2011 Success Story

[Rickson9]

I mentioned in 2010 that my +56.5% return was unsustainable.




I was wrong. I'm always wrong when making predictions.




My 2011 YTD return eclipsed 30% today. This is the first time that it has hit over 30% this year.




This result is unsustainable.




2011 YTD returns*


DOW +5.28%


S&P500 +3.10%


NASDAQ +2.88%


S&P/TSX -2.45%




* does not include dividends




My holdings are Berkshire Hathaway, Fossil Watches, K-Swiss, Columbia Sportswear, The Buckle and American Eagle. The weights are on my website at ticonline.com




I haven't bought or sold anything in 2011. This is similar to 2010.




I am a buy and hold investor. I only hold 6 stocks.




I try not to diversify. I don't use stop losses. I don't re-balance. None of those concepts make sense to me.




For me, it seems that a new stock is added to the portfolio every 3 years or so. I've only sold 1 stock in my brief investing history.




Virtually everything outside of our real estate holdings is in these 6 stocks.




I believe in portfolio concentration, but I think that goes without saying.




Best regards

 

[Thomas Beyer]

Impressive !



2010 of course was an easy year for stocks with both Dow and TSX rising sharply from a low of mid 2009 ... as also evidenced by my wife's RRSP portfolio of corporate bonds and mainly Canadian stocks. Looking forward beyond mid 2011 is not so easy though I'd say !



Questions:



How do you decide to exit stock X and buy stock Y instead ?



Why 6 stocks ? Why not 10 or 20 ?



What % of your portfolio is real estate and what is stocks ?



What's your opinion for folks that wish to enter stocks today ? What is the realistic expectations for a 1, 3 or 5 year stock return ?

 

[2ndstory]

Way to go Jim! Glad to see your continued success in the market. Great example of not over diversifying and investing for value and for the long term. Congrats!



Nik

 

[housingrental]

Hi Rickson



How much time do you spend on research? What percent of portfolio do you keep in cash and liquid assets?



You're approach - from the outside looking in - seems like it would require a LOT of time and expertise on those particular companies and their industries and an ETF strategy would be far better suited for most people.



Thank you for sharing

 

[bizaro86]

Before I looked up the weights on your website, I went through the companies charts, and couldn't figure out how your return was 30% year to date. Then I saw the weight in Fossil, which was by far the best performer of the bunch.



Your letter indicates you believe Fossil to be overvalued, but also mentions your weighting in it exceeds 40% of your portfolio, and must surely be higher now due to its performance. Is there a valuation where you would sell some of your holding? Intuitively it seems that at some level of overvaluation it could be sold and the proceeds redeployed to an opportunity sufficiently better to compensate for the tax burden.



I'm curious to hear your thoughts on the matter of selling.

 

[Rickson9]

[quote user=ThomasBeyer]2010 of course was an easy year for stocks with both Dow and TSX rising sharply from a low of mid 2009 ... as also evidenced by my wife's RRSP portfolio of corporate bonds and mainly Canadian stocks. Looking forward beyond mid 2011 is not so easy though I'd say!




Definitely true re: 2009 and 2010 as the S&P500 was up +23.5% and +12.8% respectively. It was probably easier for the majority of Canadians to invest in 2010 since many like to see an asset class rise before jumping in. It would have been harder for most to jump in in 2009 since their memory would be tied to the -38.5% downturn in 2008.

[quote user=ThomasBeyer]How do you decide to exit stock X and buy stock Y instead ?


First question re: exiting a stock. The short answer is that I don't have an exit strategy. When I buy, I expect to hold for years. Decades ideally. However, there are factors that would cause me to sell including:


1. Needing the money (ie: child's education, retirement, offset capital gains, etc.)



2. Significant reduction in insider ownership



3. Buyouts (King World bought by CBS/Viacom, Oakley bought by Luxottica, etc.)



Second question re: buying stock Y. My criteria for selling (as outlined above) does not include wanting to buy another stock. I will buy stock Y if:



1. It is better than stock X



Stock Y is considered better than stock X if it a) has all the financial characteristics of stock X and is b) cheaper on a P/E and P/B basis. Otherwise, it makes more sense for me to buy more of stock X.



