REAR WINDOW

It’s almost New Year and time to review the 2004 results. It is important that I am totally honest or else this process would serve no purpose at all. It shall be a learning process and I can certainly learn more from my mistakes. Overall, I am satisfied with 2004’s results. I shall be up to close to 7% based on MTM value, slightly shy of my 7.5% target. (on cash transaction basis, I shall be up for approximately 5%). But this is not a bad result considering at its low, I was down close to 20%. I did not believe I could have achieved this level. I would have been rather happy with a breakeven year. While the result may slightly lower than my long term target, I believe the portfolio is much better balanced with better securities, and potential for more growth in the future. So, without further ado, here is:

WHAT HAVE I DONE RIGHT

Over Weight Energy And Commodity Stocks

I have been consistently over-weighting the energy and commodity stocks throughout the entire year and it turns out to be a very good decision. In the energy sector, I focused on juniors and drillers. Obvious these have been great winners for almost all of them. Unfortunately for me, I did not have sufficient patient with a number of international plays and end up with not making more (which shall be discussed in more details later).

Avoid US Exposures

I have avoided US dollar denominated assets most of the year and my US dollar exposure remains minimum. It turns out that performance of US broad markets has not been impressive for 2004, and US dollar simply tanked and is continuing. One thing I learn that you don’t have to be in NASDAQ in order to achieve your return target.


Bush Rally

I am rather proud of myself that I correctly predicted a Bush victory on November 7th, and more importantly, I anticipated the BUSH-RALLY thereafter. And even more importantly, I added more high-beta stocks right before the election in order to take advantage of the poll result. During the heat of the campaign, I was hooked to TV junks, watching polls every single day, and stayed until the earlier hours on the election night. I was rather obsessed. I was happy with the Bush win, although you really could not show it too much. I guess that 99% of people in the office hated Bush (so are most Canadians). Without the Bush-rally, I did not think I could recover from lows. As a matter of fact, with a Kerry victory, I believe I would have lost more, not to mention I really did not like him in the first place.

Rid Of Deadwoods

I am not proud of myself for owning these stocks (NS, SJR, IQW, GNA), all of which are losers for a long time. This year, I finally managed to get rid all of them. Although, all of them were discarded with heavy losses, their impact to the portfolio performance was not significant, which means that I have generated sufficient gains in other stocks to offset these losses. When viewed with this backdrop, the performance for 2004 becomes slightly more impressive. I am rather proud that I finally have the courage to cut losses in a more rational, logical and decisive manner, and it represents a break-through of my thinking process. This is a great lesson learnt this year.

Better Diversification

I believe the current portfolio is better balanced and diversified. There is very little concentration (none over 10%) on any particularly stocks. Even stocks I truly believe, their percentage of the entire portfolio is reasonable and tightly controlled. More importantly, speculative stocks are reduced to very small percentage of the overall portfolio, both individually and collectively. (Sound incredible, this is the first year that I really comprehend and appreciate the true meaning of SPECULATIVE stocks). Managing risks is the first priority, and I believe I had done a much better job, particularly later this year.

Switch To Large Caps

Relating to the previous section, I shifted the portfolio towards large cap in the mid of this year, which I believe was a good move as small caps appeared to have lost their mojo. Even with the change, I still hold a fair number of small caps, although as a percentage of total portfolio, they constitute a much smaller amount.

Better Selling / Taking Profit / Trading Around Position

Overall, I think I did a better job to sell, take profit, cut loss as early as possible, and trade around positions, but I continue to believe this is my weakest point, particularly cutting losses, and still needs a lot of improvement going forward.

Better Research

There can be no doubt that I did a much better research work this year, particularly in the small cap space. A lot of names that I am currently following have no analysts at all and very little research work available. I have to do the research myself. Overall, I think I have done a fairly good job and a number of stocks I picked have generate very handsome gains for me. I also did a much better job of reading analysts’ research works and making a better, and independent judgement. Again those I did listen to and act upon have generated reasonable returns for me.

In summary, this is the first year that I truly felt that I know what kind of stocks that I would like to have and to avoid. It is the first time that I was very conscious of risks and made a conscious effort to manage and limit them. Although I still procrastinate a lot, my decisions have been much more rational, logical and prompt.

