Made a 22% return on my portfolio for 2010

I had another successful year as an investor, and again beat the S&P 500.

The S&P 500 returned 13% for 2010, and my portfolio (managed by the Stock Trading Riches system) returned 22%.

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An ArticleThat Describes My Investment Philosophy

Here is a June 2009 article that Laurie Pawlik-Kienlen wrote after interviewing me.

I just re-read it, and it does a good job of explaining my basic investment philosophy.

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I Just Bought Six New Stocks

It is the end of the year, so I reapplied the Stock Trading Riches formula to all my stock holdings - and adjusted the positions (by buying and selling shares) accordingly.

Since my portfolio is up about 22%, after being up 44% last year, the rebalancing of the individual positions resulted in the cash portion of my portfolio being over the maximum for the Stock Trading Riches system.

I found that I needed to add 6 positions to my portfolio to put the excess cash back to work.

Here are the 6 positions I bought:

1. Hasbro (HAS) - Parents and grandparents who had to hold back on toy purchases during the recession want to buy things for their kids now that the economy is coming back. Hasbro has a large share of the toy market, and their Beyblades are a big hit. I bought it at $47.60, which is trading at about 14 times estimated 2011 earnings.

2. Jakks Pacific (JAKK) - This is also a toy company. Besides benefiting from the improving economy, they are at the bottom of their hit cycle. Hannah Montana dolls had pushed their stock from $18 to $30. Now, the dolls popularity peaked, and the stock is at $18.65, ready for the next craze.

3. GOL Airlines (GOL) - The only developed country airline I own is Southwest (LUV), but airlines in developing countries have growth potential. GOL is the new, low cost carrier in Brazil that has quickly captured 40% of Brazil's seat capacity. At $14.71, it is trading at 1.5 times book value, 80% of annual revenue, and six times estimated 2011 earnings.

4. Flsmidth and Co (FLIDY) - I usually don't buy pink sheet stocks, but I bought this stock at $9.31. This is a Danish company that provides engineering services to cement makers. They are really strong in emerging markets like India. The stock is trading at 2 times book and 11 times 2011 estimated earnings, and will participate in the materials comeback as the developing world resumes its growth.

5. Celanese (CE) - This is a play on the improving global economy because they make acetyl chemicals, and 3/4 of its revenues are from outside North America.

6. Diageo (DEO) - With funds focusing on emerging markets and Asia, UK multinationals like spirits maker Diageo are undervalued. At $74.22, I'm broadening my portfolio at a good price to include premium drinks such as Johnnie Walker, Jose Cuervo, Baileys, and Guinness. They also own 34% of Moet Hennesy (which owns luxury brands like Hennesy cognac).

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Carnival of Traders and Investors

The latest edition of the Carnival of Traders and Investors is live.

It has a lot of interesting financial articles.

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Berkshire's Secret: Lou Simpson, The Only Other Investor Besides Buffett

Warren Buffett is the legendary investor who manages Berkshire Hathaway's portfolio.

But, did you know that there is one other person at the company who is authorized to invest?

That person is Lou Simpson, who will retire at the end of the year. Simpson manages Geico's investment portfolio (Geico is owned by Berkshire), while Buffett invests all the other Berkshire portfolios (after Simpson retires, Buffett will take over Geico also).

Since all Berkshire investments (including Geico's) are reported together, it can be hard to know which picks are Simpson's, and which are Buffett's. According to Buffett in a Chicago Tribune interview back in August, "If you see a purchase on a company in the $300 to $400 million range, odds are very good that's Lou's."

Simpson's and Buffett's investment styles are similar: value based - looking for "obscure companies poised for growth". They do their own research, talk to management / competitors, and read all company documents.

On a couple of occasions, they matched their investments. For example, they bought Tesco at the same time, and sold off Freddie Mac in 2003.

Simpson keeps things simple, and just employees one assistant and one analyst to manage a $4 billion portfolio. From 1980-2004, Simpson has only had 3 losing years, and beat the S&P 500 in 18 of those years.

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Carnival of Finance, Investing, Savings, and Debt

The latest edition of the Carnival of Finance, Investing, Savings, and Debt is up.

You should check it out, because it has a lot of personal finance articles from different blogs.

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Can Poker Help You Invest Better?

An old article in the Chicago Tribune financial section dealt with how the game of poker can make you a better investor.

In fact, Aaron Brown, a former finance professor, hedge fund risk manager, and author of The Poker Face of Wall Street, goes so far as to say it is risky to invest without playing poker, and learning your psychological tendencies for mistakes.

As someone who both invests and plays poker, I agree that, due to financial risk, both activities cause people to make bad psychological decisions that cost them money.

Here are four psychological mistakes that are common to both investing and gambling:

1. Greed - this occurs when we start expecting a big win, counting our chickens before they hatch, and start ignoring evidence that indicates we may lose. The Tribune article gives the example of getting dealt two aces in Texas Hold 'em - the strongest opening hand, but one that causes a lot of losses. If you get the ace of diamonds and ace of spades, you might stay in expecting to win the hand, even if the three community cards are all hearts. You are ignoring the possibility that someone else might have a flush.

2. Overconfidence - after winning a big poker hand, or experiencing a booming stock market, the gambler or investor can get overconfident, and start making large reckless bets.