[quote user=ThomasBeyer]Why 6 stocks ? Why not 10 or 20 ?



There is no fixed number in mind. It could easily have been 4 stocks.



To buy the first stock is easy. I screen for insider ownership and financials. This usually leaves me with 2-3 dozen candidates. Then I rank them and I wait.



The wait is usually 3-5 years. During this time a crisis usually happens that takes the price down for some of the businesses.



I'll buy one (rarely two) of my top selections over the course of a year. After a year a rebound usually occurs that forces me to stop buying.



I resume waiting (for approximately another 3-5 years). At this point I will have one (perhaps two) stocks.



When the next crisis occurs I need to determine whether to add a new stock to my portfolio. I will only add a new stock if:



1. It is significantly better than the one I already own.



The new stock is significantly better if a) it has the same financial characteristics and b) is cheaper on a P/E and P/B basis.



If it is not significantly better than the stock I already own, then I will buy more of the stock that I already own.



At a certain point (around 4-6 stocks) it becomes difficult for any new business to be better than the 4-6 that I already own. It becomes increasingly likely that it is better to add to a company that I already own.



I may add a seventh stock, but it would have to be better than all the 6 others - which is not impossible, but increasingly unlikely.



[quote user=ThomasBeyer]What % of your portfolio is real estate and what is stocks ?



Although this changes, it is approximately:


40% stocks


40% real estate


20% cash



[quote user=ThomasBeyer]What's your opinion for folks that wish to enter stocks today ? What is the realistic expectations for a 1, 3 or 5 year stock return ?



I haven't bought stocks in over 2 years. Prices are too high for me (the corrollary is that earning yields are too low for me).



Expectations from purchases made today should be minimal; GIC-like.



I hope that makes sense. My opinions only.



Best regards.

 

[Rickson9]

[quote user=housingrental]How much time do you spend on research?



I spend little time on research. My investing method relys equally on a) stock screening and b) buying when everybody is selling. This means that there is a financial component and an emotional component. I'm beginning to suspect that the majority of my gains is due mostly to the second.



I screen for the following:

1) size ($500m to $2b market cap)

2) high insider ownership (CEO ideally)

3) no debt

4) 10 years of increasing revenue and earnings

5) high returns on equity

6) high profit margin



After applying this screen, my universe of stocks is approximately 2-3 dozen. I put these 2-3 dozen stocks on finance.yahoo.com along with their P/E and P/B and wait for a crisis. I still have the same list of stocks (minus a few that have been bought out) as I had back in the 90s.



A crisis is usually easy to spot because it is all over the news and everybody I speak with is downright negative nancy. Also the P/E goes crazy (either extremely high or extremely low) and the P/B drops hard.



[quote user=housingrental] What percent of portfolio do you keep in cash and liquid assets?



Although my allocations may change it is approximately:

40% real estate

40% stocks

20% cash



[quote user=housingrental]You're approach - from the outside looking in - seems like it would require a LOT of time and expertise on those particular companies and their industries and an ETF strategy would be far better suited for most people.



After the initial screens I don't really do anything. I have no expertise in the businesses that I am invested in. Once I am invested in a business I will read their quarterly reports, but that is about it.



My method is suited for my personality. It is not intended for others with different investing personalities. It is very likely that others would benefit from other strategies such as investing in an ETF.



This is what I mean about my results being more tied to buying when others are not (or others are selling).



Best regards.

 

[housingrental]

Thanks for sharing your perspective Rickson

Very interesting

You have a lot more guts than I do that's for sure

 

[Rickson9]

[quote user=bizaro86] Before I looked up the weights on your website, I went through the companies charts, and couldn't figure out how your return was 30% year to date. Then I saw the weight in Fossil, which was by far the best performer of the bunch.



This is a consequence of the method of investing that I am using. There is a better-than-average chance for a big winner and a less-than-average chance of a big loser. I happen to have stumbled on both.



Fossil only went on a climb in the last 2 years. Before that, it was similar to Berkshire, Columbia and The Buckle - increasing approximately 3 fold since being added.



[quote user=bizaro86] Your letter indicates you believe Fossil to be overvalued, but also mentions your weighting in it exceeds 40% of your portfolio, and must surely be higher now due to its performance.



