Tuesday, January 02, 2007

Truth, Trust, Transparency and Blogging- A Year in Review

Happy New Year to all!

Well, it's report card time at Value Discipline. A time to separate facts from fiction, to separate performance from good intentions, and to provide some greater transparency and hopefully trust for our readers.

A reminder is appropriate at this time...the purpose of this blog is not to recommend stocks, but to portray a philosophy, a systematic way of thinking, and to avoid the self-destructive financial behavior that is endemic to the trading community and many individual investment portfolios.

In the Value Discipline blog, I comment on stocks and their valuation rather than construct portfolios. There is an important difference between stock picking and portfolio construction.

Constructing portfolios should not be done on an ad-hoc basis, rather, it should be done professionally with attention paid top objectives and constraints. That is best performed by seeking investment counsel from a well-versed professional. On behalf of my firm, I would be pleased to offer our help.Please contact me if interested.

I have provided a spreadsheet of all posts since the inception of Value Discipline. Not every post contains specific security advice, but many do. In keeping a scoreboard, I have been necessarily harsh on myself. Every single ditty, whether mentioned as an aside or as a specific view has been included. Every stock on which I expressed "fully-valued" or "fairly valued" or "neutral" opinions has been classified for these purposes as a short.Every stock where there was some inkling of undervaluation has been included as a long.

Here's the record:

Overall, there were 74 stocks mentioned on the "long" side. Of these, 55 resulted in gains or 74.3% successful. I had hoped to do better than the blind-folded monkey, but these results are far better than one should ordinarily expect. Overall, longs resulted in returns of 14.2%...I have not yet checked how each of these, with varying time periods has done versus the S The winning "trades" were up on average 22.84%, the losers lost an average of 10.81%.

There were a total of 28 instances of "shorts." Of these 15 were winning shorts for a winning percentage of 53.57%, slightly outperforming the blind-folded monkey. The average gain on the winning shorts was 13.51%, not a bad performance in a winning year.

Here's the spreadsheet link.

Biggest winners on the long side were Almost Family (AFAM) up 210% since January, Novo Nordisk (NVO) and Sherwin Williams (SHW) both up about 55%. Agrium (AGU) quietly developed a 46% gain since its mention here. Biggest winners on the short side were Aspect Medical (ASPM) with a 50% gain and Boston Scientific (BSX) with a 28% gain. It is im[ortant to note that these shorts are no longer in place.

Worst performing longs were in media stocks with underperformances by Westwood One (WON),and Radio One (ROIAK) The worst performing shorts included Phelps Dodge (PD) which was subject to a takeover and Turbochef Technologies (OVEN) which was recommended in Barrons despite recording one profitable year in its 15 year history.

What will 2007 bring in terms of returns? Barry Ritholtz cites Abelson's column re insider selling (Sub required) My friend, Bill questions the insider stats, and I agree that blind reliance on this single statistic can be terribly misleading, especially at year ends. Tax planning frequently supersedes sensible investment judgment especially at this time of year. Sentiment measures are all over the map with blogger sentiment running far more bearish than other sentiment measures such as AAII which is currently running 46% bullish, above long term averages.

I remain quite optimistic about finding reasonable values within this marketplace. Sentiment is confused and not terribly decisive in either camp.Investors' conviction about being in the stock market seems lackadaisical at best. I believe investors are more bewildered and perplexed than they are bullish. The slaphappy, nonchalant, self-assured bullishness that precedes most significant corrections is not there, at least in my view.

Valuations for most stocks are fairly level-headed for this interest rate environment. Though huge bargains do not abound, careful digging will unearth some decent values in my view.

Here's wishing you a healthy and properous 2007!

Disclaimer: I, my family or clients hold a current long position in NVO, SHW, AGU, and WON.

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