Ah, the dying days of December, when thoughts turn to toting up investment returns for the year that is ending.
I've been dispensing stock picks for more than a decade, and 2011 is one of my best years on record. The reason? I have, by and large, found the discipline, after years of trial and error, to follow a few key investing rules. Among the lessons I've learned:
1. Never invest in things you don't understand.
2. Avoiding losses is more important than hitting home runs.
3. There's nothing wrong with taking profits.
4. Small stocks, especially broken ones, are where the money is made.
5. Stocks that are falling tend to keep falling and vice-versa.
6. Waiting for a company's fortunes to improve before investing is generally a good idea. It might mean paying more than catching it at the bottom but you'll cut down on your risk and still make out like a bandit if you're right.
7. Don't fully trust anyone – even the supposed experts.
Let's run through these with examples, keeping in mind that investment examples don't fit neatly into a 12-month period. Some of the cases predate the calendar year.
An illustration of Lesson No. 1: On May 9, 2010, I decided to recommend the shares of Manulife , reasoning that the company's business was "slowly turning around." This wasn't an off-the-cuff comment. I spent a lot of time reading the company's financial statements, speaking to analysts and listening to two conference calls.
It didn't matter. The stock was almost $19 then. It's a nostril above $10 today and doesn't show any sign of turning around. The fact is I don't understand the company's business, and I'm not sure management has a firm grasp on matters either.
Lesson No 2: Investment math is unforgiving. If memory serves, my loss on Manulife was about 25 per cent. Just to get back to zero, I'd have to redeploy what I salvaged into something that would return 33 per cent.
Lesson No. 3: Earlier this year I recommended Points International , a company that manages rewards programs. I figured I might make 20 per cent in a year or so. Instead, the investment returned 80 per cent in a month as the company consolidated its stock, listed on Nasdaq and travel picked up. I took the opportunity to bail out. It wasn't that I still didn't like the business; it's that I've learned the hard way not to be greedy.
Lesson No. 4: The stock market hasn't done well, but some individual stocks have. One is Intertape Polymer , which I recommended this summer at $1.90. It's $3.15 today. Intertape has $800-million in sales and a market cap today of $182-million. No dealer covers the stock. That will change, and I still own shares.
Lesson No. 5 and 6: My first bearish missive on Research In Motion was about two years ago, when the stock was $60, but starting to fall. My first clue was that I found my own BlackBerry increasingly frustrating. In addition, the two co-CEOs appeared to be neglecting the business while competition heated up.
I've written since that I think RIM may be taken over. I've stopped short of investing in the stock because I know from experience that it's better to wait for it to bottom and start climbing again. I think that will happen when the stock falls below $10, if at all.
If RIM does stage a sustained comeback at that point, it might seem hard to wait and buy a stock that's up 50 or 100 per cent from its low. However, that's not the way to look at it, because a broken stock on the mend will generally still multiply from there. I'm short RIM for now.
Lesson No. 7: Yellow Media was supposed to be a blue chip stock, but all of Bay Street's analysis overlooked a key point: no one uses the Yellow Pages any more. The company has a hopeless business model.
Looking ahead, there will be more great opportunities, especially with smaller names. The energy services sector, in particular, is likely to have a good year. Investors have relentlessly sold the stocks, but the word from people in the oil patch is that barring an economic calamity, the New Year will surprise. If it does, I plan to follow the principles I've outlined here before recommending any of the stocks in this sector.