KCLarkin

I think many of the points also apply to lower quality deep value investments.

Make sure you read the research about what happens to investors when they switch funds after a losing streak.

I have made all of those mistakes in the last year. Fortunately, they were mostly in very small positions. Everyone should add these to your checklist. You didn't add excessive sector concentration to your list though?

This is for shareholders only?

How did they manage owning a sizable Berkshire stake? They owned a railroad that was eventually bought by BNSF.

"Invest at the point of maximum pessimism." - Sir John Templeton While that is a good quote, I hardly think it applies here. Shares of HCG were up almost 20% in 2014. The quote was in reference to the negative sentiment on Canada not HCG. I don't think we're at the point of maximum pessimism on Canada yet but the other half of the quote "sell at the point of maximum optimism" may apply to the U.S. market. If HCG falls another 20%, then I will open a thread for more debate. At current prices, I am aware of the risks and the position is sized appropriately.

"Invest at the point of maximum pessimism." - Sir John Templeton

Why didn't the Canadian housing bubble collapse in 2008? And if it didn't collapse in 2008 during a worldwide financial panic, why would it collapse in 2015? America's sub-prime lender (Countrywide) had delinquent loans of 11%, 15%, 19% in 2004, 2005, 2006. Canada's sub-prime lender (Home Capital) had delinquent loans of 0.35% in 2013. "The bubble in America was caused by some combination of megalomania, insanity and evil in, I would say, investment banking, mortgage banking,” Charlie Munger.

78% of loans are in Ontario. Only 5% in Alberta. Geographic concentration is a risk but the limited supply of detached homes in GTA (due to provincial policies) does partially justify the astronomical prices in Toronto.

Are you not worried about the CDN housing market? What will happen to HCG earnings if the market corrects 40-50%? I'm not done buying yet. So yes I am very concerned. Please short HCG! A few reasons why I think the concern is overblown: - Most mortgages in Canada are full-recourse. Strategic default isn't an option so a dramatic, nationwide drop (like the U.S.) is very unlikely. It also means that unemployment is the key metric to watch. As long as borrowers are employed, HCG would be able to recover a significant portion of any defaults even if houses were underwater. - HCG has a Loan-to-value ratio on its uninsured portfolio of 65%. That means that house prices would need to drop 35% and borrowers would need to default before their would be significant losses. - Why would house prices drop 40-50%? The most likely cause would be a dramatic spike in mortgage rates. Do you see any evidence of that happening anytime soon? - Unlike U.S. lenders, HCG keeps most of its loans on its own books. It has a very large incentive to maintain credit quality. - Most of HCG's loans are in Ontario. Ontario should benefit from the low Canadian dollar. Am I worried about Canadian house prices? I have been worried since at least 2000. In the meantime, HCG has grown 24% per annum. At a 10x PE for a stock growing 15% per year, I think I am getting compensated for the risk. I just wish it was cheaper. In 2013, I think I was buying it at 8x not 10x.

When I talk about concentrated portfolios, I mean a core portfolio 6-10 stocks. That means a maximum of ~15% in any one stock. Anything above 20% is probably not prudent (unless you are WEB).

O'Shaughnessy: "Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was..." Ritholtz: "They were dead." O'Shaughnessy: "...No, that's close though! They were the accounts of people who forgot they had an account at Fidelity." So that could mean those accounts held mutual funds, ETFs, cash, anything. They didn't necessarily hold "hand selected high-quality stocks". There's a lot that that few sentence quote doesn't say. A forgotten basket of almost anything would beat the returns of most active individual investors. I suspect a basket of low-quality stocks bought by monkeys might do the trick: http://www.businessinsider.com/typical-investor-returns-20-years-2014-8

We've seen this story before. Maybe this time is different but you're going to have to prove it. In 1990 the price per barrel of oil averaged $23 due to the gulf war. Over the next few years the average price fluctuated between $15-$20 -- in 1997 the price per barrel was $19. The next year Oil prices plummeted, with the average oil price at $11.91. We had articles like these : http://www.economist.com/node/188181 http://money.cnn.com/1998/11/30/economy/oilprices/ Sound familiar? Oil was heading to $5 a barrel. I remember hearing about how technology would leave oil worthless and useless. Funny thing we're still using oil. How did Exxon Mobil do during this time? It was roughly up 350% including dividends. How did it perform during the drop between Jan 1997 to Jan 1 1999? It was up 50%. Drillers and the oil equipment companies were bloodied... just like they are now. There is a big difference: margins have been squeezed for the last 10 years even with crude at USD 100. Oil majors aren't the cash cows they were in the 90s – they are slowly deteriorating. I'm not arguing that oil will be up again sometime, I'm arguing that oil majors will face serious cash flow reductions. Everybody is essentially speculating that oil is going to shoot up within a very short timespan and that oil majors can therefore keep their high dividend payout ratios. The majors are integrated oil companies. Their refining and chemical businesses give them a natural hedge against falling oil prices. They also have the cash flow to pickup distressed assets, if they become available. The odds of XOM cutting the dividend in the next 5 years is surely less than zero. In other words, they will certainly raise their dividend. XOM's PE ratio has been compressed because they are depleting their reserves. Depressed oil prices should make it cheaper for XOM to replace their production.

