2011 Annual Investment Performance Review

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On the one hand I am pleased that I did not lose much money during the last year, while many hedge funds had a disastrous track record.  On the other I am very disappointed to break my streak of outperforming the S&P 500.  It could also have easily been a very different story.  Later I will delve into a reflection on learnings from the year.  But first let’s see the results……

Leprechaun Investor saw a slight loss of 3.2% for the year, compared to the total return for the S&P index (including dividends) of 2.1% in positive territory.  The long term results are updated in our tracking table.  Of course the Buffett figures will be added later in February.

S&P 500 Difference Buffett Difference
1996 255.2% 23.0% 232.2% 31.8% 223.4%
1997 57.9% 33.4% 24.5% 34.1% 23.8%
1998 21.3% 28.6% (7.3%) 48.3% (27.0%)
1999 89.6% 21.0% 68.6% 0.5% 89.1%
2000 (0.3%) (9.1%) 8.8% 6.5% (6.8%)
2001 (47.7%) (11.9%) (35.8%) (6.2%) (41.5%)
2002 (55.8%) (22.1%) (33.7%) 10.0% (65.8%)
2003 114.0% 28.7% 85.3% 21.0% 93.0%
2004 (13.9%) 10.9% (24.8%) 10.5% (24.4%)
2005 42.8% 4.9% 37.9% 6.4% 36.4%
2006 9.8% 15.8% (6.0%) 18.4% (8.6%)
2007 10.3% 5.5% 4.8% 11.0% (0.7%)
2008 (10.5%) (37.0%) 26.5% (9.6%) (0.9%)
2009 30.1% 26.5% 3.6% 19.8% 10.3%
2010 40.8% 15.1% 25.7% 13.0% 27.8%
2011 (3.2%) 2.1% (5.2%)

The long term record continues to look very bright with the 5 year performance in the charts below, comfortably exceeding the benchmark.  Of course I am always happy to accept some short term volatility or underperformance in exchange for better long term results.

Leprechaun Investor outperforms S&P benchmark easily over 5 years

Portfolio performance over 5 years (2006 to 2011)

Mis-timing some key macro trends

Looking at the macro level, this was a year where getting timing right meant everything.  My general positioning for the year was bullish for gold/silver, energy and pharma, with an especially strong weighting to gold mining stocks, and neutral on general stocks.  In the relative performance chart on the right you see strong volatility compared to the benchmark, until beginning in the 4th quarter performance began to track the market.  Note that this period of this chart is actually end January 2011 – end January 2012.

Leprechaun Investor portfolio was very volatile relative to benchmarks

Relative Performance of Leprechaun Investor compared to Benchmarks

The peaks in April and September were due to strong gold/silver performance.  This could have been even better if I had more gold relative to silver, but I avoided silver (the real big winner) because it really is a risk-on play (and I wanted to be conservative – rightly so considering the poor stock markets and Euro crisis).  Secondly the metals performed far better than the miners.  Now, in early 2012, it finally appears that miners have touched the bottom of their valuation range compared to the metals, so hopefully this will pay off in future.

Secondly I did not lock in gains at some of the key turning points.  It would be nice to predict the tops perfectly, but it is always better to stay with the momentum.  Rather than pick perfect tops, I prefer to get the timing right for buying when fear is at it greatest.  Nevertheless one key missed opportunity was in September, when I was sure that after gold/silver had started its initial plunge, that they would bounce back together with the broad market in a relief rally before another plunge.  When the relief rally failed to materialize I should have just sold.

Diversification in individual trades helped

Looking at major gains in individual stocks there is no single sector play that was overwhelmingly successful.  The main theme that paid off was in written puts to profit from the high volatility of stocks during the fall sell-off.  RIMM also stood out for exceptional gains on the short side.

The clear theme on the losses for the year, was the repeated disappointments in biotech.  I believe this is a critical sector for long-term gains so I persevere to find the right approach.  I learnt from previous years to have a more diversified basket of stocks.  Unfortunately most of the basket were losers!  I tried to apply more technical charting to the stock selection since it is impossible to get an edge on what drugs will be approved or not by the FDA.  However I entered stocks after the initial run up and did not avoid shock selloffs on sudden bad news.  Two patterns seem promising to improve returns from biotech stock investing: 1) to invest in companies well before an FDA event, and to sell just before the event occurs (however this is too much work for me to track), 2) if a stock starts underperforming, sell first and ask questions later, but if a shock selloff has already occurred continue to hold, because almost without fail these stocks eventually recover the price before the crash.

The new year 2012 has started very promising, and we aim to recover our outperformance track record once again.

Update 31 Jan, 2012: I just saw the 2011 results for the panel at Barron’s Roundtable as compiled by PunditTracker.  So I can’t really complain after beating all but three of these star investment advisers.

2011 Returns
Fred Hickey 9.2%
Felix Zulauf 6.4%
Mario Gabelli 5.6%
S&P 500 -1.1%
Abby Joseph Cohen -2.7%
Meryl Witmer -3.9%
Roundtable Average -5.0%
Oscar Schafer -6.1%
Marc Faber -12.3%
Scott Black -13.6%
Archie MacAllaster -27.8%
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