WHAT HAD I DONE WRONG

Blow Ups

I believe it is not unacceptable to have blow-ups, particularly when you are hanging around in the small cap arena. What becomes unacceptable is when position is too significant and this was what happened this year, particularly in the case of CJC. At one point, I had more than 10% holding on CJC, clearly a speculative stock. In hindsight, I believe greedy overcame rationale, and my position in CJC shall never exceed 2% at any time. Had my position been limited, my loss, while significant individually, would have minimum impact to the portfolio at large. The same conclusion could be drawn from HP, and DY. THIS SHALL NEVER HAPPEN AGAIN. Without CJC’s loss, I would have been up at least by 15%, possibly 20% in 2004. One loss erased a lot of gains.

Too Much Concentration In Small Caps

This may appear to contradict previous paragraphs, but I recognized this issue and started to amend the situation in the mid year. While I still hold a lot of small cap positions at the end of year, as a percentage, they become less significant. Moreover, I am still bullish on energy stocks and positions in juniors and drillers are reasonably safe. Key positions are all in mid- large caps and I expect them to generate decent returns until Q1/05. Nonetheless, lessen learnt. Going forward, I have to try to manage my small cap positions. If fundamentals have not changed, trade around the positions in order to limit their impact; Cut loss as soon as possible. The first loss is the best loss.

Biotech Not Work At All

I held a number of positions in biotech, which was horrible in 2004. I learnt from this experience to appreciate the fact that these biotech stocks are true speculative stocks. None of them have any earnings, almost all cash flow negative, most have one of two compounds in various phases of testing. When you purchase these stocks, you are really buying hopes. The chance is probably no better than slot machines. It therefore, becomes extremely important to buy a basket of securities, limit overall exposures and be extremely patient. It also helps if you understand some basics of the compounds, development of clinical trials, milestones, partnerships, etc. Stocks maybe purchasable: multiple compounds, advanced phases of clinical trials (with positive efficacy / safety / tolerance results), large cash reserves (preferably fully-funded for the entire clinical trials), established partners, strong and consistent management. Notwithstanding above, I am cautiously optimistic about biotech sector in 2005. A couple of them (CJC, COM) announced very positive preliminary clinical trial results in December and were very well received by investors. More detail analysis will be announced in early 2005 which should provide much needed catalyst for the sector.

Lack Of Patient – Leaving Winners Too Earlier

Patient has never been one of my virtues and none is more marked in management the portfolio. I had so many extremely good picks, unfortunately for me that I lost patient at certain point and got out, ending up losing most of its gains (CEP, picked at $4., exited at $5.25, and it went up to $25, a six-bagger; POC, pick up at $11, exited at $13.5, and it went to $25; CJC, picked up at $5, exited at $7 and it went up to $15; ZCI, picked up at 1.2, exited at 1.9 and it went up to $3.0;). There were no real reason to exit these positions other than protecting little profits in them. Short term gratification overcame rational judgement and patient. I have learnt a little from these experience and in later part of 2004, I was more patient with many positions. I also learnt to trade around positions, taking some profit off while keeping the position open and it has worked out as well.

Under Weight Large Cap Financials

I have been under-weighting large cap financials (banks, insurance, mutual fund companies) and I missed a lot of easy money, although their performance in 2004 has not been as robust as 2003. These are very solid companies, steady financial results, reasonable dividend yield, and good defensive positions. I have to pay attention and be opportunistic in 2005.

Missing The Income Trust Train

I have basically ignored the entire income trust sector, and missed the roaring trust train entirely. What a costly mistake that was. A number of my holdings converted into trust earlier this year and I sold them promptly on the way up. In hindsight, I should have kept those positions. It turns out the income trust sector remains the easiest money you can get for the past five years. I only started to look into them later in 2004 and took on a couple of positions and they worked out alright. Would this asset class work again in 2005? I wish I have the crystal ball. At minimum, I believe we have to be cautious as they have gone up a lot. It just reminds you that you can’t really ignore any asset class at all.

Overall, I think I made a lot of amateur mistakes (what can I say, I am one). However, I do believe I have learnt a lot from these mistakes and I have taken some corrective actions. As I almost achieved my return target, the right stuff must have overcome the wrong stuff. I exit 2004 with more confidence and looking forward to 2005.

