2012 Story

[Rickson9]

Since "success" is in the eye-of-the-beholder I decided to call this a simple "story".



As some may know, I only invest in U.S. stocks and real estate (currently only in Toronto and Phoenix, AZ). 2012 has been very disappointing as all opportunities have dried up in both of these markets.



I have no expertise in any other market so I am sure that I am limiting myself, but I feel that it is better to be somewhat good at picking assets in one or two classes rather than being mediocre or poor at picking assets in dozens of classes.



This year's success has been primarily centered around raising my baby daughter as there is nothing in the U.S. stock market or real estate to distract me. Perhaps this is how it was supposed to be. Who knows. It worked out.



After taking a pause last year, the U.S. stock market took off again in 2012. YTD returns (excluding dividends) are as follows:



NASDAQ +17.6%

S&P500 +12.6%

DOW +8.5%

Chuong +10.8%



Since I've been benchmarking myself against the S&P500 for the last 15 years or so, this puts me behind with a little over 4 months to go. Again, my return has been based on doing nothing - buying nothing and selling nothing. I've had no more than 6 companies in my portfolio for the last one and a half decade. Again, I don't feel that there is any point to holding more. I'm definitely not able to keep track of more myself, but that's just me. Besides, compounding 6 companies at double digit returns for 15 years seems to build up the net worth very pleasantly.



Going into 2012 I was hoping to really push into Phoenix, AZ with a lot more buying. The idea was to literally double down on what I had already purchased in 2010 and 2011. However, fate had other plans as the door closed firmly before the end of 2011 as prices literally took off. Even though rents are rising as well (it is odd to have both prices and rents rise, but I'll take it), they are not rising fast enough to make these properties worthwhile as investments at current prices. Gross rental yields have moved from over 20% to 14%. A 14% gross rental yield (7% net before taxes) is not worth it for me.



Each property that I hold in Pheonix, AZ is generating a little less than $400 per month before tax. It is nice to know that by waiting for the right opportunity, I generate with one door what some people do with 4 or even 8 doors. Even after taking off half my gross revenue for expenses. And with far less risk since I haven't needed to employ a cent of debt.



The properties have also increased in value by 15%-20% over the last year or so. That is somewhat irrelevant since I'm not selling. However, it may come into play if I decide place liens on them.



In my history as a small investor I have always encountered resistance to what I do. Mostly because I take advantage of painful situations. When prices fall, I make an appearance and take assets from panicked investors looking to throw them away. It probably doesn't help that I'm very happy as I'm doing this either.



In addition to panic, many around me also feel that I'm making a big mistake going into what they perceive as an inferno. However, I don't see it that way - the harder the price falls, the faster I see risk fade away. I never understood why people were MORE cautious when prices fell by 75% to $40 p sq ft. It boggled my mind. I felt that the risk just evaporated by 99%. I just don't think I'll ever understand the average person in this regard.



Vice versa. When prices are consistently rising, I become more agitated and fearful. It is what it is.



All I know is that buying during really bad times has made me a lot of money and I'm loathe to go against my encouraging short-term results.



When I face resistance to what I am doing, I often am reminded by a multi-millionaire that I had the fortune of meeting. He was far wealthier than I will ever be, and he said, "F-them and F-their opinions. Opinions are irrelevant. All that matters is results. Results man. What are their results in that market? If they don't have results, their opinions are worth sh-t."



Not very eloquent, but it made me laugh. However, a more refined and elegant quote that I also use to remind myself is this:



"Do just once what others say you can't do, and you will never pay attention to their limitations again."



So I will.

 

[obiqo]

Congrats on a fruitful 2012. Your level of financial success is quite inspiring, especially having accomplished it by such a (relatively) young age. I checked out your website and signed up for your email list.





You mentioned in your post that you take advantage of painful situations by buying during times of crisis when everyone is in a state of panic and offloading their shares.









What are your thoughts on the fiscal policy changes scheduled to take effect at the beginning of 2013 in the US and their effects on global markets? Do you anticipate a major sell off from panicked investors? In connection to your investment strategy, is this the level of crisis that would present an opportune time to swoop up shares?












