We achieved a Return on Investment this year that far exceeded our expectations. Our numbers were so good, that it hard to expect to achieve similar results in future years.
Having regard to this success, we thought we might start the New Year by listing some basic policies that we religiously follow. These guidelines should stand any investor in good stead.
Trends
We read the markets on a continuous basis. We are very conscious that the FIRST PRINCIPLE of investing is “Don’t lose your capital”. We try to anticipate when there are negative signals, and if there are, we are not greedy. We will diminish our positions and move to cash.
In the cycle started in March 2009 until today, we see only growth. We continue to see a recovery in place and every day there are more signs of this. We are fully invested currently and intend to remain so. We anticipate that although there will be bumps in the road, the trend is upward for the foreseeable future.
Cash Reserves
We do no have a policy of maintaining cash reserves. Because we are a private fund, we need not maintain any reserves for possible redemption’s. We may therefore utilize more efficiently our capital. When we require capital for a new position, we simply sell some of our existing positions.
Margin
The lessons of 2008 & 2009 remain vivid. Margin hurt us and so many others very badly. We do maintain credit facilities, but we only use them in a very moderate way in order to be able to immediately seize opportunities. Upon using a credit facility, we then quickly start liquidating existing positions in an amount necessary to quickly eliminate the margin position.
The obvious benefit of this policy, is it forces us to take an amount of our profits off of the table – to harvest some of our gains so to speak.
Portfolio Review
As we have said so many times, the days of “buy and hold” are long gone. Anyone that follows a policy of buy and hold, will be sorely disappointed in the long term. There will be events that will happen (the Black Swan is an example) that will completely change your view of what to invest in. Perhaps inflation will change the landscape. Perhaps deflation will change the landscape. Perhaps China will suffer a dramatic event – either positive or negative.
Perhaps shale gas will replace oil, or perhaps oil will go to $300 a barrel of oil.
No-one knows the future, but what we do know is that events will unfold that will be unexpected and will change the landscape.
We review every single position on a regular basis. We apply then current criteria to determine whether to hold, whether to sell, whether to buy more, or whether to lighten up. Decisions are constantly being made based on the knowledge on hand at the time the decision is being made.
Guidelines.
The only guideline that is absolute is “Protect Our Capital”. Every other guideline has to be rethought at each time a decision is being made for a particular holding.
We try to always be flexible and to try to understand what is going on in the world in making our decisions.
Small Cap Companies
As mentioned many times in previous blogs, we favor small caps. We look for juniors primarily in the resources field that have a dramatic upside and we are patient. We are prepared to wait. We are not traders. We are investors.
We look for a company that has a deposit that seems to have the scope to be expanded dramatically. We look for ‘orphans’ that have been abandoned or forgotten by the market but are close to production. We look for stocks that are undervalued , perhaps because of a previous mishap or because the traders have moved on to their next pick, or whatever.
We look at 5 or 15 new stocks every week, and sometimes we pick 1 or 2, and sometimes none.
When we pick a new stock, we have to always consider whether it has more upward potential than those already in our portfolio, because we have to sell something in order to get the cash to buy something.
Large Cap Companies
We do keep our eye on the world and on many large cap companies. However we use very different investing principles. When we invest in a junior stock, it perhaps has a value of $0.50. If that stock falls off the table we lose a maximum of $0.50. But it could go to $5.00. Now that is a nice win/loss ratio possibility.
Using that analogy, if we lose on 9 stock investments (very unlikely) and win big on one, we are still doing just fine. I would say that the actual number of individual stocks that we lose on is very small.
We look at the underlying values of each stock very carefully and NEVER follow tips. We do our own due diligence. We invest if we think there is real and unmistakable value. These stocks seldom fall off the table. At worst, they remain unrecognized and our capital remains tied up.
Now I have to say that losing all value in a stock has not happened to us although in the crash of 2008, most stocks fell dramatically, large caps as well as small, so indeed it could happen again and we are very conscious of this.The fact remains however, that the most we could lose in this $0.50 investment is $0.50.
If we bought a large cap at $35.00, like GM for example (a recent IPO) we could lose $35.00. So we always consider our win/loss ratio potential. On a $0.50 stock we could lose $0.50, but it could go to $5.00 That would be a 10 bagger, to use industry colloquialisms. For us to achieve the same return on the GM, it would have to go to $350.00. Now what do you think the possibility of that is? Not very likely I would say.
So here our win/lose ratio possibility is not in our favor and there would have to be other compelling reasons to invest the $35.00.
Options
In the occasional foray we make into the large caps, we use Long Term Call Options, normally referred to as Leaps. This converts the win/loss ratio possibility dramatically in our favor. We have a set minor amount that we can lose and no more is at risk no matter what happens. However our up side is unlimited. We do pay a small insurance for this, but it is insignificant and very good value.
I discussed Leaps in previous blog.
Good Investing
This is the start of 2011 and we wish everyone investing success.