PROCRASTINATION

ATY
This is very frustrating. I was actually looking forward to today’s earning announcement and I was expecting a small positive surprise. As soon as I read the release, I realized that while the earnings basically met the expectation, the revenue figures appeared to be a toad light ($613 vs. $630), and right there I knew it would be a rough day. I had a decision to make: should I hang on this or should I dump it? I often found this is the most difficult decision. On one side, as an investor, you are not supposed to sell, as long as fundamentals have not changed. In this case, I certain do not believe the fundamentals have changed. The company indicated that the light revenues was caused by supply constrains. Had it fully supplied, its revenues would have been about 10% higher, which would have made it $675 million, well above expectations. Moreover, the company raised the outlook for the next quarter (Q2/05); On the other hand, I knew it would get hit pretty hard and it was (down more than 5%). From here, it probably will either sideline or trend down a little, until next quarter announcement (March). So, there is an argument to sell it now and deploy the cash resources elsewhere and maybe re-purchase the share later at a better price. I have never been able to develop a process that resolve this issue on a rational, logical, decisive, and disciplined manner. In almost all cases, I procrastinate, resulting in doing nothing. Mind you, even I sold it at opening, I would be still got hit by about 5%. A more decisive decision would not be able to avert the 5% loss in any case.

NEW YEAR "RESOLUTION"

BID RSE @ 4.35
I submit a bid for RSE @4.35 and got filled. This will replace exposures of CUX which I pared yesterday. I believe the valuation remains reasonable (4.3X CFPS05, 42K boe/d) and it is traded at a discount compared to its peers. And RSE has not run with other juniors. I do not see any operation or production issues and its next two quarters should be as expected or better. With its 05 production of 9,500 boe/d, and potential large cash tax, starting in 05, chance of exit to trust is relatively high. I believe it could go up to 5.5-6.0 after Q1/05, provided that crude price does not fall to lower 30s.


REPLACE RER WITH FE
Sold RER and put a bid with FE. I believe RER is fairly valued here. Although there might be another buck up, but that will come from conversion of trust. FE on the other hand, is undervalued compared its peers (3.5XCF05, 33K boe/d). It is traded at discount based on forward production and cash flow figures, and FE would have to deliver its production growth target for FY05, although its tied-in could easily take its production volume to 3,750 boe/d. If FE fails to deliver its production target, it would be rather expensive at current level. Q4/04 production figure would be key. Target at 4.5, at the end of Q1/05. While I do want to add FE, but I really do not want to increase the net exposure in Energy sector, which I am already over-weighting.

SELL HIGH

REDUCE CUX @12.15
I pared some CUX@12.15 today, even though it just took out it all-time high. I have had problems to take profit and I always find it difficult to sell on the way up. There is nothing wrong with the company, momentum is strong, technical is beautiful and I truly believe it will continue to go up. However, I am looking at a 63% gain since late September. Moreover, I believe that the down trend of the crude is not broken by this little reversal and there is till a chance that crude will continue to slid towards US$35 / bbl. Notwithstanding the strong fundamentals, it will fall if crude decline to US$35. Finally, it's never wrong to take some off the table and I am determined to sell on the way up.

COIN FLIPPING

CP OR TEK
The market seems not to want to fall and I would like to add a little more position, but I am having a hard time to determine between CP and TEK. Both are very good companies with very strong earning growth momentum. Valuation wise, TEK is expected to earning more than $4.0 for 05, resulting its forward P/E at about 8X. CP is expected to earn $2.6 for 04 and 3.25 for 05, resulting a forward P/E of 12X, which is slightly lower than its historical valuation of 13X-14X. Both are positively correlated to the increasing coal price, although impact to TEK would be more significant. While both have very strong earning momentum, CP seems to have better chances to have upside surprises due to its conservative assumptions of crude price (US$48), settlement of contract disputes, coal price, and freight rate (CP is sort of a natural hedge against oil and gas exposure). On the other hand, TEK will have to deliver its rather haughty earning expectation. Both have very strong pricing momentum, although CP just took out its all time high. Both are extremely economic sensitive, and if economies slow down, neither will perform well. I guess I have to flip a coin. I could not decide, so I add both.

POKER FACE?

