4Q ’07 Portfolio Review

January 30, 2008

This post is way late and A LOT has happened since 12/31/07! So, to keep things relevant, I will show some performance numbers but focus most of my commentary on how I am positioned as of the end of January, 2008.

Here’s the full year compounded monthly return of my portfolio compared to the S&P 500:

 

2007-investment-returns.jpg

Notes:

  • Between 12/31/07 and 1/29/08, my portfolio has declined by 8.2%. The S&P 500 declined 7% during the same period.
  • My two best performing stocks of Q4 ’07 were both in the agriculture sector: John Deere (up 23%) and Potash Corp of Saskatchewan (up 31%)

Over the last few days I have been raising cash in my portfolio.I think we will have a bear market this year and I want to be prepared to buy stocks later on when they are cheaper.

Here’s how my portfolio is allocated today:

     

    portfolio-allocation.jpg

     

     

    allocation-chart.jpg

    Noteworthy Changes:

  • I have brought my cash position to 35% of the portfolio
  • Gold is right at my target allocation of 10%
  • I am still extremely “underweight” the financial sector. I’m sure there will be a time to buy financials at some point this year, but I still think there’s a huge amount of risk there.
  • Even though I have a lot in the materials sector, I have actually lightened up here by selling my position in Compania Vale do Rio Doce (Valle). My largest holding in this sector is now Potash Corp.
  • A note about agriculture: John Deere and Potash have become incredibly popular stocks and everyone is talking about them. I realize there is risk here and I am prepared for a correction. I have not sold any for two reasons. First, I have big gains (still short term) and I don’t want to pay tax. Second, the growth prospects for these companies (especially Potash) are HUGE. I think the stocks are priced as if the ag-boom will not continue.
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    Don’t Panic!

    January 23, 2008

    A friend of mine came to me today and said she was going to move her entire 401k into bonds and make all future contributions to a money market fund “until the bear market is over”. Without telling her specifically what to buy (because I have no idea), I was able to convince her out of this crazy notion.

    Here are some quick thoughts on how I think you should allocate your 401k:
    You should come up with an asset allocation (stocks, bonds, commodities, gold, real estate, etc.) based on the number of years until you can retire. Run the model once per year and reallocate accordingly. All 401k contributions out of your paycheck should go into equity mutual funds, regardless of your age.

    Especially for Retirement Accounts, Take the Long Term View:
    For those of us with a long time to go before retirement, we should take a very long-term perspective with our retirement accounts. That means continuous buying of “growth” stocks – emerging markets in particular. Ten years from now we won’t be able to see the difference between stock prices in December 2007 and January 2008 – in future real terms, the difference will be meaningless. But the return you get from incremental purchases at these discounted prices will be huge. Consider that you can buy shares of the same fund for 20% less than you could a month ago. If emerging markets continue to fall… even better! Over the long term, you can make a fortune by “dollar-cost-averaging” into emerging markets. You make money (by buying) when stocks are down, not when they are up.

    ** My 4Q 2007 Portfolio Review has been delayed because my broker won’t provide my December 2007 statement. Once I get it in the next couple of days I can crunch the numbers. Writing about the good returns I earned in 2007 will be bittersweet considering that I’ve given a big chunk of them back in the first two weeks of 2008!


    The importance of writing clearly

    November 13, 2007

    I found a great speech by Mark Sellers on Greg Mankiew’s blog today. Sellers talks about what it takes to be a great investor, excerpt:

    Sixth, it’s important to have both sides of your brain working, not just the left side (the side that.s good at math and organization.) In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn’t write worth a damn and had a hard time coming up with inventive ways to look at a problem. I was a little shocked at this. I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses. On the other hand, if the right side of your brain is dominant, you probably loath math and therefore you don’t often find these people in the world of finance to begin with. So finance people tend to be very left-brain oriented and I think that’s a problem. I believe a great investor needs to have both sides turned on. As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death. You need to have a sense of humor and humility and common sense. And most important, I believe you need to be a good writer. Look at Buffett; he’s one of the best writers ever in the business world. It’s not a coincidence that he’s also one of the best investors of all time. If you can’t write clearly, it is my opinion that you don’t think very clearly. And if you don’t think clearly, you’re in trouble. There are a lot of people who have genius IQs who can’t think clearly, though they can figure out bond or option pricing in their heads.

