My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Wednesday, November 30, 2011

The Anti-Boring Portfolio- Me and My Money Revisited

I am in the process of transitioning from being an active stock picker to a more conservative passive investor. Numerous bloggers and journalists preach passive index investing with re-balancing and little trading. My blog on Monday highlighted the book, The Brilliance of Boring Investing by Marshall McAlister. In that book, Marshall discusses how passive boring investing, through indexes, is the way most investors should design their portfolios.
As I have discussed in prior blogs, stock investing should not be considered entertainment. However, I will admit that personally, I still need a small fix of speculative stocks in my portfolio. When I complete my metamorphosis to a full-fledged boring investor, I will get my stock picking fix by allowing myself to pick individual stocks for the small cap. allocation of my portfolio, which will be 60% of my portfolio (just joking, somewhere between 5-8%).

Last February Larry MacDonald profiled me in The Globe & Mail’s Me and My Money column. In the column I noted many small cap. stocks I held. These stocks only comprised a portion of  my portfolio, but I noted them because, let's face it, it is boring reading about the same 5 ETF's everyone holds. So as my stock picking days fade into the sunset, I let my anti-boring alter ego take over for one last time and discuss how my small cap picks have fared since the February, 2011 Me and My Money column.

I am posting this blog for three reasons: (1) Just for fun, as I can only read so much about index investing (2) to note where these picks came from, and (3) to reflect how risky and volatile small cap stocks are, which is a stark contrast to Marshall's boring investing mantra.

I have stated numerous times in my blogs, that as a chartered accountant I cannot provide specific investment advice and I do not have any regulatory investment licenses or specific training. I actually even felt compelled to check with my regulatory body that I could even be featured in the Me and My Money column, in case my picks were considered as investment advice.

Thus, to be clear, this blog is not to be construed as providing any specific investment advice and in fact I waited to write this blog until I disposed of most of these stocks and I will not disclose which of the two stocks I still own.

All joking aside about boring investing, stock picking is a risky way to play the market and research has shown it to be ineffective for the vast majority of people, and thus, I would not recommend picking individual stocks for the vast majority of people.

The following chart reflects my stock picks (except for Microsoft) in the Me and my Money column on February 11, 2011 and the closing price on November 29, 2011.


Name
Feb 12
Now
Costal Energy Company
7.36
$13.80
Wi-Lan Inc.
6.25
$5.52
Sterling Resources Ltd.
4.70
$1.70
Rainy River Resources
13.12
$7.35
Hathor Exploration Ltd.
3.30
$4.69
Nymox Pharmaceutical Corp.
6.49
$7.53


The Costal Energy pick came from the Investor Village chat forum. Most would think that to be a strange and risky place to obtain a stock pick and I could not agree more. However, I have followed a certain poster on the forums for years and he has selected several winning stocks and he made several compelling posts on why Costal was extremely undervalued. Those posts got me interested in the stock and I researched it further. Costal Energy which operates in Thailand, has been very successful in both finding oil and increasing production since February and the stock price reflects such.

I invested in Wi-Lan after reading about how it was protecting its patent portfolio by initiating litigation for royalty payments against the who’s who of technology companies. Based on my research, I figured it would become a cash cow upon settlement of the litigation. Most companies eventually did settle and the stock price soared to $9.50 or so buoyed by an indirect valuation put on Wi-Lan's patent portfolio by the sale of Nortel’s patents and a New York Stock exchange listing. However, Wi-Lan had some issues with one of its lawsuits and also made a failed hostile bid for Mosaid which deflated its stock price.

Sterling was a pick from a free newsletter I receive called David Pescod’s Late Edition. The newsletter contains many high risk stocks and thus I am not recommending or condoning the newsletter, I am just making you aware of its existence. David Pescod is an investment advisor for Canacord who writes about resource and small cap stocks. Sterling was undertaking some high impact drilling in the North Sea and if successful it was thought the company would explode in price. With some initial success the stock rose to $5, however, subsequent drilling was not as successful as hoped for and they had an issue obtaining drilling permits in Hungary, so unfortunately, the stock price exploded to the downside.

I learned of Hathor through a friend who was keen on Uranium and he provided me his due diligence. By happenstance, Pescod’s Late Edition was also bullish on Hathor since around the $1.90 mark. Hathor is the poster child for small cap stocks. It ran to $4.50 on great drilling results and was rumored to be a takeover candidate. However, as a uranium explorer, the stock price collapsed back to $1.80 after the nuclear meltdown in Japan. Subsequently, Cameco initiated a hostile takeover at $3.75 which has resulted in a bidding war with Rio Tinto, which Rio appears to have won at an offer of $4.70. Hathor shareholders have had quite a wild ride this year, unfortunately for many, they exited the stock after the nuclear disaster.

Rainy River is a gold explorer but, like many gold stocks, it has not participated fully with the exploding price of gold which is a strange phenomenon on its own. I first heard of Rainy on a stock chat board.

Nymox came from a friend who is in the medical field. It is in phase 3 testing for a pancreatic drug.

Although the above portfolio is only a microcosm of a small cap. ETF or mutual fund, it actually almost performed on key. It had one huge winner (Costal), one big winner (Hathor), two neutrals (Wi-Lan and Nymox) and two flameouts (Rainy River and Sterling). That is why most advisors want some exposure to small caps, potential gains in excess of the market (this mini-portfolio if equally weighted outperformed the TSX by 15% or so), however, advisors try and cover the downside risk by having a large baskets of small caps.

So this is how my stock picks from February have fared.  As I stated earlier, this post should not be construed as advice in any way and I have sold most of these stocks. This post was written in most part for entertainment purposes. Now you can go back to boring investing.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

1 comment:

  1. For investing, stick to index ETFs. Even 5-8% in small caps can significantly drag down your returns over time if you pick poorly.

    (Note: be sure you're buying ETFs, not ETNs, or other weird ETF knock offs.)


    For the "adrenaline fix", you can test your predictive abilities on InTrade https://intrade.com/v4/markets/
    ( With their new zero transaction cost trading fee structure, playing around won't cost an arm and a leg. Unless you bet wrong that is. :) )

    ReplyDelete