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.