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From the Editor - January 06 |
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The commentary below is from our monthly newsletter and is provided here as a convenient reference for our readers. |
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2005 in Review Despite lackluster returns for the overall market, 2005 was not that bad of a year. With the S&P 500 index turning in almost 5% (including dividends), that is still better than money market funds for the year—though such funds are quickly closing the gap. Consider that interest rates have been rising for the entire year, as have oil prices (up 42% for 2005), and it’s a wonder the markets were positive at all. Our own portfolio, though more volatile than we would have like, finished well for the year at 11.3%, which is 6.4% better than the S&P 500 index. Our goal is to add at least 2% additional return over and above the S&P 500 index (including dividends) per year through our proprietary stock selection process. As Table 1 clearly shows, for the third year in a row we have done considerably better than this goal. Having said that, we confess to a few goofs for the year. Our biggest mistake was not staying rigorously committed to our trading strategy at all times. This is such a common mistake for most investors, and yet we should chide ourselves for making such a “rookie” mistake. Several of the stocks in our portfolio just looked too tempting to hold onto, and we just knew a turnaround was right around the corner. And yet, they eventually failed to meet our criteria for holding, with better stocks waiting in the wings to own. As someone once wisely said, “Never fall in love with a stock; the stock doesn’t know you own it.” It can be hard for any of us to sell a stock we’ve fallen in love with. Our pledge for 2006 is to stick to our investment strategy with rigor, be quick to admit our mistakes when they occur, and rotate out of stocks that no longer meet our criteria for ownership. Our higher-than-usual trading for our Model Stock Portfolio, as shown in Table 2, represents our first step in that direction. Although we think the four stocks we are removing from our portfolio may still be good long-term buys, and hate to see them go (each for a different reason), their replacements simply look more attractive. And more importantly, the three replacement stocks fit our investment criteria for ownership. Visit our blog for a more detailed discussion of our January Model Stock Portfolio changes (see below). We have been implicitly promising for all of 2005 that we would put up a website for The Prudent Investor. Actually, we have had one for several months now, but it has been nothing more than a skeleton. To bring in the new year we would like to announce our new website available to you at www.PruInvestor.com. At the suggestion of one subscriber, we have also launched a weblog (blog) on a trial basis. You can read our blog by going to either www.PruInvestor.com or visiting pruinvestor.blogspot.com. This blog is designed to be a place for us to add additional commentary on potential (and actual) changes in our Model Stock Portfolio that are not discussed in our newsletter. It is also a place for our subscribers to add their commentary and questions as they relate to our newsletter. We hope you will find it useful. Protecting Your Financial Data As a final point of discussion this month, we wish to touch on backing up your valuable financial (and other) data on your personal computer. This topic is, granted, a bit off the beaten path of our regular commentary, but given that we wish to be Prudent in all things here at The Prudent Investor, we thought it worth a short discussion. Consider the following quote in the December 2005 edition of MIT’s Technology Review magazine discussing the lurking dangers of viruses transmitted over the Internet: [The protection of individuals’ computers] functions as well as it does only because of ‘the forbearance of virus authors themselves,’ says Jonathan Zittrain, who cofounded the Berkman Center for Internet…. ‘With one or two additional lines of code…the viruses could wipe their hosts’ hard drives clean or quietly insinuate false data into spreadsheets or documents. Take any of the top ten viruses and add a bit of poison to them, and most of the world wakes up on a Tuesday morning unable to surf the Net—or finding much less there if it can.’ Here you have it, from someone who knows. Your data is at risk. You already knew that, but you may not have known just how much at risk it was. (As a complete tangent, when waxing theological we at The Prudent Investor consider hackers who write viruses to be one of the most convincing evidences around of the biblical notion of “original sin.” For the vast majority of hackers there is absolutely nothing to be gained in writing and distributing a virus…other than the perverted pleasure the hacker receives from monitoring the level of damage inflicted by his virus. At least other crimes (=sins) usually bring the potential for personal reward to the criminal. Virus writers inflict pain on others for the shear joy of knowing they have done it on as large of a scale as possible.) Remember, even if your data are never damaged by a pernicious virus, it can still be damaged by hard drive failure, fire, flood, theft, and even those nasty alpha particles flying through space all the time (hitting your hard drive and potentially turning a 0 into a 1 at the point of contact). How does one protect himself against what is otherwise inevitable data loss, given enough time? Here is our quick list of suggestions:
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