In being retrospective, it’s common for us to exaggerate the extent to which the events of the past were predictable. That is, we typically convince ourselves that an outcome was inevitable and that deep down, we knew it all along. Sports fans refer to this tendency as Monday morning quarterbacking, psychologists speak of the hindsight bias, and doctors probably call it malpractice litigation. Whatever it’s called, it sure is popular in the financial pages at this time of year. Financial commentators, analysts, and ordinary investors speak of the year as unfolding exactly as it should have. The Dow behaved logically and anyone paying attention saw it coming. The fact of the matter is, I had no idea 2003 would unfold as it did and I’m not sure what 2004 will bring. I trust you are same. Now that I’ve inspired your confidence and completely de-legitimized my own writing space, let’s proceed with a post-mortem on the year that was and the portfolio that could have been. What worked, what didn’t, and how can I apply what I’ve learned to the year ahead?

Performance
The year 2003 saw the portfolio increase by over 27%. This is in-line with with the 24% advance of the S&P/TSX composite and the 25% lift in the Dow Jones Industrials. It looks good compared to the portfolio’s 17% return last year and the 12% generated in 2001. After a good year, don’t you find the air fresher, the colours brighter, and even your food tastes better? Or is it just me? More importantly, I came in 11th place out of 30 in my NFL pool, only 8 games out of the money. Market Dad placed 20th, so I get bragging rights until the new season begins in September. It’s important to have priorities.

My Best Investment Decisions of 2003:

1. Sticking with income trusts and dividend-paying stocks.

Talking about my TransCanada shares (TRP on the TSX) and financial stocks just isn’t as exciting as talking about trusts. So let’s talk about trusts. Is there anything more satisfying than looking at your monthly statements and seeing the cash flowing in? In 2003, every sector of the trust market advanced nicely and there were some wonderful investing opportunities. There wasn’t nearly as much value to be had as last year, but investors didn’t seem to mind. New issues were eagerly snapped up and it actually would have been a challenge to lose money here. I was thrilled with the distributions and unit appreciation of BFI (BFC.UN), Riocan (REI.UN), Inter Pipeline (IPL.UN), Calpine (CF.UN), Arc Energy (AET.UN), among others.

However, the prevailing wisdom for 2004 is that investors should be content with their distributions, and not much else. Very little capital appreciation is expected and that could be difficult for some investors to swallow. I’m totally content with the cash, but that’s just me. In fact, many predict strong headwinds for the sector, with possible increases in interest rates, lower energy prices, and investor dollars moving into growth stocks. The bulls counter that the issue of unlimited liability is being addressed, which should lead to the inclusion of trusts in S&P/TSX Index. This would increase the level of institutional participation, which is a very good thing. Also boding well for the sector is that many of the trusts are actually GDP rather than interest-rate sensitive.

In reality, who knows where rates are headed? With the Canadian dollar appreciating, the Bank of Canada has some flexibility to either maintain or actually reduce rates. A tame inflation picture and the US election should render the Fed about as talkative as Lt. Castillo from Miami Vice. This leaves me even more at ease with trusts. Besides, it’s really the pipeline and power trusts that are the most sensitive to rates and these represent only a small percentage of the overall trust market.

Lt. Castillo rarely spoke …and neither will the Fed in 2004

Here’s the punchline: For now, I’m not so much a buyer of trusts, although I’m always on the lookout for value candidates (the sector is maturing to the point where it’s easier to determine the cheap from the pricey). However, I sure am an enthusiastic holder across each sector. As the year moves along, I’m eager to evaluate the new trust product that’s coming and will pare back on holdings that have become stretched.