O'Shaughnessy: "Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was..." Ritholtz: "They were dead." O'Shaughnessy: "...No, that's close though! They were the accounts of people who forgot they had an account at Fidelity."

This book saved me from trying to catch the falling oil & gas knife. The history of oil & gas independents through boom and bust cycles was well worth the price of the book.

HCG.TO

Interesting that: 1 - All of your winners are North American and IP or brands. 2 - Most of your losers are foreign or commodity-based This might suggest one of two options: 1 - Foreign and resource-based companies are outside your circle of competence 2 - Your losers just reflect that it was a bad year for commodities and international stocks

33% total return on my actively managed portfolio. 3rd year in a row at 30%+. Amazingly, 11 of my 12 stocks beat the S&P 500. I will never repeat that hit rate. IBM was my sole loser (down 6%). Notes: - total return is dollar weighted return (using quicken) - currency effects are excluded (I think). Actual return would be higher due to strong US dollar. - returns are unlevered (I think). Actual return would be higher due to modest amount of leverage. - my portfolio is currently 50% passive. I am moving towards 100% active.

You also need to be aware of hidden correlations. You might have a high hit rate because you own a diversified group of high debt companies that are all benefiting from low interest rates. Or tech stocks in the tech bubble. Or finance companies in a credit bubble. If you aren't a bad investor betting on 50 companies isn't likely to improve things much. If you are picking stocks, concentrate. If you are diversifying, buy an index fund (or use a quant screen).

Kevin, I think your caution is reasonable but I'm sure you know oil pricing behaves different from natural gas: - Oil is a global commodity (easy to export), NG is local. So increased US production will have a larger relative impact on NG pricing. - NG is often a byproduct of oil or liquids production. So normal laws of supply and demand break down.

I am saving my post until Jan 1. But I agree that there is a real danger of readers developing envy based on some of the outliers in this thread. I almost succumbed to this temptation last year. If you didn't do greater than 15% this year remember a few things: - In any normal distribution, there will be people who get 50%+ returns from luck alone - Most people who are listing 40%+ returns are using (possibly dangerous) amounts of leverage - In a world of 2% interest rates, compounding at 10-12% is phenomenal I frequently see posters dismissing people like Yacktman because they only outperform by 2 or 3%. Keep your expectations reasonable and you will be happier and safer.

Well I agree that there are bargains in O&G juniors, this is nothing like 2009. A quality company like CNQ is only down 27% peak-to-trough. In 2008/2009, you had companies like BRK and AAPL down 50% from their peaks. Most of the bargains in O&G juniors face real financial distress.

Thanks Vinod. I need to start doing this for my investments. I did one on Vistaprint and it was very helpful to validate my thesis after the price changed dramatically. The price rose well above my initial sell target but I had the confidence to hold on because of the report. Looking back at my winners, most had a "negative catalyst". In other words, there was some temporary problem that allowed me to purchase the stock on sale. I see you have "why is it cheap" in your recommendation section. I think this deserves it's own sub-heading.

Jawn, here is a riddle for you: IBM's mainframe business grew 72% YoY in Q4 2010. How did a nearly 50 year old technology grow 72% YoY? My guess: They introduced a new model (System z), so people stopped buying the old one and waited for the new one to come out. ;) Sales of System z mainframes were up nearly 70 percent in the quarter: http://www.eweek.com/c/a/Finance-IT/IBMs-Q4-2010-Profits-Driven-by-Hardware-Software-Growth-Markets-433045/ Okay, so let's say that Mr. Market believes that IBM's revenue is down because the cloud is killing their mainframe business. Mr. Market doesn't pay much for dying businesses. But what if revenue is down for other reasons? Maybe they are in a soft spot in their mainframe product cycle? What happens when they launch the next model of System Z? My point is that you (Jawn) are presuming that IBM is a value trap because the stock is down. It might be a value trap but you can't rely on Mr. Market to make that decision for you. http://basehitinvesting.com/thinking-differently-the-most-important-contrarian-behavior/

IBM