BehavioralTrader.com’s inaugural year turned out to be my best financial performance to date. My total return was 60%:: 52% in my margin account and 88% in my IRA. Its hard to say how much blogging helped — did it improve my execution or did I just have good picks? I think its too early to say, but one thing I think is helping is that when faced with new situations, I have a record of how I handled similar situations in the past and how things worked out. Hopefully that will lead to better outcomes in the future.
I began 2007 betting on a continued turnaround in Japan and with large positions in mining companies such as AUY and SLW. I had high hopes for a couple of companies I had researched on my own: XSI and FFHL. I also had ideas about shorting IPO issued by private equity groups because of the high indebtedness and high private equity shareholdings to be unwound. Of these ideas only XSI and mining were successul, though the mining firms which worked out were ones I picked up during the year. I was out of Japan by about midyear. FFHL has been a bust so far. Luckily it was a small stake and I think it may ultimately be successful. Among the private equity IPOs I shorted were Burger King, Jcrew, and Hanes Brands. I was about break even.
Despite this, I was good at not staying wedded to my initial strategy and letting my thinking adjust with the market. I also was able to pick up many good ideas from the posters on on valueforum.com. Learning who to listen to and to use their ideas is a very useful skill which I continue to develop.
Market Timing
The market offers tests every day, but the three real tests of 2007 year were the end of February Shanghai-triggered collapse, the mid-July to August swoon and a very bad November. I reacted badly to February, getting scared out of positions in FXI and TDF, among others. I played the July-August swoon pretty well though. I got to zero cash right at the bottom which made for an explosive September and October. I should have realized this couldn’t last forever and been a lot more aggressive dumping in November. Tax liability helped stay my hand in my margin account, but as I’ve learned many times, giving tax consideration undue influence often leads to the only thing worse than having to pay tax – not having to pay tax. I could have also sold more in my IRA where there are no tax considerations.
Highlights
My biggest success of the year was Absolute Software (ALSWF), a pick by one of the most prescient posters I know. He had begun recommending it in 2006 at about 3. I was relatively late picking up my first shares in the 7s in November 2006, but by mid 2007 it was my largest position and hit a high of 40 before retracing. Absolute continues to grow subscriptions for its LoJack for Laptops service and I think its fundamental prospects continue to be bright even though the stock price has taken a beating recently.
One of my best ideas of the year was shorting newspaper stocks including GCI, MNI, and MEG. IMHO these companies have little relevance in the era of Google ads and Google already occupies the niche they would have to move into to thrive. All of these companies have seen revenue declines and have negative net worth. The writing has been on the wall since 2004-2005 when the stocks of these companies peaked. They have declined steadily ever since. In the past I have generally shorted hi-flying stocks I felt were overvalued and these have taken me on wild and often very damaging rides (this year AMZN gave my a small bruise). My newspaper shorts, on the other hand, have gone steadily down. My big regret is that I didn’t take much larger positions.
Other successes included:
XSI: I bought this because of growing revenue and announcement of a bunch of new contracts. These were overlooked by the market because of the small size of the company. A talk with the CEO caused me to buy more. I cut this stake after third quarter earnings didn’t meet my profit expectations.
MLKKF: bought because of the tremendous potential at their mines, which have entered into production.
QADMF: another miner with a good valuation and prospects.
Dry-bulk carriers: my motivation here was the dividends and surging dry bulk rates. As yields compressed due to price rises I got out and was able to avoid most of the late-year swoon.
CHNG: high growth at a reasonable valuation got me into this one. I didn’t get out at the top but still made a good bit of money.
Financial and Housing shorts: the writing was on the wall. A success but could have done a lot better.
Things I could have done better
FXI and TDF: the original strategy was to hold these for the longer term based on China growth. I got scared out in the late February Shanghai downturn.
DRYS: with BDI falling I should have gotten out of this quicker. I did get good prices for much of my position but should have gotten rid of everything.
MBI: as with many of the other housing and banking stocks I let short-term volatility affect my thinking and pulled out well before I should have. I just about broke even right by getting out after the Warburg-Pincus equity investment and right before the December plunge. Part of my caution here was the extremely low PEs on many of these stocks, but those PEs now look laughable in the face of the massive (and foreseeable) write-offs. Another reason for caution was the stocks had already fallen quite a bit by the time I was ready to pull the trigger. However, like the Internet in 2000, when things which have gone up for a long time begin to fall, they can fall for a long long time.
FFHL: what originally attacted me to this stock was a PE of 3 which was incorrect because not adjusted for IPO shares. Even with those shares, the valuation didn’t seem too outrageous, so I bought in anyway. When things started to slip I should have gotten out much quicker.
Looking ahead
2008 has started off with a big market swoon and I’ve gotten hit along with most everyone else. It looks like it will be a much more challenging year than 2007. I don’t have strong faith in many macro ideas right now. I think financials and real estate will continue to fall for a while, but am wary of an eventual recovery. Is the general market in a bear market? I don’t know. I continue to like newspapers shorts. I hope to find at least one other dying industry I can short. On the long side, I continue to like ALSWF and select mining companies. There also seem to be many small Chinese companies with attractive valuations based on their growth prospects. If they can execute that is. It is probably a big if but I like my investments in SNEN, CHNG, and GA, particularly the former. FFHL has had its problems, but if it can get its growth back on track, it looks pretty cheap. I’m hoping good fourth-quarter results will pull these stocks up. I continue to like ONAV and DHT as dividend plays. With commerical real estate defaults rising I’m a little more wary about NRF, currently my second largest position, and AHR. I am thinking of cutting back on the former though this may change based on the tenor of the dividend announcement in late January.