2. Taking currency into account.

So the S&P 500 index was up 26% in 2003. Sounds like a great year, doesn’t it? A buddy of mine has a financial advisor who kept recommending US stocks all year long. Based on what happened to the S&P, it sounds like a good call, right? Well hold on there Pedro! If you’re a Canadian, you need to consider the effect of currency valuation. Because of the 22% appreciation of the Canadian dollar, Canadians owning the average stock in the S&P started 22% in the hole. So in order to match the 26% return offered by the S&P index, your American stocks had to appreciate by 48%. In any investing universe, that’s a tall order. Sobering, isn’t it? For some investors, this realization might provoke a scene like in Cast Away when Tom Hanks lost Wilson. Sheer agony. As a result, most of the US index products had underwhelming years to say the least. For example, the iUnits S&P 500 index fund basically broke even. My preoccupation, obsession, and love affair with Canadian income product kept me largely removed from the US market in ’03, and for that, I’m quite thankful.

Looking ahead, most commentators seem to be calling for continued weakness in the US$. What’s been pressuring the greenback? Among other things, the US budget deficit is at its highest point in 50 years and Bush seems content to run up the tab. I’m still trying to get my head around the fact that Republicans have become the spenders and the Democrats the fiscal conservatives. Also against the buck is the decision by the US to abandon a strong dollar policy and it’s unclear at what point (if any), they’d jump in to reverse the current trend. If my brain had been firing on all cylinders, I would have made money here. So let’s discuss…

My Worst Investment Decisions of 2003:

1. All that glitters is not gold…although gold sure did glitter

In order to capitalize on US$ depreciation, many investors flocked into gold stocks. Meanwhile I missed the entire rally. Is there an area of the market that inspires more devotion than the gold sector? The gold bugs have been out in full force the past few months, spreading the word. It’s almost as if they are part of a religion and anyone who doubts the bullish case for gold just doesn’t understand. I completely misplayed the sector a few years ago by selling about 5 minutes before the whole thing took off. It seems that a modest allocation to precious metals would be appropriate for a diversified portfolio. Perhaps the fact that everyone is all excited about it makes it somewhat less interesting.

If I were going to play the gold market, I’d probably go with the iGold units (XGD on the TSX). It’s an exchange traded fund that is currently invested in 14 of the larger Canadian gold companies, so if you’re into the juniors, keep moving. American Barrick (ABX) and Placer Dome (PDG) make up over 45% of the portfolio, which is kinda spooky. But the MER of 0.55% is hard to beat. I’ve been hearing about an investment vehicle by which you can move beyond the gold stocks and make trades specifically around the price of bullion. What an emotional ride that could be. Let’s just say I’m curious enough to pay attention.

2. Early profit-taking in the energy patch

For several years the portfolio had been dramatically overweighed to the energy sector. The results were very positive, but entering last year I wanted to book some gains and have a more balanced portfolio. What better selling opportunity than a war in the Middle East, a cold winter, and a natural gas shortage at home? It was the perfect storm. With the thermometer dipping, crude trading in the high $30 range and natural gas on a spike, I bailed on several holdings….and subsequently missed out on more significant gains. My selling focused on energy trusts, specifically those inter-listed in the US. The rationale was that American investors would create powerful selling pressure once energy prices dipped. Little did I think that Iraqi “insurgents” would keep blowing up their own pipelines, we’d start hearing about China’s emerging appetite for oil, and the US economy would perform much better than expected? As a result, American investors kept taking the inter-listed trusts higher and higher. I missed out. Looking back, I should have gradually sold into the rally, rather than eliminating these positions entirely. An added benefit of such a strategy is that I could have spread my tax burden around. In any event, I held ARC (AET.UN) throughout the year and it performed exceptionally well, thereby dulling some of the pain of a missed opportunity.

The trade I didn’t make…but should have
It was July and I was looking at convenience store operator, Alimentation Couche-Tard (ATD.B on the TSX) in advance of their quarterly release. This is the company that owns Mac’s, Becker’s and a host of other places. I’d been following the company for about a year and was ready to make an investment. I was logged into my discount broker, had filled out the order screen for a batch at $13.50. At that point the only thing between doing business and not doing business was the click of the mouse. This reminds me of that 1999-2000 discount brokerage commercial involving the investor in front of his computer, nervously looking at his order screen, then pacing around the room while he contemplated the trade? Finally he clicked on the order button, the trade was executed, and a mariachi band started playing? Well, for ATD there was no mariachi band because I never placed the trade. They subsequently released a fantastic quarter, made a huge, much lauded acquisition in the US and the stock is now trading over $24. I’m not sure what stopped me from making the trade, but every investor has been there. The mind tells you it’s a good deal, but the heart steps in and kyboshes the whole thing. Stupid heart.

