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2016 Lessons Learned

When reviewing my investing activities and performance in 2016 the common theme was allocation of capital and each year as I get older the more I find my focus is on quality, prudent portfolio management and on increasing tax efficient cashflow from my investments (dividends).

My large cash position of 30% at the start of 2016 was utilized throughout the year with purchases of existing positions taking up the majority of this reduction in cash. There was very little turnover in the portfolio throughout the year. Turnover was contained to removing Shaw Communications (SJR.B) from the portfolio and replacing it with Rogers (RCI.B). I sold outright my positions in TransCanada (TRP) initiated after the Keystone XL rejection in late 2015 and in Manulife (MFC) that I had initiated in February 2016 when markets moved down.

Current Sector Allocations are:

Financials 14.3%
Industrials 9.5%
Pipelines 9.9%
Consumer 14.8%
Utilities 13.9%
Telecom 6.0%
REIT 3.1%
Holding Co 4.1%
ETF 16.2%
Cash 8.2%

The total return for the overall portfolio (RSPs, TFSAs, RESP & Non-Reg) was 15.5% including dividends with an average dividend yield of 3.15%. Saputo (SAP) and Capital Power (CPX) remain as the largest holdings in the portfolio at 4.1% each.

My best move by far in 2016 was moving into an overweight position in CPX as the price dipped below $17.00 in late 2015 to early 2016 after the announced plans of the Alberta NDP government to cancel coal powered electric plants early. I felt I understood the power purchase agreements well enough to commit that Capital Power could cancel their PPA legally and that to continue operations the provincial government would either challenge it in court (and lose) or have to compensate CPX for the decision to phase out operations by 2030. I also liked the confidence their CEO Brian Vaasjo projected to shareholders, the media and the market including the dividend raise in July of 6.86%. I had priced in a much longer term process to resolve the cancelled PPA’s, but I’m happy with an earlier resolution and may have to trim my position in 2017 if it continues to do well.  My yield on cost at present is 8.2%

Saputo is no stranger to my portfolio as I’ve held a position in the company since early 2002. Saputo is one of my original investments in a now retired Value Portfolio. The Value Portfolio had a CAGR of over 20% for nearly 8 years while I was completing my post secondary education.  To say it was time consuming to manage is an understatement.  As I’ve gotten older the need to feed my investing ego has waned and I’m content with a CAGR of 10-12%. One of my Values Rules I still keep from my initial portfolio is to never fall in love with a stock, but Saputo is one I have always had a serious crush on. It would take a lot to remove this from my portfolio for many reasons. It is rarely cheap, it consistently raises its dividend and has a history of making patient acquisitions with meaningful impacts to earnings. In my eyes this has always been a Canadian company Buffett would invest in. From time to time I overweight a position up to 5.5% when the stock is down, but more often I am trimming as the stock moves upwards and take a larger allocation of the overall portfolio. When I do sell I always say to my Web Broker; “I hate to see you go, but I love to watch you leave.” $$$
I know the answer, but I often wonder how much my initial investment would be worth if I had never sold a share. Unfortunately I’ve needed the capital to allocate to other positions I would not have otherwise been able to purchase without the proceeds from the sale of Saputo intermittently over time. It has rarely disappointed me, but I am always aware that at any time in the future an investment can go to $0.00 and I will not accept unnecessary risks because of poor decision making.
Rule #1 is NEVER LOSE MONEY.
Rule #2 is SEE RULE #1.

I also trimmed down the number of US holdings I had considerably in 2016. I am still holding onto Coca-Cola (KO), Hormel Foods (HRL), Johnson & Johnson (JNJ), Berkshire (BRK.B) and Aflac (AFL) but sold long held positions in Kimberly Clark (KMB), Procter & Gamble (PG), Colgate-Palmolive (CL) and Becton Dickinson (BDX) moving those proceeds into VOO & VYM. ETF’s now account for just over 16% of the portfolio with a mindset that for exposure to certain sectors such as real estate investment trusts (REIT) I don’t have the time anymore to do such detailed assessments and valuations. ETF’s also give me a highly correlated return for a very reasonable price, are highly liquid and provide little change in overall income when held within the TFSA. I am also quite convinced that the S&P500 will outperform (including dividends) an individual collection of stocks over the next 20 years. What I’ve chosen to do is focus on a small core group of investments with a high dividend growth rate to help add cash (USD) for future purchases while participating in the market overall affordably.

 

2016 was good to my portfolio overall so I really had few complaints.

It was definitely the year where investors and the market overall had zero (and I mean ZERO) patience for an earnings miss, uncertainty or any kind of negative news. I am glad I had cash on the sideline because it allowed me to take advantage of opportunities, mostly short-term, that I otherwise might not have taken. This included a heavy over weighted position in Finning (FTT) as it was up 40%+ YTD and initiating long-term positions in WSP Global (WSP) and CGI Group (GIB.A) at favourable valuations.  I also added Cara Foods (CARA), Brookfield Infrastructure (BIP.UN) and Maple Leaf Foods (MFI) to the portfolio.

 

My Predictions for 2017…

Anything will happen and everything will happen. 2017 will be a year where all the focus will continue to be on the US President.  What he does, what he doesn’t do and what he forgets to do. What he says, what he denies he said and all the things he thinks he hears people saying. The Poorly Educated will think he’s the greatest and the Greatest will think he’s poorly educated.

If you strip all of that away what you will find, in my opinion, is a focus on economic development intended to benefit corporations, millionaires and private interest. There will no doubt be a cost to the environment and I do expect some progress, but there is likely to be more inflation after the next 4 years than less. No one understands inflation better than a real estate developer or someone with a borrowed portfolio worth of real estate. I have not had any bond ladder in almost 10 years and I will likely be starting one in late 2017.

I want to maintain a cash position of 5-10% in order to take advantage of opportunities that present themselves from various weird and wild policy decisions that no doubt will affect a number of economies and companies. I don’t anticipate these to be overall negative, but I do expect investors to be overenthusiastic at times with either their willingness to buy or sell positions. This will create opportunities but you’ll need to be prepared to sell into strength and be tactical when you buy. Have an entry and exit plan and stick to your targets. This won’t be a market to “let it ride” because where the top is no one will guess correct.

For readers of The Stock Analysis Mail List they’ve already received a copy of my Value Rules for 2017 and they should revisit them often. I believe those tools are as relevant today as they were in 2002 when I started developing them. Very few have changed or been removed in 15 years and many of them have been shared with clients who have benefited from using them.  If you missed joining the mailing list I will send copies to readers who sign up before January 1.

I’ve said countless times this year, “Don’t invest like Warren Buffett. Invest like Warren Buffett.”

So many investors want to copy, emulate and imitate Warren Buffett because of his success yet so few investors take the time to study how he was successful. Don’t copy his portfolio expecting his results from the past 40 years. Study his past 40 years and expect the results over your next 40.

Allocation of Capital.
Finding Undervalued Businesses.
Understanding a Sustainable Competitive Advantage.
Learning about Working Capital.
Focusing on $1 Customers
Assess the Management

Want to see my entire portfolio? Too bad, can’t have it!
But you can benefit from my knowledge.

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