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The year just past was a good one for most investors, and someone who followed our recommendations would have outperformed the indices. With some exceptions, of course.
Let’s start with the exceptions. At the beginning of the year, I said that the boom in contemporary art prices had peaked. Finally, the bidding frenzy was over. Wrong.
My mistake was going to the most discriminating and intelligent people in the business to get their sense of the balance of supply and demand.
Clearly, if I had polled art fashion victims and transcribed promoters’ press releases, I would have been in better touch with market trends. The auction results tell the story, which is that, in the words of P.T. Barnum, the eminent American culture critic: “There’s one born every minute.”
In mid-February, I noted that I had ignored friends who had bought diamond producers’ stocks in recent years, and opined that this was still a good time to get into the market. The early investors are still way in the money but that would have been a good time to wait. Aber Diamond, one of the stocks I mentioned, is off about 9 per cent.
In August, I said it was time to buy the Beirut story, as that war was beginning to wind down. Actually, this one worked pretty well up until the November political crisis, which is still unresolved. The Beirut index, which is heavily weighted with Solidere, the real estate company, is now off about 1 per cent from the time of my August call.
The other 20 or so clear recommendations paid off pretty well. My call to go long on gold at the beginning of the year worked out.
In mid January of last year I suggested using bond analysts’ LBO screens to pick stocks. These analytic formulae were intended as risk management tools for institutional bond investors such as pension funds and insurance companies. The idea is to avoid bond issuers with good cash flows, low leverage, and low stock prices, on the assumption that they are vulnerable to takeovers and subsequent ratings downgrades.
In the event, there were fewer ratings crashes than you would have thought, given the long list of LBO “targets”. However the stocks did far better than the market, either because the cash flows were more fairly valued, or because equity investors wanted to buy ahead of the private equity gangs. Either way, buying an index of LBO screened companies would have been a big success.
Gold went from about $520 an ounce at the beginning of the year, and went past my $600-plus target in mid-April, when I recommended a shift into copper. That switch worked out well, as copper outpaced gold in the last month of the commodity buying panic.
In mid-May, I suggested another switch from copper to Russian stocks. Those dipped, then recovered rather better than the metals before I recommended selling them in the early fall.
The energy-related recommendations worked out fairly well. I suggested buying junk electric utilities shares in January. The stock of one of those, Sierra Pacific, the principal Nevada electric utility, rose more than 31 per cent by the end of the year; not bad for a conservative industry.
Cheniere Energy, a sale I recommended in a July article about the impact of the Ukrainian gas dispute, has declined by 23 per cent since then.
Foster Wheeler, which I recommended in August as a high-beta play on energy capex, has seen its stock rise by 36 per cent. The bonds of Pemex, the only way to be long Mexican oil-company risk, have outperformed other emerging market corporate paper.
For those who were willing to profit from US defence policy, whatever their political convictions, I suggested back in February that they buy the PowerShares Aerospace & Defense ETF. Thanks to the procurement policies of the Rumsfeld Pentagon, those are up by more than 19.6 per cent, better than the S&P 500’s
13.19 per cent.
The fixed-income tactics also worked reasonably well. At the beginning of May, I suggested getting out of EMBI, the emerging market bond index, and putting on a mix of half dollar bonds of selected countries and half short-term local market instruments of high-yielding, high-risk countries.
Just to torture me and anyone who took my advice, the Turkish local market suffered from panic and devaluation later that month. But the idea worked and, over the year, the volatile Turkish position turned out to be the most profitable. The six-position emerging market bond portfolio had a total return of 12.59 per cent from May through the end of the year, better than the EMBI index.
Curtis Mewbourne with Pimco’s emerging market bond group was supportive of this idea, and a fellow believer in Mexico’s prospects. Pimco’s bond investors were well served by that strategy.
Among the ideas I suggested that were not appropriate for whatever widows and orphans read this column was a September recommendation of a long position in the bonds of the bankrupt Iridium LLC. The only prospect for them receiving payment is a lawsuit against Motorola, the company’s equipment supplier.
Usually, that would be a very, very long shot, but I was convinced by the bondholders’ case presented to the bankruptcy court. So was the market; the bonds have gone from the low to mid 20s (as in cents on the dollar) to 29 and change.
No New Year’s look-back would be complete without a resolution or two, and I have one: I have tended to put out reasonable ideas, many of which worked out, but then did not always follow up with prompt close-outs when they worked or when it could be seen that they would not. This year, I will make a practice of going back to review past recommendations to see if they still make sense.
This column is not an investment advisory service; it is a journalistic market commentary. But I venture to say it has compared rather well with the results of people who charge 2 per cent fees and 20 per cent of profits.