2007 results and thinking about 2008

Should have mentioned this in my happy new year post but forgot -- for 2007, the secular value investor's portfolio was up approximately 14.6% or about 900bps ahead of the S&P 500 (not the most appropriate index given my large Asian holdings or my large weght in small cap stocks but its the main measure of the "market").

How did I do so well? Easy -- lots of Asia, lots of energy, lots of tech that went up. Can I repeat in 2008? possible -- and on the first day the portfolio outperformed by about 56 bps -- but the likelihood of another huge outperformance year is slim in my mind. I'm still worth listening to though because you might take my ideas and do even better.

Why slim? Asia is unlikely to outperform again in my mind for the 6th or 7th year in a row. Expectations in Asia are high but they are low in the US -- investors have moved their money accordingly and that sets many up for disappointment. I should take some profits there -- the question is one of timing and having the guts to do it. For me, Asia is a long term bet based on their relatively free market approach to the economy and huge populations that have lots of opportunity to increase productivity.

With Asia around 1/4 of my assets, how that region does is a big deal for this portfolio.

Energy in my mind will continue to do well although I wouldn't be surprised if we saw some "volatility" this year as investors sort through economic issues. Slowing economic growth will hurt the price of oil but how much of that is already factored in the stock prices is a hard question.

My stock picks -- who cares about the overall market and the overall economy -- if my companies do well then the stocks will too. That is the advantage of buying individual stocks -- the disadvantage is that if you are wrong you are very likely to lag the overall market by considerable amounts. This is why selection is so important. You need to really know the situations and have confidence that you are right -- that allows you to withstand the volatility and even take advantage of it.

Just a reminder, my philosophy is based on the precept that investors often underestimate secular growth stocks and that an investor can outperform by owning a portfolio of secular growers. The key is selecting the right trend to follow and picking the right stock to play the trend and getting in at a valuation that suggests investors haven't already fully discovered the story. The right trend is one that will afford above average growth for years to come. The right stock is one that has a very high probability of benefiting from the trend in an above average way from an economics standpoint. The best valuation is after the stock has taken a dip or a pause for reasons that are temporary. ILMN and NVT from this last year are quintessential examples. FLIR in mid 2006 would be another one. Is MCO one now? potentially although its early in that story.

FLIR -- I have the utmost confidence in the long term secular story as I have been saying over several notes but I have not been aggressive in buying the stock because of the valuation. I wouldn't be surprised if at some point investors become a little more concerned about the future story -- this could drive the valuation down to 20x instead of 30x now. At that point I will endeavor to pounce and really build up the position. It won't be easy to buy in the face of a decline like that but unless I see clues that suggest the companies franchise is in trouble, I will buy more.

hope you do well in 2008 and thanks so much for reading -- if you would like me to cover particular issues or stocks or make changes to the site -- please either email me or make a comment. If you enjoy the blog, please feel free to mention it to others.

thank you and good luck in 2008!