Looking forward to your reply.

 

[Rickson9]

[quote user=obiqo]What are your thoughts on the fiscal policy changes scheduled to take effect at the beginning of 2013 in the US and their effects on global markets? Do you anticipate a major sell off from panicked investors?



I get many similar questions, but my answer is usually the same - I don't know. I don't really think about what may or may not panic investors. All I do is act when investors are panicked. Until that time, I just go about my daily routine.



[quote user=obiqo]In connection to your investment strategy, is this the level of crisis that would present an opportune time to swoop up shares?


For the stocks that I am interested in, I try to get as close to a P/E of 10 and a P/B of 2.

 

[Rickson9]

Two months to go to end 2012.



Phoenix, AZ real estate +27%*

Stocks +18.5%**



Dow +8.3%

Nasdaq +15.9%

S&P500 +13.5%

S&P/TSX +4.6%



* cash on cash return of 10%

** includes dividends



2012 is another year that has further convinced me that investing more money in a normal market is vastly inferior to investing less money in a distressed market.



It makes sense for me to do nothing in during times of a normal market. Unfortunately all markets where I have a little bit of knowledge have normalized, so I go back to watching Treehouse with my daughter. She just turned 1 last week. Fun times.

 

[GaryMcGowan]

There is always opportunities in chaos! Nicely done Rickson. The real win is now you get to spend time with your daughter.

 

[Rickson9]

One month left until the end of 2012. Another year, and almost no investments made. Almost. I'll get to that later.



With regards to stocks, this is how things stand in 2012 YTD:

Dow +6.6%

Nasdaq +15.6%

S&P500 +12.6%

S&P/TSX +2.4%



I benchmark myself against the S&P500 and currently stand at +17.7%. Hopefully this holds and I can put another winning year behind me.



I only hold a few stocks. Namely, Berkshire Hathaway, The Buckle, American Eagle, Fossil Watches, Columbia Sportswear and K-Swiss. I've had some of these stocks since 1998. In aggregate, they run like a solid rental - profits every year like clockwork. Fingers crossed.



My return includes dividends whereas the aforementioned index does not. This is a non-trivial difference this year because The Buckle (BKE) and American Eagle (AEO) paid out a $4.50 per share and $1.50 per share "special" dividend respectively. The lump sum payout is in December so that's a nice Christmas gift. This is to avoid the changes to the tax code on treatment of dividends. Unless Congress acts, dividends will no longer be taxed at a piddly 15% rate.



Daniel Hirschfeld is happy. He's the CEO and owns 16,000,000 shares of The Buckle (BKE) so he'll be getting $75 million in dividends in a few weeks.



Other happy individuals include Jay Schottenstein and James O'Donnell who own 940,000 and 2,000,000 shares of American Eagle (AEO) respectively. Jay actually got me interested in company a few years ago. I saw him buy a ton of stock at $10 per share which piqued my curiosity. Once I saw that James also owned a huge stake, I decided to join them.



I prefer to invest alongside other large shareholders because I'm lazy. Riding coattails is the easiest way that I know to make money in the stock market. A large shareholder always acts in their best interests which is basically the same thing as my best interest.



...



My wife and I have contributed $5k to our TFSA every year since their introduction in 2009. This is a total contribution of $40k. The accounts currently stand at a little less than $90k. This rate of return will drop over time. It's always high in the early going.



It was just lucky happenstance that the TFSAs were introduced at the depths of the last stock market crash (they bottomed in March 2009). Although I didn't know it was a bottom at the time, I purchased stock in Fossil and The Buckle.



I haven't found anything much to buy for our TFSAs until this year. I added Guess? (GES) at prices ranging from $22 to $24. Brothers Paul and Maurice Marciano own 300,000 and 100,000 shares respectively so I've hitched my trailer to their fortune. Actually insiders control 30% of the stock. I've probably hitched my trailer to the entire board of directors.



Guess? is having problems right now so we'll see if they can recover. I'm most comfortable buying assets when there are problems. I don't like rosy optimism when it comes to investing. It's not foolproof, but for me it's been pretty close.



GES issued a $1.20 per share "special" dividend too. I didn't expect that, but I'll take it.