It reminds me of the time Market Gal asked me to go see a Madonna concert in Montreal. I knew the baseball playoffs were coming. I knew the Jays were in first place. I knew I might miss a game. But she begged and pleaded and she looked really good while doing it, so the brain jumped out of the car and let the heart drive. I subsequently missed game 6 of the 1993 World Series. Yes, I missed Joe Carter’s 9-inning, series-winning shot. The most memorable sporting event of my lifetime and while it was happening, I was walking out of Olympic Stadium, packed in a crowd of people dressed like the Material Girl. I’ve often thought of how I might have reacted had I been sitting at home watching THE game. Would I have jumped up, sat there stunned, yelled? How many fist pumps? When would the tears of joy stopped flowing? I’ll never know. And to make matters worse, Dick in Edmonton has taken the incident as a permanent license to ridicule. If he writes my epitaph, it will surely read, “Here lays a man who missed game 6 to be at the Girlie Show Tour. Only now he rests in peace. What an idiot.”

Up until Game 6, the Market Guyhad seen every pitch of every playoff game the Jays had ever played. Learn from his mistake and just say “no.”

By way of an update, ESPN Classic just replayed the entire series andMarket Gal had a chance to at least soothe some of the pain. She could have sat down and watched game 6, maybe made some nachos, and lied to me about how exciting it all was. She could have watched Joe hitting that 2-2 slider to left, then touching all the bases as he headed for home. She could have heard Sean McDonough’s indelible call: “Well hit down the left field line…waaaay back aaaannnnnd GONE!” But instead, she went into the other room and watched sitcom reruns and reality TV. I’m not bitter. Not bitter at all. Let’s just move on. Can we just move on? I need medication.

Back to Couche Tard. I suppose it’s better to regret the buy you didn’t make, than to regret the buy you did. It was that kind of year. Stupid heart.

Who isn’t being sued?
If you’re having a good year, it leaves some time to stop and appreciate some of the little things that otherwise might have been regarded as noise. The Martha Stewart saga gained steam, an Italian dairy went sour, and just about everyone tried to avoid Elliot Spitzer (or is it Ness?). 

But was there anything more satisfying than watching video from Tyco’s Sardinian retreat? I mean haven’t you always wondered what a $2 million toga party would look like? I especially enjoyed hearing of Jimmy Buffett’s $250 000 performance fee (not my choice booking for toga party, by the way) and the ice sculpture of Michelangelo’s David urinating vodka. The only thing missing was Bluto Blutarsky of Animal House and Caligula playing on a big screen. I laughed out loud when they played clips of all this at former CEO Dennis Kozlowksi’s larceny trial. He must have squirmed more than a 10-year old on the last day of school. The best quote to come from the whole mess was offered by some legal commentator who said, “This could be devastating in front of the jury.” Just like a broken leg could affect the play of your quarterback.

Tyco and Togas and Tips…Oh My!

As long as we’re dabbling in the oozing hubris file, let’s not forget Lord Conrad Black, who after resigning in disgrace as the chief executive of Hollinger boasted, “I made 50 million bucks yesterday.” Let’s give thanks for the financial enema that he is about to receive.

Christmas tree ornament giver of the year award
To Market Gal (also the winner of this year’s award for going above and beyond the call for the portfolio when she insisted her boss rent a BFI garbage bin). The ornament combines a stock exchange facade with a stock chart and computer keyboard. What could be more festive?

There surely is a Santa Claus when the Market Guy gets an ornament like this

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. Over the holidays he became addicted to the Food Network. There’s always a tasty morsel over atmail@marketguy.ca