I am a big believer that a portfolio should be diversified according to individual goals, portfolio size, and securities that serve individual purposes to an investor. Back in November I completed a 5 part series in which "Building The Perfect Portfolio" was discussed: And within these articles I discussed a wide range of topics including how to diversify a portfolio according to size and how to choose stocks that provide growth in various ways: long-term yield, value and growth, short-term value and growth, small cap investing, and emerging markets. Over the last several years my strategy for investing changed as my portfolio grew larger and I found myself unwilling to take the same level of risk and began to invest with less risk and more security.
Now that 2011 has ended we can sit back and reflect on the year's performance and make a new year's resolution of how we are going to invest. Every investor hopes to get better with experience and learn from mistakes; and the very best investors use experience and the past as a way to change and to make more intelligent investment decisions. Unfortunately, 2011 was a year that some may want to forget, and because of its volatility there are a large number of investors who lost a large percentage of his or her portfolio. However, 2011 has been quite rewarding for myself, as I learned how to play the trends and volatility of the market and how to invest in value like never before. Therefore, 2011 may be a year that some want to forget yet I believe it should be remembered and investors should try and learn from both there failures and success in order to not make the same mistakes twice.
I've always considered myself to be a value investor who uses fear and panic of other investors to capitalize on the most undervalued stocks, according to fundamentals. And I believe that 2011 has changed my perspective of investing unlike any year before it. Because with such high volatility along with fear regarding the immediate future in Europe I anticipate the first half of 2012 trading similar as the last six months of 2011. Therefore, as we look forward to another year, it's now time to reflect and think about what's worked and what will come in 2012. I've made substantial changes to my long-term investments during the last two weeks: some in which I highlighted in a recent article "Changing Up My Portfolio Positions For 2012."
The most significant change that I've made to my portfolio is selling my largest holding AT&T (NYSE:T) and then using the return to invest in Dish Networks (NASDAQ:DISH), Kroger (NYSE:KR), and Sprint Nextel (NYSE:S). And although this is the largest change that I've made heading into 2012, I've also sold, my other four long-term holdings to purchase stocks that I believe have better upside potential during 2012. Two of the most difficult changes that I made to my portfolio was selling Google (NASDAQ:GOOG) to purchase Apple (NASDAQ:AAPL) and selling General Motors (NYSE:GM) to purchase Ford Motors (NYSE:F). And although I believe that each of these companies have tremendous upside potential I sold GM and GOOG because I don't believe its upside is as great as the two stocks I purchased in its place.
I am a big fan of the auto industry and I believe that over the next five years it will become the best performing industry within the market. Yet, because of volatility within the market and fear of another recession both Ford (F) and General Motors (GM) have traded substantially lower with mounting questions surrounding their dependency on Europe. However, if you look at both companies you see that despite problems in Europe, both Ford and GM are posting their best sales since cash-for-clunkers and have reinvented themselves by focusing on the newest technology and fuel-efficient vehicles.
The contributing factor, to me, is Ford's new dividend and my belief that its yield will control the volatility and result in more long-term investors from its current price. Both of these companies are trading with very low valuations -- with single digit valuations above earnings -- yet are posting double digit growth year-over-year. Therefore, I don't think you can go wrong with an investment in either of these two companies, but in my opinion, Ford's upside is slightly greater than GM because of its yield. As a result I sold 80% of my holding in GM for a slight loss. My strategy for GM had been to purchase shares in the company every time it crossed below $20, with the only exception being my investment in August at $27.50. I then purchased shares of Ford at $10.50, which is now the fifth largest holding in my portfolio.
I bought GOOG in 2008 and 2009 when the stock was priced at $460 and because of the stock's recent uptrend I decided to collect my reward and take profits. However, I kept 15% of my shares in GOOG, which now makes it a small holding in my portfolio from the being the third largest. The company continues to grow at a rapid rate and finally appears to be trading off fundamental progress. However, its valuation is a bit too high for a company of its size, with a P/E ratio of 22, and I wonder if it can break through its current range and trade much higher. The company has made several significant changes in 2011 including: acquiring a handset manufacturer; acquiring a large consumer based rating company; and its own social networking site which it hopes can compete with Facebook. The company appears to be moving in a new direction and although I'm sure it will be very successful I believed that Apple presents more value at this time.
Apple trades at just 14.6x earnings compared to Google's 22x earnings, and despite its most recent quarter being considered a "bust", the company still posted revenue gains of 39% and continued its streak of higher margins with net income growth of 53% year-over-year. With fundamentals such as this and a price under $400, at the time, it was an opportunity that I couldn't pass up. The company recently broke all of its own records with sales of the new iPhone 4S and most believe a new tablet will be released in early 2012. I anticipate big things from Apple in 2012, and despite the passing of the great late Steve Jobs, the company's still perfectly positioned to capitalize on the high demand of its operating system for several years to come. In addition, I, along with many, expect an attempt to conquer the TV space which could grow the company at even a faster rate. Overall, 2012 could be a great year for the company, and if its new CEO decides to implement a dividend, which many believe is possible, then this stock could trend much higher than Yahoo's $510.43 one-year target.
The changes to my portfolio are a result of reflection and my willingness to take a profit and look elsewhere for better opportunity. And although I probably could've held these two stocks and returned large gains, I believe the changes that I've made present a better likelihood for a larger return. I believe that all investors should use the new year as a time of reflection to look back on 2011 and identify whether or not it's time to make any portfolio changes. So far I've discussed selling my shares in GOOG, GM, and AT&T (T) in a previous article. Each of these stocks were emotional attachments that I found difficult to sell, because it's hard to sell stocks that have returned consistent gains over a period of several years. However, the purpose of investing is to return more money than what you put in and if you're holding stocks with large returns then maybe it's time to re-evaluate your positions and look for opportunity elsewhere.
Disclosure: I am long F, AAPL, S, KR, DISH.