    The whole speech is worth reading. It hit a chord with me because the ultimate reason why I write this blog is to become a better investor. Writing helps me to clarify my thinking about thorny topics such as inflation, investing, asset allocation and tax planning. I know I would be thinking a lot less clearly about these things if I didn’t write about them from time to time.


    3Q ’07 Portfolio Review

    October 6, 2007

    3q-portfolio-returns.jpg

    The third quarter of 2007 turned out great thanks to a strong September. On the year, my compounded monthly return is 14% compared to 9% for the S&P 500. The portfolio includes about 8% in cash (high yield munis) and 8% in GLD. The balance is made up of 24 stocks and is allocated as follows:

    3q-portfolio-allocation.jpg

    It should be obvious why the portfolio did so well in September: when the Fed cut rates on September 18, it was a huge boost to stocks having anything to do with inflation and the “global boom.” This includes anything to do with metals, mining, agriculture, infrastructure, gold and emerging markets. My best performing stock this quarter was Companhia Vale Do Rio Doce (RIO), which is the big Brazilian mining concern.

    It was also helpful that I have very little exposure to financials. Going into the fourth quarter, I am thinking of adding some more exposure to tech because a) I am very “underweight” relative to the S&P; and b) tech stocks often do very well in the fourth quarter.

    Taxes

    The third quarter is a good time to calculate all of your realized gains and losses in taxable brokerage accounts. Given that there are still three months left in the year, there’s plenty of time to shuffle things around so cap gains taxes are minimized.

    So far this year, I have a net long term capital gain and a net short-term capital loss. They are roughly the same amount which means the short term loss will go to offset the long term capital gain. This really is not an ideal situation because of the higher rate at which short term gains are taxed; it does not make sense to use valuable ST losses to offset LT gains. I will try to realize some ST gains before the end of the year so that I don’t waste the ST losses.


    Calculating the Performance of Your Portfolio

    July 11, 2007

    I have been investing in stocks for about 7 years. Until 2007, I have absolutely no idea what my rate of return was and whether I under/over performed the market.

    Many of us (myself included) believe that we are better investors than we really are. We vividly recall the success of winning stock picks but somehow forget about the losers. In my case I like to think of all the money I made in PetroBras stock over the last few years. But what about the small fortune I lost trading gold futures in 2006? I almost never think about that – I have subconsciously blocked it from my memory. While it can be fun to live in a fantasy world, it is important to know the truth so that we can make smart decisions.

    Why is it so hard to figure out my return? Because I’ve been continuously adding money to my brokerage accounts…. Sure my account is going up in size, but how much is a result of savings and how much from positive returns? I use Excel and the formulas below to easily track my portfolio returns. Now that everything is setup, it takes less than 5 minutes per month.


    Monthly Return:

    Each month I compute the time-weighted-return of my portfolio. This tells me the return of my portfolio for the month and takes into account any deposits or withdrawals:

    Rate of Return = Change in Mkt Value / (Beg Bal + (Net Contributions * Factor of days in Month)

    For example, if I contribute $1,000 into my account on the 20th day of June, I would multiply the contribution by .33 (10/30). This is done because the $1,000 contribution was only in the account for 1/3 of the days in June.

    Calculating Compounded Monthly Return:

    Use this formula to calculate the compounded monthly (or any period) return in your portfolio:

    Return for the Year = (1 + R1)*(1 + R2)……(1 + R12) – 1

    In the above formula, R1 = rate of return for January, R2 = rate of return for Feb, etc.