About three years ago I did the unthinkable–I started investing in individual stocks. As a long-term, buy and hold, index fund investor, dipping my toe in the deep end of the pool was unnerving. But there I was, buying shares of Citi in my SEP IRA that I have with Scottrade.
There were two reasons why I started investing in individual stocks. The first was to further reduce the cost of investing. Even with index funds, you pay an expense ratio based on your total investment, which doesn’t include the cost of trades the fund makes. While the cost of many index funds is really cheap, it’s still a cost I’d rather avoid if possible. We’ve been talking a lot about this in my newsletter, including how I track expenses to the penny with a free tool called Personal Capital.
Second, I felt that I had the right temperament to invest in individual stocks. I’m generally not swayed by either a rise or fall in stock prices or what is “popular” in the market at any given time. My willingness to invest in unpopular stocks and sectors paid off quite handsomely in 2012.
So enough chit-chat, here is my 2012 performance for just the individual stocks and sector ETFs in my portfolio:
|Investment||2012 Return||Percentage of Stock Portfolio||Weighted Return|
|U.S. Home Construction ETF (ITB)||78.1%||17.3%||13.5%|
|Total Weighted Return||33.1%|
|2012 S&P Return||16.0%|
There are some really important things to keep in mind with these numbers. First, the returns for Citi, Apple, ITB, and CSCO do not include dividends, so my actual weighted return was a bit higher than what I’m reporting (but not by much). Second, I bought my positions in Ford and McDonald’s in October 2012, so the returns there reflect performance over just one quarter. Third, the S&P 500 return I’m reporting includes dividends. Finally, the above represents just my individual stocks and sector ETFs. My total return was lower, both because it includes bond funds and because my stock mutual funds did not average 33% last year.
So how did I do it? I attribute my 2012 performance to my willingness to buy stocks and ETFs that had fallen out of favor with much of the market. Let’s look at a few examples:
Citi: I first bought shares of Citi back in 2010 when the banking industry was still reeling from the 2008-2009 crisis. Citi was selling for a song because nobody wanted to touch bank stocks. My logic was simple–Citi either survives or it doesn’t. If it does, it will turn out to be a nice investment. My position was in the red for a year or two, during which time I bought more. So far, patience has paid off. Now I’m wondering if the stock is overpriced.
ITB: During the housing crunch, everybody fled home construction stocks. While the housing market obviously went through hell and back, I knew it would eventually turn around. Rather than investing in an individual home builder, I bought a sector ETF in 2011, and added to my position in 2012. As the housing market rebounded, the ETF went up in value. It was my best performer in 2012.
Ford: I bought Ford when it was trading at about 2 times earnings and offering a nice yield. I had no idea when the market would reward Ford with higher share prices, but I believed it eventually would. And it has.
Apple: As a last example, I give you Apple. The big news has been the fall in Apple’s stock price from above $700 to the low to mid $400’s. As a result, it is trading at less than 10 times earnings. Back out its enormous stockpile of cash, and it’s trading at around 6 times earnings. So guess what I did?
Yep, I took my SEP IRA contribution for 2012 that I just made and bought more shares of Apple.
As an aside, you may have heard of an investor named David Einhorn who wants Apple to issue preferred stock with a rich yield. Sorry, but Apple needs to ignore that guy. If Apple wants to return cash to investors, they should buy up their cheap stock. Just ask Warren Buffett.
One final word. Returns over a one year period are at best interesting, or maybe even entertaining. But it’s returns over a few decades that really matter. Next year my stock picks could underperform the market. I’m happy with 2012, but it’s just one year. I don’t recommend any of the stocks above or any investment for that matter to you. I’m not a professional and I don’t offer investing advice. I encourage you to do your own homework and, if you want, consult a professional advisor.