An Excellent 2012–Performance, Lessons and Thoughts

Buy and Hold does not make you money. There is no virtue in holding on to a stock that has reached its fair value. Even less so, if it has exceeded it.

While this is not a new insight, 2012 provided ample examples supporting this very basic principle of value investing.

But let’s start by recapping the portfolio performance of Value Stock Guide portfolio.

A 100% Leveraged Bet on S&P500 Index Would Have Still Trailed Value Stock Guide

The broad stock market performed surprisingly well in 2012. Given the state of the global economy and various shocks (PIIGS, The Fiscal Cliff, persistently high Unemployment numbers, etc) and the fact that retail investors continued their exodus from the market, not to forget the vast institutional block of capital known as hedge funds collectively underperforming, it is quite a surprise that the markets held up as well as they did. Listed below are the Total Returns of various US equity market indices for 2012 (Total Returns are index returns with dividends included).

 

US 2012 Total Index Returns (%) Core Growth Value
Value Stock Guide 32.44  
Broad-Market Indexes      
S&P 1000 17.4    
S&P 900 16.16    
S&P 1500 16.17    
Nasdaq Composite 15.91    
Russell 3000® 16.42 15.21 17.55
Large-Cap Indexes      
S&P 100 16.05    
S&P 500 16    
Dow Jones Industrial 10.24    
Russell 1000® 16.42 15.26 17.51
Russell Top 200® 16.04 15.06 17.01
Russell Top 50® Mega Cap 15.65    
Mid-Cap Indexes      
S&P 400 17.88    
Russell Midcap® 17.28 15.81 18.51
Small-Cap Indexes      
S&P 600 16.33    
Russell 2000® 16.35 14.59 18.05
Russell 2500™ 17.88 16.13 19.21
Russell Microcap® 19.75 15.17 22.81

Keep in mind that the Value Stock Guide returns are adjusted for commissions paid whereas the index returns are not. None of these numbers are adjusted for taxes. The Total Returns as calculated for the indices assume reinvestment of dividends, whereas the dividends earned in the Value Stock Guide are not automatically reinvested.

The table at the bottom of this article shows the returns of various global indices tracked by Russell Investments and you may want to take a look to review how various markets around the world performed. These indices are essentially what various funds and etfs are based on, and of the infinite number of fund/etf portfolios you could construct off these indices, not a single one would have beaten the Value Stock Guide portfolio for returns, unless you employed excessive leverage.

Talking of leverage, it is also worthwhile to note that for most of the 2nd half of the year, we maintained a cash level on average around 20% of the portfolio. Part of the reason was the anticipation that the valuations will improve and present us with better buying opportunities, and partly due to the increasingly risky economic environment during the last 6 months of 2012.

A Few Words on How The Performance is Tracked

At the top of any page on Value Stock Guide, you will see a table that shows how the portfolio has performed for the various time periods. Earlier I used to update this on a weekly basis but starting December the updates are going to be monthly, at the end of each month. Additionally, keep the following in mind when reading this table:

  1. The returns starting 2012 onwards are tracked for Total Returns (includes dividends) for both the VSG Portfolio and S&P 500. The VSG numbers are net of commissions whereas the S&P 500 numbers are not adjusted for it. To compare apples to apples, you may want to reduce the S&P 500 returns by 0.20% annually, which is I think the expense ratio of the cheapest index fund you can buy.
  2. The return shown since inception (Jul 23, 2009) are cumulative returns for both the index and the portfolio. In addition, till 2011 I have only tracked the price returns for the portfolio and the index and 2012 (and future years) have dividends included for both. This is still apples to apples. I suppose I can go back and figure out the total returns for the portfolio and the index since inception, but the effort to do this is not worth it. The outperformance over the index is significant enough for me to not worry about this. If you insist, you could just increase the reported numbers by the dividend yield of the index (my dividend yield is higher so this will give you a conservative figure for VSG portfolio).
  3. Finally, I note this since I have been asked about this a few times. The returns include gains on the stocks that have been sold within the timeframe in question and we no longer hold. So when you look at the current portfolio table, and think to yourself that the returns shown for the stocks in the portfolio do not line up with the returns shown for the portfolio as a whole, do scroll down and look at the stocks that have been sold and are no longer part of the current portfolio.

Oh yes, past performance is just that and does not guarantee future results, etc, etc.

Getting Down in the Details …

I do not trade often, perhaps frustrating some of my monthly subscribers who might feel a month’s fee is wasted in the months that I do not trade Smile I firmly believe that your returns are made up of 2 basic components: 1. the stocks that you buy, and 2. the stocks that you do not buy. If your portfolio is to have any success at all, you should be able to pass up on 10-20 stocks for every one stock that you do buy. Great opportunities are not common but lack of discipline in investing is very much so.

But this is by no means a buy and hold portfolio. Some of our greatest returns in 2012 have come from the stocks that hit my sell target and were promptly sold, against the backdrop of increasing investor optimism and Wall Street analysts rushing in to post upgrades or initiate coverage.

