Tuesday, January 01, 2008

Report Card - Predictions in Review

This is the time of year when many financial columnists and bloggers review their picks, predictions and suggestions made during the past 12 months.

I'm not going to do that, since this blog specifically makes the point that investing is a longer-term process, and picking your winners and losers an average of just six months later is foolish and leads to thinking which doesn't improve your long-term results.

What I am going to do is review the 2006 predictions and suggestions I made, providing a better longer-term outlook.

This blog started in February 2006, and on Feb 19th I looked at a portfolio heavy in dividend companies, with the hope that the dividend growth over about 5 years or so, would then pay enough in dividends to make a theoretical mortgage payment used to buy those securities with. Based on history, I was looking for a 10% annual portfolio growth, with about 5% of that coming from dividends, and 5% from capital growth.

Overall, the portfolio is up 12%, plus the dividend yield of about 5% annually, which is producing a return pretty much bang on. The dividends have also grown, from 4.75% annually of the initial portfolio value, to 5.08% annually now. Call that a win overall.

Incidentally, with long-term mortgage rates now in the 5.3% (15yrs) to 5.8% (30yrs) range, now is an excellent time to revisit that same strategy, although I expect the portfolio might well get stuffed today with many more financial firms, given some of their perceived difficulties and consequent high yields. Read the entire Leverage Series.

Emerging markets was a popular theme for me, calling them good value in March/06, May/06 and October/06. Buying the most-popular emerging markets ETF, "EEM", you'd be up anywhere from 45% to 55% depending upon your entry point. The S&P 500 moved up only 10-15% over that same period. Call that a clear victory.

I also suggested in March/06 that uranium producers had a long tailwind in their industry, given decades of under-mining the resource and shortages to come. The world's largest single uranium producer, Cameco ("CCJ") moved up by just 5% since then, against a 14% increase in the S&P500. However, since then, Cameco has also been plagued with production problems, which has likely impaired its stock price. Still, call this a loss.

In early March/06, I also warned that I felt the US currency would continue its descent, and later re-iterated this call in April. Since the initial call, the US dollar has lost 18% when measured against its largest competitor currency, the Euro. Call this a win.

Also in March, when many were suggesting that Berkshire's Warren Buffett had his better days behind him, I suggested it would be too early to count an extraordinary investor like him out. Since then, Berkshire shares have risen by 63%, rising from $87,400 to $142,200. Call this a win.

In mid-March, I felt that the oil-boom in Alberta Canada, was going to continue to positively impact their real estate sector, and suggested three companies who would likely be prime beneficiaries. Since then, these stocks have risen by an average of 42%, against Canada major stock index, the S&P/TSX60 (represented by the ETF "XIU" on the TSX) which has risen by 20% since then. Call this another win.

In late March, I suggested that inflation was on the upswing (a win), and that as a result of this, US homeowners would be wise to lock-in their variable rate mortgages (ARMs) to 15 or 30 year fixed rates, as rates will be higher in 2-3 years, and much higher in 5-7 years. While the jury is technically still out, long-term fixed mortgages were in the 6.25% range then. The freeze-up in the credit markets has resulted in the Fed dropping its rates, and 15-30 year fixed mortgages are now in the 5.3% (15 yrs) to 5.8% (30yrs) today. Call this a loss.

In April/06, I suggested that constructing a simple, sensible, long-term portfolio was as simple as "1,2,3 - A,B,C". That portfolio used just six ETFs, tracking both domestic and international markets. The portfolio gave consideration to value type investments, as well as growth through a 25% holding in emerging markets. It was also much more balanced internationally than most investors holdings, with 60% of its holdings outside of the US market. This portfolio has returned 22%, against an 11% increase in the ETF "SPY" (which tracks the S&P 500). Call this a clear win.

In April, I also suggested that the US market had reached its peak for quite a while to come - since then the S&P 500 has risen by 14%. Call this a clear loss.

In April/06 I also said that Canada's Ontario land-title provider Teranet (TF.UN), would likely jump upon its IPO issue to reflect a lower yield. While that did happen, it also fell subsequently on some poor results. Call that one a draw.

Looking back now, it seems like an easy call to say that the US residential real estate was going to get trashed, but then, not so many were certain of that. I made calls on this sector in March/06 saying it was too hot and re-iterated that again in June/06. In July/06, I twice advised against investing in home-builders or related stocks, warning that "it won't be pretty out there in two to four years". This warning came despite some sensible bloggers, notably Geoff Gannon and Bill of No-Do-Das, suggesting they looked like good long-term investments. Depending on which point you use, the home-builders ETF "XHB" has fallen by as much as 55% since then. Call this a can of "whupp ass" victory.

In September/06, I suggested another simple ETF portfolio, this time for Canadian investors, using just four ETFs. This one would have half of the portfolio invested outside of Canada, with the balance in the country. That portfolio is up 37% on a local (Canadian) currency basis, compared to a 22% improvement in the country's major index (S&P/TSX60). Call this another clear win.

Finally, in November/06, I suggested an investment in the leveraged split shares of LSC and ALB (trading on Canada's TSX) exchange representing several Canadian insurers and banks respectively, looked like good value. Since then then have fallen by an average of 2%, against the S&P/TSX60 increase of 13%. Call this a clear loss.

Well, that's about it - the way I read this is that I got almost all the major calls right - that is, the portfolio suggestions, the ETF builders (e.g. emerging markets, etc.), currency calls, and the real estate meltdown. And while I was right on the inflation rate indications (upward), I didn't anticipate the Fed dropping rates due to the credit market freeze up. And I also missed on a few individual stock predictions. However, I would say that my biggest miss was calling a US market high in April 2006. Overall, though, I'm pleased with how the suggestions have turned out.

I hope that my 2007 predictions and suggestions look as good in 2009 as these ones generally have.

PS (Jan 6/08): I now also recall a 2006 year end survey by Birinyi Associates who run the Blogger Sentiment Poll, asking which S&P500 stock did I think had the potential for the greatest increase over the year. I selected Coke, "KO", which closed on the trading last day of 2006 at $48.25 and the last day of 2007 at $61.37, for a 27.2% increase. By comparison, the ETF "SPY" (representing the S&P500) gained just 3.2% over the same period. Call that also a clear win.

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Deborah said...

My goodness Jay, I am terrified of the financial firms, to the point that I don't even want to put my money in the bank and I'm thinking hide my money in the mattress or something...

I expect to see more than one bank run before the credit indulgences have worked their way out of the market.

Interesting on what you say on the interest rates. I looked them up in the summer, as my mortgage comes due in August, and they are up since the summer, at least here in Canada.

Jay Walker said...

I consider that many - but not all - of them look like good value these days. Warren Buffett isn't known for buying into distressed businesses or industries, yet he's purchased shares in several of the big banks lately.

Greg Donaldson has a good posting on the same, here:


mark said...

The real estate business is like an elevator, it has its ups and downs !!
This is an excellent real estate blog. Many people do not realize the importance solid fundamentals and principles in the area of this business. Please keep working on your site and blog because good real estate info like this is hard to find.

God Bless,
Real Estate Professional