3. Regret - after losing a big poker hand, or losing on a large investment, the gambler or investor may try to break even on a reckless bet or be scared into playing too conservatively.

4. Seeing patterns - Humans are wired to see patterns. In poker, this can be seen in the "hot hand" fallacy. If you are holding a 10 or jack, and the flop has a queen or king, you may bet big by overestimating the odds of an ace. The investor may over-invest in past stock market winners.

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Harry Markowitz's Portfolio

Nobel-winning economist Harry Markowitz is famous for his work on modern portfolio theory, and is sometimes thought to advocate buy and hold.

In reality, he stated in a Chicago Tribune interview that he's "never been a buy and hold guy".

Markowitz said that, early in his career, he didn't take the level of risks that today's investment advisers suggest for young investors. He simply saved regularly and saved 1/2 his money in stocks, and 1/2 in bonds.

He kept asset allocation really simple. He never sold anything to regularly rebalance. When he felt that one category was higher, he stopped contributing to it.

At 82, he has a large municipal bond portfolio so that, if he dies, his wife can live off the interest.

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The True Way to Spirituality

The true way to spirituality is accepting whatever happens in life without regrets. It lacks expectations and, so, is devoid of a need for rewards.

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Carnival of Wealth #15

The Carnival of Wealth #15 is up and has a lot of good financial articles.

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Should Borders Buy Barnes and Noble? Ackman Offers Financing For $16 Bid

Today, William Ackman and his Pershing Square Capital Management (which own 37% of Borders) stated in a regulatory filing that they would provide financing to Borders to offer $16 a share for Barnes and Noble.

This is 21% higher than Barnes and Nobles' closing price on Friday.

Would this combination be a good idea? On one hand, it sounds good because there are many people who still love bookstores. Also, they could invest in making the Nook better.

On the other hand, Yahoo quoted an analyst:

Simba Information's senior trade book analyst Michael Norris said the deal would simply be a distraction to the booksellers and "fundamentally weaken not just the combined entity but the consumer book industry in general."

"A proposed combined entity would spend a year thinking about what overlapping stores to close, and at least another year combining systems and operations while trying to hang on to talent with both hands," he said. "While that's going on, rivals like Amazon, Apple and Google will just be steaming ahead unimpeded."

Also, the same Yahoo article had an interesting comment: If you tie two anchors together do they sink faster?

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Interesting Article on Citigroup CEO Vikram Pandit

New York Magazine has an article on Vikram Pandit, and mentions a bit about Citigroup and the financial crisis.

This quote from page 5 of the article (mentioning Citigroup’s Sandy Weill and Clinton’s Treasury Secretary Robert Rubin) is a good example of the marriage of politics and finance that got us into this mess:

Rubin and Weill had been friends since the late nineties, when Rubin served in the Clinton administration. It was Rubin who helped push through the Gramm-Leach-Bliley Act that effectively allowed the merger of Travelers and Citicorp. A year later, Weill made Rubin a board member at the company he helped create, paying him a salary of $17 million a year.

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Two Stock Ideas: NETC and RPM

Today, I bought Net Servicos De Communicacao (NETC) at $13.628. This is Brazil's largest pay-TV provider and a large player in their phone and internet access and services.

I feel like this stock is both a growth and value play. It gives my portfolio access to Brazil's growing middle class, and Forbes columnist (and portfolio manager) Ken Fisher feels that the stock is cheap at $13.

I wrote a more detailed analysis of NETC on the Stock Trading Riches Discussion Board.

I had narrowed my choice down to NETC or RPM International (RPM). RPM is a value and dividend play. At $20, Ken Fisher considers the stock cheap and it has a 4% dividend yield. RPM makes industrial and consumer paints, adhesives, etc.

I ultimately decided on NETC because my portfolio could use more exposure to Brazil, and I have several stocks that are already similar to RPM: Cummins (CMI) and Illinois Tool Works (ITW).

I also discussed this stock in a bit more detail on the stock trading riches board.

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Reverse Global Marketing: Disney's Duffy Bear

Usually, Disney creates new characters through their movies and TV shows. Then, they create merchandise and introduce the characters to their Disney World theme park. Finally, they take the character global.

Duffy Bear is different, and is a good example of how the global economy doesn't always revolve around the U.S.

Duffy Bear has never been in a TV or movie. Originally, he was introduced at Disney World in Orlando (as Disney Bear), but flopped.

In Japan, where teddy bears are a cultural symbol, Tokyo Disney renamed him Duffy Bear, and they made up a back story that Minnie Mouse created him to keep Mickey company on his travels. He called him Duffy because he carried him in a duffel bag.

Because of the back story, Duffy became a big collectible hit with young Japanese women. Now, Duffy has gone from Japan back to Orlando - along with a long line of merchandise.

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Holiday Shoppers Should Be Wary of Extended Warranties

At this time of year, retailers are discounting items such as TVs, cameras, etc., and accepting a smaller margin.

However, they try to make up for it by more aggressively pushing extended warranties - which are a big source of their profits.

Unless you are buying something really expensive (like a 3D TV), these warranties are not worth it. Most electronic devices are covered by the manufacturer for one year, and that is where defects will show up - not during the extended warranty period ( years 2-4).

If you do decide to get the extended warranty:

1. Read the fine print of what is and isn't covered.

2. Keep proof of coverage.

3. Hang onto any receipts, serial numbers, or UPC symbols you may need.

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