Newsletter July 1, 2012

InvestorsFriend Inc. Newsletter July 1, 2012

An investment and investment advice success story:

My long-term track record of success as an investor and investment advisor has been well documented on this Site. Basically I have been able to compound money at an average of about 12% per year for a long time. Those who subscribed to our Stock Picks and followed the advice (at their own risk of course) were also provided the means to compound their money an average of 12% per year. We have NEVER made any guarantees of performance in the past and make none about the future. Nor can we even make any predictions about future returns. Still, I do like our chances of continuing to beat the market.

Of course there is no suggestion that our returns were steady at 12% each year. Not at all. My own annual returns in the past 12 years have ranged from minus 23% in 2008 to positive 44% in 2009. But the only other negative year was 2002 at minus 8%. So certainly most years were positive. Our Stock picks from the start of each calendar year have had average returns for the year (as a group of stocks) that ranged from minus 34% in 2008 to positive 57% in 2003. There was only one other negative return, minus 1% in 2007.

Turning to more recent times, we have done very well in this first half of 2012.

My own portfolio is up a surprising and rather gratifying 16.4% in the first half of 2012. For the group of stocks that we rated in the Buy or strong Buy ranges, the average return has been 7.3%. This compares very well to the Toronto stock index which is down 3.0%. The Dow Jones Industrial Average is up 5.4% and the S&P 500 index is up 8.3%.

My own success in 2012 has come from concentrating my investments in a few good companies. Right now 64% if my equities portfolio is invested in my top five holdings and 90% in my top 10 holdings. And at times during the year the concentration has been even higher.

Each of top five holdings are very established companies. Basically, they are blue-chip type stocks. Three of these are U.S. stocks. One is a conglomerate. Two of the five are retailers. One is a large bank. One is a real estate developer. The average gain on these five in 2012 has been 14%.

During 2012 I have been very close to 100% invested in equities. I have trimmed some positions, mostly on gains and I have bought on dips.

Over the years I have invested almost exclusively in somewhat boring profitable companies. These companies lend themselves to fundamental analysis based on their past earnings. I have rarely to almost never invested in oil and gas stocks and resource and commodity stocks. I don’t invest in early stage companies that are not yet making money. These companies that I tend not to invest in are more exciting and one could win the lottery playing them. But I have favored a steadier and less risky approach. It has worked out well. However I have had to stomach some major price declines, especially in 2008. And certainly not all of my stocks have worked out well.

If you are not already a subscriber to our stocks picks, you can get access to our stock picks and to the composition of my own portfolio by subscribing.

How Warren Buffett motivates his managers to achieve remarkable results.

The topic of how t motivate people is extremely important. After all, little would get done in this world without motivation. And I think it is obvious that a positively motivated worker is a happy worker. And that’s true whether that “worker” is the CEO or a front-line worker.

I have written an article that documents how Warren Buffett motivates his direct reports. Most of the article is simply quotes from Buffett’s writings.

Dollar Laws:

A dollar saved is a dollar earned : Obviously if you can save a dollar on a purchase, that is every bit as good as an (after income tax) dollar gained by working.

A dollar can only be spent once: Many people will purchase an item because they can “afford it”. But this thinking neglects to consider that there might be a better use for that particular dollar. A better purchase today perhaps. Or a better purchase tomorrow. When a dollar is spent, what is really being spent is the opportunity to spend that dollar elsewhere or at a future time or to investment that dollar.

A dollar invested should be invested at the best available combination of return and risk: A dollar invested at 10% is probably a great investment. But not if an equal or lower risk investment at 15% was available.

A Manipulated Market?

Many investors fret that markets are manipulated and that “there is no chance for the retain investor”.

This may be  a valid concern for those who invest based on “technical analysis” buying what is hot. Manipulators could drive  stock up in price and then drive it quickly down leaving retail  investors behind with large losses.

But value oriented investors should view market manipulation as an opportunity rather than a problem. In the long run a stock’s performance will reflect the underlying earnings. If market manipulation causes stocks to swing more wildly from under- to over-valued then this simply creates more opportunities to buy low and sell high.

Financial Crisis and European Worries?

Many investors are afraid that stocks will plunge due another financial crisis emanating from Europe. And they could be right.

But it’s unlikely that any such plunge would be permanent.

If you were the owner of the local Tim Horton’s franchise it’s not likely that you would be losing much sleep about the impact of a financial crisis upon your business. And it’s exceedingly unlikely that you be looking to sell your franchise due to the risk. So why then do the owners of shares in Tim Hortons and other good businesses fret so much?

It may be prudent to keep some cash available just in case of a financial crisis. But it’s probably not a prudent move to avoid stocks altogether.


Shawn Allen, President
InvestorsFriend Inc.

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