2012 has been a great year for our clients. The Growth Portfolio was up 31% through the first quarter of the year. The more concentrated Aggressive Growth Portfolio grew 35% in Q1. The S&P 500 was up 11%.
What Went Right
In all fairness, the quarterly results weren’t because I did anything special during the quarter. I think the gains were a combination of:
- The stock market was extremely weak in November and December of last year, and this year stocks mearly jumped to where they should have been. Last December was especially eery, the great growth stocks acted sick. Then when 2012 came in they took off. The Growth Portfolio was up 2% last year — it shoulda been up 20%. So 2012’s Q1 was a catch up period.
- The Big Three — Apple (AAPL), Priceline.com (PCLN), and Baidu.com (BIDU) — had good quarters, and approximately 60% of assets are invested in these stocks. BIDU rose 21%, AAPL 48%, PLCN 53%. In retrospect, I should have had more in AAPL and PCLN — or at least bought more when they reported stellar results last quarter. AAPL and PCLN were severely undervalued, and although they were my biggest investments as the year rang in, I should have invested with more confidence. I knew AAPL was “one of the top stocks of our generation and all signals point to an explosive move ahead“.
- No bad news. No economic worries. No European crisis, or political crisis. There was nothing to panic about. So the stock market went up. Up 11% (S&P 500).
Conservative Stocks Popped too
It wasn’t just growth stocks that took flight in the first quarter, conservative stocks were great too.
Microsoft (MSFT) was a bargain at 9 times earnings in late 2011. I would have bought the stock, but profits weren’t growing fast enough for acceptance into the Growth Portfolio. MSFT closed 2011 at $26. One quarter later it was $32. That’s over 20% for a company with a Long Term Growth Rate of 7%. Now MSFT has a P/E of 12, its not undervalued anymore.
JP Morgan (JPM) was another stock that was poised to rise late last year. JPM closed 2011 at $33 — I thought it was worth $45 — and the stock jumped to $46 during the first quarter of 2012.
Now a lot of the “deals” we had last year are gone. Stocks aren’t on sale like they used to be. For more on this, read Stocks Aren’t as Cheap as They USed to Be.
The gains are now going to be harder. In fact, we might get a back-and-forth stock market until the fall. One reason is the successful portfolio managers are up big this year. When the summer comes, they will want to take off on vacation. Spend that money. So it could be a slow summer.
Mistakes I Made
The biggest mistake was selling beaten down stocks in late 2011. I sold Weight Watchers (WTW) late last year because growth was slowing to around 12%. But the P/E was around 13. I bought WTW at $65 in Ferbruary 2011, and sold it at $55 on 12/30/2011. I got bored with this stock.
WTW jumped from $57 to $77 last quarter — and we weren’t in it.
I also dumped Netflix (NFLX) from the Aggressive Growth Portfolio in late 2011 only to watch in jump earlier this year. I don’t have the number here in front of me, but I’m guessing I sold NFLX from this portfolio in the $70s or $80s. I did better with NFLX in the Growth Portfolio, selling later at $113 (the stock closed at $84 Friday). I bought NFLX at $205 on 8/22/11.
Where to Invest Now
At this point I am selling stocks that are fairly valued, and looking to invest in companies with huge upsides and special retail stocks that are small and have the ability to compound in size. I think a lot of stocks made thier 2012 gains in the first quarter and won’t do anything until at least November.
The 31% gain is solid, but the road to 40% will be much tougher. That’s my goal for 2012: 40%. It would be the third time I’ve delivered investors a 40% return in my career (2003 & 2007). To do so I’ll have to sell stocks I feel have topped out and invest the proceeds in stocks that not only have solid upside potential, but that realize this potential too.
