For the fifth straight year, the Enlightened America portfolio outperformed the broader market with gains of 7.6%, beating the S&P 500's flat performance for the year -- readers can view the portfolio in spreadsheet format here. Warren Buffett once stated that an investor needed 5 years minimum of track record before any judgment as to investment acumen can be made. I have now cleared this hurdle, in some of the toughest trading markets in at least a generation, so some expectations to meet investment objectives may be reasonable at this point.
While beating the market is gratifying, I must reiterate my primary investment objective is not to beat the market each and every year. Rather, I seek to outperform the market during down years, of which 2011 may be included in this category, and to remain within shouting distance of the broad market during bullish years. These are exactly the objectives laid out by Buffett during the years of his hedge fund and if accomplished over the long term, should lead to preservation and growth of capital.
While year-end recaps are customary with the advent of a new year, it may also be instructive to review the portfolio activity in 2011 as it may yield clues on how to continue gains in 2012. In a year when stocks basically went nowhere, almost all my new positions in 2011 generated gains which points to the importance of price in determining investment success. Buying stocks at the correct price is the primary tenet of my investment philosophy. New holdings in the year like Cisco Systems (CSCO), Devon Energy (DVN) and Applied Materials (AMAT) all registered 10-20% losses in 2011 yet each generated positive gains for my portfolio since they were purchased at what I believe to be fundamentally undervalued prices. It is still too early to declare success with these holdings but I am confident these stocks' value will come through over time. Surprisingly, long stodgy GlaxoSmithKline (GSK) was my biggest winner among equity holdings, followed by ExxonMobil (XOM) and some gold mining positions -- all of which were long-term positions (i.e. bought over a year ago).
The other big driver behind 2011 gains was my use of covered calls and naked puts to generate returns in a market that ultimately went every which way to return to zero. I have detailed conservative yet effective options strategies before and 2011 is a prime example of how valuable these strategies can be in stagnant markets as options generated roughly a third of my total return. As my portfolio is heavily invested in gold sector stocks, options are a great way to monetize the volatility inherent in the sector, thus turning a supposed "risk" into a benefit.
But I do not rehash 2011's glories merely to pat myself on the back -- despite the change in the calendar year, I believe these same strategies will benefit investors in 2012. Value investing and buying stocks on the cheap is a timeless strategy, especially if investors focus on decent and dependable yields so we are paid to wait in the event we must wait for a time before realizing full value. As investors fret over headlines in Europe, some stocks may get even cheaper yet and present opportunities for those able to tune out the noise and focus on the long-term horizon.
Trading options to either monetize current holdings approaching fair value (via covered calls) or wished-for prospects nearing adequate margin-of-safety prices (via naked puts) remains attractive. There is some risk of being called away and forgoing some gains which is a rather luxurious problem. More worringly, a market crash could force us to buy stocks at much higher prices than necessary but if we choose our stocks and entry points wisely, this scenario would only set us up for good returns in the long term.
I have been steadfastly bullish on energy and gold for the past five years and I see nothing to change my stance. We live in a world of energy scarcity, despite our country's recently bountiful supply of natural gas and it is instructive that despite oversupply, natural gas companies like Chesapeake Energy (CHK) and Devon Energy (DVN) remain resilient and adaptive. Peak oil theory is still valid, even if energy companies manage to transition advanced natural gas drilling techniques to oil production. After all, peak oil does not hold that we are running out of oil, only that production becomes increasingly difficult and less productive as we tap the planet's reserves. Fracking oil shale or drilling miles into the ocean off the shores of Brazil is definitely much more resource-intensive than drilling in Saudi Arabia 50 years ago. Green energy remains insufficient to replace carbon fuels and Japan's nuclear incident may have set back that industry world-wide. A decade into the 21st century, 20th century energy is still the primary fuel of the global economy, thus peak oil remains an actionable investment thesis.
Unlike oil, gold and precious metals are not indispensable to the global economy but as long as the world's major economies engage in a race to devalue their currencies, run up huge deficits and maintain unfeasible economic strategies, gold will continue its near decade-long run up. One of the biggest criticisms of gold as an investment class is that it pays no interest, unlike bonds. But now we have a situation where (short-term) US Treasurys effectively pay no interest either. The recent correction should not worry investors (at least those who didn't buy at $1800+) -- if government officials profess undying adherence to loose money policies, gold inevitably benefits. Investors may want to pick their spots to enter positions but this may be more difficult than with equities as gold's intrinsic value is inherently relative to the world's major currencies and cannot be fundamentally derived like a regular company's stock. Investors may fare better with gold mining stocks, which have lagged the metal's run up and many seem undervalued compared to assets in the ground relative to gold/silver's market price.