ADD CWH @5.20
I bid a little CWH @ 5.20. (1) Tremendous growth: top-line: 91% in FY03, 40% for Q1, Q2/04, 83% Q3/04; sequential growth is strong as well (17% Q2/Q1, 32% Q2/Q3); EPS: over 300% Q2 and Q3; (2) Profitable and cash flow positive; generating positive free cash; ROE consistently above 25%; (3) Margin improved consistently quarter after quarter; (4) $0.46/share cash balance, no debt; (5) It is in a nascent industry with significant growth potential and a few established competitors; (6) Currently traded at about 20 times of its 2004 earnings and 15X of its 2005 forward earnings; Given it expects EPS to growth by 90% in FY04 and another 40% in FY05, the valuation remains reasonable; (7) Trend appears strong and should continue; Drawbacks: another small-cap which I would prefer not to add presently, given my exposure to the small cap space, which I believe will likely be out of favor for 2005. All other drawbacks related to the small caps, lack of coverage, liquidity, and notoriety. Overall, the stock seems too good to pass. Target 7.50, representing about 22X of its FY05 EPS estimate. Portfolio position: less than 2%.

TAKE SOME ATY OFF THE TABLE

PARE SOME ATY @ 23.80
I want to pare some ATY at 24.50, and as usual, it never really get there. On the day it went over, the broker’s computer system broken down. I guess there is a more powerful force there against me and I’d better to pare some when I still can. I am still positive about the story and I believe I still have more than sufficient exposure for a good news on December 21. A 12.5% return for two month is not too bad at all and it certainly well above my return TARGET, to which I shall never lose sight.


GLK.V @0.40
I have put a bid for 0.40, and I am not too sure if it will get filled. The valuation is simply too compelling to ignore. For nine months in FY04, it generated $0.06 earnings, $0.11 cash flow from operations, and the stock is traded at 0.40. Assuming it makes 0.03 for Q4/04 and 0.15 cash flow, which normally is its peak quarter, it is traded at 4.5X P/E and 2.7X of P/CF. Although the company’s earning has not been consistent in the past (I remembered that it failed to delivered its Q4/03, and it could happen again). Its B/V is currently at 0.52, and it is traded at 77% of its BV, a 23% discount for a profitable company. The company is in the middle of booming energy industry in Alberta, and strong drilling activities. It is going into a seasonal strong couple of quarters. However, the company has been very inconsistent in the past and for its shares to move up it must deliver the two winter quarters. Information flow is also far from satisfactory and there obvious is nobody to cover it. At this point, I would like not to put too much into these micro-cap stocks, but this one may be the exception. It got filled.

HOP ON POLAR EXPRESS?

RAILWAY STOCKS (CNR / CP)
There a lot of ramblings about railway stocks. PROS argue (1) economies grow at a very stable 3%-4% over the next couple of years, and rail stocks have high correlation with GDP growth; (2) an upward trend of freight rates over the past year or so, after a very long period of decline (sort of like oil stocks with increasing crude price); (3) "CHINA", Shall I say more? (4) earning momentum, relatively strong Q3/04, Q4, 2005 and 2006 outlooks remain strong; (5) good companies, well managed. CONS counter: (1) strong Canadian dollars will damper their earning potential; (2) fuel costs with crude north of US$40 (although PROS argue that fuel costs are partially mitigated by hedges and fuel charges to customers); (3) valuation; Both CNR and CP are traded at over 16X of trailing E; and 13-15X of its 2005 forward earnings; This represents a premium over its historical trading range. With this level of multiples, they’d better deliver their earnings. Given that, I think I will wait.

ON THE WAY UP!

SELL T @33.20
Finally, I got to sell one on the way up! Fundamentally, I still like it, but I believe there is probably only a couple of dollars to go in the near term. I am a little puzzled by today’s incredible strength. If I understand correct, there will be 70 million shares of T coming into the market @31.00 (minus the $0.20 dividend, which makes it $30.8) in the next couple of weeks. Why this frenzy of purchasing at $33 today? I must have missed something. Nonetheless, I am happy with my 53% return in less than 6 months (not to mention dividends). I might have left a couple of bucks on the table, but I am not going to lose too much sleep over it.

ON SALE

T
T has been really weak for the past couple of weeks and it really concerned me. I did not pull the trigger only because it had relatively small volume. And today, the news is out, Verison wants to dump its 70 million shares. While the price has not been determined, it will certainly create an overhang in the near term, which will put a ceiling on the shares. Now the question is should I follow the lead of Verison? This is the most frustrating part for small investors. In principle, fundamentals have not changed at all. The stock is under pressure only because some big shot wants to get out, for whatever reasons. On the other hand, do I hate to see price going down as a result. And It went down rather hard. Normally, this kind of circumstance actually creates a buying opportunity (PetroCan, for example), but if you are in it already, it only gives you headache. Looks like I will choose DO NOTHING, which is really hang on there.