It's amazing how quickly the tide changes. A few months ago, it was almost impossible to find an economist who was bullish on the American economy. Pundits were blabbering about 'double-dip' this and 'flat GDP growth' that. Fast-forward to today and economists are painting a starkly different picture. The consensus for GDP growth is predicted at a modest 3% figure, and analysts are expecting a stock market rally until year end. My point is: NEVER DOUBT THE AMERICAN ECONOMY. To prove my point, lets look at my portfolio valued at my first post (8/20/11) and look at the annualized return to date. I listed my portfolio in my prior post.
(N.B: I'm listing the price per share as of 8/20/11, 10/28/11, the return over that period, and the annualized return)
(I) Caterpillar (CAT) - $79.97, $96.85, 21.1% = annualized return of 171.3%. - that's almost double your original investment in profits!
(II) Bank of America (BAC) - $6.97, $7.35, 5.5% = annualized return of of 32.2%
(III) Apple (APPL) - $356.03, $404.95, 13.7% = annualized return of 95.3%
(IV) Baidu (BIDU) - $126.98, $144.2, 13.9% = annualized return of 97.1%
(V) Philip Morris (PM) -$68.83, $72.12, 4.8% = annualized return of 27.7%
(VI) SOHU (SOHU) - $69.01 - $69.00 = 0% annualized return
(VII) Citigroup (C) - $26.77, $34.16, 27.6% = annualized return of 256.4%
So weighting each stock based on total investment, the total weighted annualized return is 78.63%. Lets also be conservative and assume a 1% dividend yield across the portfolio, bringing the return up to 79.63%. Think about that. If you invested $100,000 as of 8/20, you would have made $79,630 profit in a year, bringing the total value of your portfolio to $179,630. Not bad eh? Especially in today's economy.
So what lessons can be learned from all of this? Here's my thoughts:
(i) ALWAYS BE CRITICAL OF THE PUNDITS:
Pundits may be so-called experts but remember, they're also heavily invested in the stock market. This being said, they're only going to publicize opinions that would benefit their portfolio. A bearish investment banker who's placed a lot of short positions always advocates that the economy is in dire straights because that leads to investors overreacting and unloading their investments. This drives down the stock prices which makes short positions very lucrative for the investment bank.
(ii) USE HISTORY AS A GUIDE
I've only been investing for a few years and there's already been countless times when the market may have pulled back due to sovereign debt crises, lack of clarity from the federal reserve etc. It seems that during these sour situations, the average investor assumes the market will never recover and starts selling their investments at significant discounts. My point is, look at all the low points in history, whether it be the crash of '87, the great recession of 2009 or even the depression. Statistically, the market performed significantly better 3 months, 6 months and even a year after these times. Just have a little patience. Don't overreact and sell. Unless there is something fundamentally wrong with your companies, then don't sell. Wait and prices will go up!
(iii) DO YOUR RESEARCH
Don't invest on your gut feeling. Do the research. Look at the technicals and fundamentals of a company. Critically read the analyst reports and digest as much information as possible.....knowledge is the key here. If you want to make money, then you need to put in the work and do your homework. Also, vary your analysis for each company. For example, the P/E ratio of a relatively young company isn't a good indication of future profitability as expenses are generally high during the initial stages, thereby distorting the P/E ratio. However, this ratio is a much more useful tool of gauging the profitability and historically relative cheapness of a more established company such as Caterpillar.
Interested in my current portfolio? Here's the breakdown:
(i) Caterpillar (34%) - Heavy-Industrials/ Construction. Should be the first industry to grow rapidly during global recovery
(ii) Bank of America (18%) - Financials, trading well under book value
(iii) Baidu (20.2%) - Chinese search engine/advertising- the Google of China
(iv) Sohu (12.7%) - Chinese internet portal/ online gaming
(v) John Deere (4%) - Agricultural/ Construction equipment. Good play for global expansion and rising food costs
(vi) Netflix (6.4%) - Company had made a lot of recent mistakes but I bought this at a huge discount and there are a lot of overseas opportunities
(vii) Dang Dang (3.7%) - Chinese E-Commerce, up and coming Amazon of China
(viii) Citigroup (0.1%) - financials - trading well under book value
(ix) China New Borun Corp (0.1%) - good volatility play
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