...



Phoenix continues to do well. I haven't bought anything this year, but I'm still looking. Properties that I purchased in 2010 and 2011 are running like clockwork. My property manager (CR Property Services) keeps me updated with monthly statements and phone calls (if necessary). Prices have gone up anywhere from 20% to 30% depending on location and property type. I purchased my properties at a gross rent multiplier (GRM) of 5.



One of my units experienced a pipe leak that impacted a bedroom in one of the properties. It happened on a Friday. Thankfully the tenant spotted/reported it. The property manager dealt with it within a day (Saturday). The pictures looked messy with all the cutting of the drywall to get to the pipe, parts of the carpet damaged, fans on the ground drying the room, etc. I had to have phone conversations with my PM, insurance agent, and insurance adjustor, but in short, I paid my $1k deductible and another $1k for items that insurance didn't cover. That effectively ate up 6-7 months of profit for that property so that's not good.



That's pretty much it. One more month to go and it's time to start the game all over again for 2013...

 

[housingrental]

Thanks for the post

Do you have any strategy to deal with currency value changes?

If so, what and costs and is this included in your returns?

If not, do your returns account for currency? If not, and these are included, what are the numbers?

 

[Rickson9]

[quote user=housingrental]Thanks for the post

Do you have any strategy to deal with currency value changes?


I do not have any strategy to deal with currency value changes. From my readings some believe that currency issues tend to cancel out over long periods of time. I guess I am testing this assumption and will see how things play out over the next 25 years (i.e. when I turn 65).

[quote user=housingrental]If so, what and costs and is this included in your returns?


Currency changes have not been included in my returns. Investments during the tech wreck in 2002 saw $1 CAD = $0.65 USD. Investments during the 2008 credit crisis saw $1 CAD = $1.10 USD. I only mention those two periods of time because they involved larger investments than normal.



Today the USD and CAD are at parity. I don't know how things will play out going forward. Again, my assumption is that it will look similar to the aforementioned image. Time will tell.



[quote user=housingrental]If not, do your returns account for currency? If not, and these are included, what are the numbers?


My returns do not account for currency changes. If they are accounted, I do not know what the returns are. The following are my USD denominated returns:



Year Chuong

1998 +68.0%

1999 -4.9%

2000 +18.7%

2001 +21.0%

2002 -1.8%

2003 +33.0%

2004 +26.2%

2005 -3.6%

2006 +8.6%

2007 +22.4%

2008 -33.4%

2009 +31.6%

2010 +56.5%

2011 -4.7%

2012 +17.7%*

* Nov 2012



Bolded years are years in which I was beaten by the S&P500. These returns were achieved by buying and spending the 99% of my time holding. No active management. No asset allocation. No meaningful diversification. No sector rotation. Simply buy when the market or an identified company's share price tanks, and then forget.



If someone is interested perhaps they can adjust my returns to take into account the fluctuations between the CAD and USD.

 

[housingrental]

Thanks for the detailed response, it's appreciated!



I have a healthy fear of currency changes It adds more risk that is difficult to control / costly ($ and time) to mitigate for the small investor.



Anyone have a practical solution? (any foreign ETF's or mutual funds with currency hedging built in? other ideas?)

 

[Rickson9]

And 2012 ends.



Dow +7.3%

Nasdaq +15.9%

S&P500 +13.4%

S&P/TSX +4.0%



Me: +18.9%



Fortunately I beat the market again; this year by 5.5%. The returns of the indexes did not include dividends. Adjust as you see fit.



Phoenix property prices increased dramatically for me. Condo price were up 30% and detached home price were up 100%. Rents were slightly higher, but not significantly so.



The huge disparity between equity run-up and rents have crushed my gross yields by double digits. I will be looking to extract equity in the coming years. There is no point tying up large amounts of equity to produce $750 per month per door in rent.



PS: people who told me that I was crazy to load my TFSA accounts up with individual stocks when the TFSA was introduced in 2009 and people who told me that I was crazy to load up on Phoenix real estate in 2010 and 2011 were right. The amount of money pouring in is pretty crazy. More than even I anticipated.