, was it really such a surprise to see the US as the best-performing of the markets this year? So why didn’t I bloody well own more US stocks..?! Er um, because the US is far more expensive than Europe, and is/will soon be suffering from the same problems… Whatever! However alarming it is to buy in the face of such shaky economic & political fundamentals, the old saw ‘You can’t fight the Fed‘ (or eventual US dollar debasement) is true most of the time. You gotta roll with it… [OK, sorry, Oasis really kinda suck...I just saw Foo Fighters :-)] And that’s how we get to the next bubble, and then the next crash…
But really – for fuck sake!?! Would you really have picked the UK as the worst market so far this year? Over Europe? For, Gawd’s sake – yeah, well, I wouldn’t have… But unfortunately, I happen to own oodles of UK-listed stocks/funds! They don’t have UK exposure, but that negative FTSE sentiment really manages to drag everything down with it… I better bloody well see the reverse effect when the FTSE’s finally in the ascendant!
OK, we’re nearly done here. Ah, except for that hedge fund question… No, I can’t quite explain why hedge funds are doing so badly this year – but let’s hazard a few guesses: They were doing a lot of zigging, instead of zagging? They were incapacitated by the European sovereign debt crisis, and missed the boat on the underlying slosh of liquidity/quantitative easing? They picked up on the easing, but piled into a multitude of inflation plays that haven’t delivered (only physical gold has really worked out so far). They are so hedged, it strips away a lot of their (beta) return? [Hmm, I could possibly live with that, if I could forget their disastrous 2008 performance - they certainly didn't do what was bloody on the tin!] Er, I just don’t know?
But I do know that as of end-Aug (Sep figures won’t be available for a few weeks yet), the Barclay Hedge Fund Index was only showing a YTD return of +4.2%. I’ll stick with mine, mate..! ;-)