This is another consequence of the method of investing that I am using. There will be many (many) times where the stock is overvalued during its history in my portfolio. In fact, I would say that 90% of the time, the stock will be overvalued unless something significantly changes with its financials.



[quote user=bizaro86] Is there a valuation where you would sell some of your holding? Intuitively it seems that at some level of overvaluation it could be sold and the proceeds redeployed to an opportunity sufficiently better to compensate for the tax burden.



Another consequence of this method of investing is that I can only find very few opportunities. As I mentioned before, I usually find an opportunity every few years or so. On the other hand, there is an extremely high chance that one or all of the businesses will be overvalued many times during its time in my portfolio. As a result there is often nowhere else to put the money resulting from the sale of an overvalued security.



Something else to keep in mind is that when I mention that a business is currently overvalued I am using currently known results. It doesn't mean that I will sell or whatnot. It just means that I won't pay what the market is currently asking.



In short, my method and personality find that opportunities to deploy capital are few and far between. The opportunities are rare. I usually don't sell because I'm fairly confident that I will make many-fold my initial investment.



[quote user=bizaro86]I'm curious to hear your thoughts on the matter of selling.



I will sell when I need the money (for a child's education, retirement, to offset capital gains, etc.). I have also sold when the business has been bought out (King World and Oakley). They were also bought at at approximately 3-fold.



Otherwise, if the business is doing well, I see no reason to sell.



It is difficult for me to find consistent compounding.



I hope this makes some sense.



Best regards.

 

[Rickson9]

My 2011 YTD return eclipsed 40% today.



This return is unsustainable and likely to collapse after Fossil's quarterly report in August.



The 6 stocks remain the same.



2011 YTD returns*

DOW +8.58%

S&P500 +5.53%

NASDAQ +6.18%

S&P/TSX -0.22%



* does not include dividends

 

[MichelSelim]

What do you think of stock education companies like VictorVest? Would it be helpful for a new investor to save the time and follow their recomendations?

Thanks and congrats on your success.

 

[Rickson9]

Speaking for myself I would avoid any 'black box' algorithms since I don't understand their rationale for business and price selection. I'm more of a read-and-evaluate-it-myself kind of person. I hope that helps. Best regards.

 

[chrisbinder]

Really impressive....great to see your continuing success.Your ways of research are also expertise.

 

[bizaro86]

[quote user=Rickson9]My 2011 YTD return eclipsed 40% today.



This return is unsustainable and likely to collapse after Fossil's quarterly report in August.



The 6 stocks remain the same.



2011 YTD returns*

DOW +8.58%

S&P500 +5.53%

NASDAQ +6.18%

S&P/TSX -0.22%



* does not include dividends



Fossil took a ~35% drop today, on a slight decrease in profit guidance and revenue growth. I'm curious whether you'd consider it a buy at it's current price point, or if you still feel it's overvalued at it's now considerable lower price point.



Regards,



Michael

 

[Rickson9]

Only speaking for myself, FOSL is still slightly overvalued for me. I tend to like prices closer to 10x profit, but have been known to buy stock as high as 14x profit.



I feel relieved at the return to normalcy. The market always seems to bid FOSL up after a good quarter or two - always to unsustainable levels. I'm not sure who is buying FOSL at 30x profit, but it's definitely a good way to lose a lot of money.



The first time FOSL crossed $100 p sh I thought about writing calls because the price was ridiculous (to me). I didn't realize that the market would go to 'ludicrous'. I'm glad I didn't because my shares would have been called away very quickly.



However having said all this, as I mentioned in my letters on my web site, I haven't found anything compelling to buy in the stock market for over 2 years now.



In the last 2 years I've been spending more time focusing on the disaster known as U.S. real estate, although that opportunity appears to have dried at the end of 2011...

 

[bizaro86]

[quote user=Rickson9]I feel relieved at the return to normalcy.


This is a great statement! Very few people would be able to say that after having what must have been a significant paper loss. Of course, if you're not selling, that doesn't matter, since you own the same percentage of a good business that you did before.



Regards,



Michael

 

[bellaswan]

What a very inspiring stories you all got their!!!!