So Homeowners Choice (HCI, formerly HCII) was sold at $22 netting us a gain of 96% in 4 months of holding. Tuesday Morning (TUES) was sold at $6.26, netting us a gain of 71% in 6 months. Not to forget a 93% gain on VOXX for a little over 6 months of holding.

This rapid appreciation is not common and the reason I mention these stocks is to illustrate a very important principle of disciplined investing. Buy when the valuation is attractive and sell when they are not. When market gives you a high price for your stock and you consistently think that the market is judging the stock correctly, you will never make money in the stock market.

As of this writing all of these stocks are below the prices we sold at.

It all boils down to this: most investors hate the stocks that we are buying and they love the stocks that we are selling. Sometimes this throws up interesting situations where the analyst who downgraded the stock at its low, upgrades the stock at its high. Thank you!

Patience is Too Underrated and Why You Need a Process

I have a watch list that I use to collect interesting ideas whose time has not yet come. The problem with investing is great ideas are hard to come by, and even when you have found a great company to invest in, the price may not be right, or as is the case with some of the stocks in my watch list, the business conditions may not yet be appropriate. So I collect these companies in the watch list and wait for the right time. It may be year or 2 or even never, but waiting does not stress me and I would rather be sure than be early.

That being said, yes I do end up being early at times. Every investor makes mistakes. However, if you can work out a system or a process that minimizes these mistakes, that in itself gives you a statistically significant odds of beating the market over long term.

If you are buying and selling every few days, you are more likely to make mistakes, no matter how good you are. So I don’t do it, and with all this extra time I get, I use it to review the business in greater detail, including mentally modeling different future scenarios and how the business might react. This helps in filtering out potential losses and epic mistakes.

Sometimes You are Right and the Management Screws Up – AKA You Were Wrong

Dex One (DEXO) management was doing everything I hoped and expected they would do to increase the shareholder value. They were paying down debt, improving their margins, growing their high profit segment, sending the right signals to the market, etc. Then they made a boneheaded decision to merge with SuperMedia and anoint the person who was part of the bankruptcies of BOTH RH Donelly (former Dex One) and Super Media as the new CEO of the merged company. I did not see this coming and I own up to this mistake. Fortunately, we have strict caps on max allocation to any one stock and therefore mistakes like these can be absorbed.

Network Engines (stock used to be NEI) lost over 30% of its revenues when it lost EMC as a customer. We bought at a good margin of safety and the company got acquired as it was very attractively valued. Sometimes bad things happen, but if you have bought well at deep discounts, you will still come out with a profit, which we did (around 14%).

Again, as long as you have a good process and safeguards in your portfolio, you will be able to absorb mistakes better than average.

On a more personal note

Lot of great things have happened with Value Stock Guide in 2012. I started VSG in 2011 and about 60,000 times a page at Value Stock Guide was viewed that year. In 2012, the number of page views went up to 257,000. Seems like a nice trajectory that will push us beyond a million page views in 2013. I have no doubt in my mind that we will do even better.

The membership growth has been tremendous as well and I have been fortunate to interact with so many investors and readers over the year. Thank you for reading thus far and I wish you many happy investing returns in the new year!

I will now leave you with the state of investment returns around the world as seen through various global indices compiled by Russell Investments

Russell Global Indices 2012 Total Return Core Growth Value
Global      
Russell Global 17.2 16.6 17.7
Russell Global Large Cap 17.1 16.5 17.6
Russell Global SMID 18.5 19.3 17.8
Russell Global Small Cap 18.3 17.9 18.7
Russell Global ex-US 17.8 17.9 17.7
Russell Global ex-US Large Cap 17.6 17.7 17.5
Russell Global ex-US Small Cap 19.4 19.7 19
Russell Global ex-North America 18.6 19.4 17.9
Russell Global ex-Japan 18 16.8 19.2
Russell Global ex-US ex-Japan 19.5 18.4 20.8
Russell Global ex-UK 17 16.6 17.3
Russell Global ex-Canada 17.6 17.4 17.7
Russell Global ex-Australia 17 16.6 17.4
Russell World Cap 17.1    
Russell Developed 16.9 15.8 17.7
Russell Developed Large Cap 16.9 15.9 17.7
Russell Developed Small Cap 16.6 15.5 17.6
Russell Developed ex-US 17.4 17 17.7
Russell Developed ex-US Large Cap 17.5 17 17.8
Russell Developed ex-US Small Cap 16.8 16.4 17.2
Russell Developed ex-North America 18.5 19.1 18
Russell Developed ex-North America Large Cap 18.4 18.8 18.1
Russell Developed ex-Japan 17.8 16.1 19.4
Russell Emerging Markets 19.1 19.9 17.5
Russell Emerging Markets Large Cap 18.2 19.2 15.9
Russell Emerging Markets Small Cap 24.6 24.4 25
Russell BRIC 15.2 17.7 10.3
Russell Global 1000â„¢ 16.8 15.6 17.8
Russell Global 1000â„¢ ex-U.S. 17.6 17 18.1
Russell Global 2000â„¢ 18.4 18.2 18.7
Russell Global 2000â„¢ ex-U.S. 20.4 20.9 19.9
Russell Global 3000â„¢ 16.9 15.8 17.9
Russell Global 3000â„¢ ex-U.S. 17.8 17.3 18.3
Asia Pacific      
Russell Asia Pacific 17.1 18.9 15.5
Russell Asia Pacific ex-Japan 22.6 20.5 26
Russell Asia ex-Japan 22.4 21 25.1
Russell Greater China 21.1 20 23.3
Russell Greater China Large Cap 21.1    
Russell Greater China Small Cap 21.3    
Russell Developed Pacific Basin 14.6 15.6 14.2
Russell Developed Pacific Basin ex-Japan 25.5 19.3 31.6
Russell Emerging Asia 20.8 20.9 20.6
Russell Australia High Dividend 22.8   26.8
Russell Australia High Dividend (AUD) 21.3   25.2
Europe      
Russell Europe 20.9 21.1 20.5
Russell Europe ex-UK 21.3 22.9 19.8
Russell Eurozone 20.8 23.5 18.7
Russell Developed Europe 20.8 20.7 20.5
Russell Developed Europe Large Cap 20.2    
Russell Developed Europe Large Cap (EUR) 18.3    
Russell Developed Europe Small Cap 29.1    
Russell Developed Europe Small Cap (EUR) 27.1    
Russell Developed Europe SMID (EUR) 26    
Russell Developed Europe SMID 28    
Russell Developed Europe SMID (GBP) 22.4    
Russell Developed Europe SMID (CHF) 25.3    
Russell Europe SMID 300 (EUR) 25.2    
Russell Europe SMID 300 27.1    
Russell Europe SMID 300 (GBP) 21.6    
Russell Europe SMID 300 (CHF) 24.5    
Russell Developed Europe ex-UK 21.2 22.4 19.7
Russell Developed Eurozone 20.8 23.5 18.7
Russell Developed Eurozone SMID (EUR) 23.5    
Russell Developed Eurozone SMID 25.4    
Russell Developed Eurozone SMID (GBP) 19.9    
Russell Developed Eurozone SMID (CHF) 22.7    
Russell Eurozone SMID 150 (EUR) 19.5    
Russell Eurozone SMID 150 21.4    
Russell Eurozone SMID 150 (GBP) 16.1    
Russell Eurozone SMID 150 (CHF) 18.8    
Russell Emerging Europe 23.4 27.8 19.8
Russell Emerging Europe Large Cap 22.3    
Russell Emerging Europe Small Cap 34.9    
Russell Emerging EMEA 21.6 22.4 20.3
Chi-X Europe Russell PanEurope (EUR) 17.7    
Chi-X Europe Russell Eurozone (EUR) 19.2    
Chi-X Europe Russell PanEurope60 (EUR) 14.4    
Chi-X Europe Russell Eurozone40 (EUR) 16.8    
Americas      
Russell Latin America 12.3 15.4 4.2

Comments

  1. Leonard says

    Happy New Year Shailesh!

    Thanks for this write up. I also want to thank and congratulate you for an excellent 2012. I am very happy to be a member here and look forward to a wonderful 2013. I have learned a tremendous amount by following you.

    Thanks again and here’s to a happy, healthy and prosperous 2013.

    Leonard

  2. Randall Waibel says

    Great job in 2012 Shailesh. VSG has to be one of the best investment opportunities out there. It makes great gains at minimal risk. How can investing get any better?
    Thanks,
    Randall

  3. says

    Nice job Shailesh. Unfortunately many people don’t want to buy when the valuation is good. They look for stocks that have already done well and then they want to buy. Human nature works against the principles you favor. Thanks for your unique viewpoint. Suzanne

    • says

      Thank you Suzanne! You are right. Emotions often interfere with rational decision making. Most investors also find it hard to trust their own judgment and mistake a popular vote for a stock as a sound verdict on investment merit of the stock and they are more often than not disappointed.

  4. says

    I was definitely suprised by the performance of the markets in 2012. Things weren’t exactly great in 2012, yet the market rallied. Hopefully we will see a continuation of this rally in 2013. Have a great new year!

  5. says

    Congratulations Shailesh on a great year. I was hoping that we would have some good buying opportunities due to the fiscal cliff, but now it looks like that might be postponed for a few weeks. Will have to wait and see!

    • says

      Thanks Dustin! Not sure if the debt ceiling discussions would cause much panic. I think most investors are quite jaded now. Besides, there is a boatload of money on the sidelines waiting to be plowed in if the market so much as hiccups. Still, one can hope!

      Welcome to the site!

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