Value Hunting - 2011 Investing Review and Expectations for 2012

It has been quite a while since I last posted and December will go down as my second most inactive month this year since September. I have been planning this post for a while but wanted to see what my performance since inception where the VH fund would close this year. The VH fund for 2011 was down around 16% (since May) slightly outperforming the FTSE 250 (red line) and underperforming the All-Share (green line) by about 6%. I have done something of a wrap-up for 2011 already.

To summarize, although the performance was generally disappointing I think my mistakes were caused simply by going for returns without thinking about risk. Although I gave the example of GRG in the original post, Dart Group and Robert Wiseman Dairies are probably more practical examples as the downside was actually tested in reality. To be clear, the problem was not in buying the businesses, I would still be happier buying Dart (LON:DTG) or Robert Wiseman Dairies (LON:RWD) at a 10% earnings yield than something with more growth priced in at 8%. Rather, the problem was not seeing that given the general view of the sectors they are in, the structure of the business, and general investor sentiment that I should have been looking to get a slightly higher yield than I went in for. As I said though, I am still perfectly happy to hold both them down 25% or so.

One thing I didn't directly mention in that post but would be good to run through quickly before I give my expectations for 2012 are my positions in Switzerland and my forays in long USTs/short equities. To recap, my move into Swiss exporters was on the back of the SNB peg and my long position in 20yr+ USTs was in anticipation of Operation Twist. On the former position, it has worked out well registering a gain pretty much since I put it on. On the latter point, I was correct but did not sell out at the point of maximum optimism which was just after Twist was announced (although they have retested the high this month). I still made a decent gain, esp. compared to my value positions, but this prompted my move into a short equities position in late November which has since performed pretty badly. The question is: are these positions worth it? I feel distinctly uncomfortable with the Swiss exporter position as I don't know when it is "fairly priced" and it is much harder to monitor than all the other positions. Next year I won't be putting on any macro trades of this style although they are effective. However, I think putting on broad, hedging positions is a good idea. At the very least, exposure to the market can be hedged out. The only potential problems are choosing the right products to trade and getting the position size right. In short, I will continue these positions for next year.

I will first give my expectations for individual stocks/sectors that I think I will look at/already hold in 2012 and then look a bit more broadly at general investing conditions (i.e will I keep my short equities position).

• Exor SpA – this is one that I have already looked at (here). It is fairly simple situation, the company holds a mix of listed/unlisted companies with the market value of listed companies being more than the current market cap. Although the stakes in Fiat and Juventus are pretty scary, I think the margin of safety is good and it has some decent unlisted companies too. 
• Lookers Plc – again, one I have already looked at briefly but do not hold. The valuation is starting to look quite interesting and I think if the market cap falls to around £180m then it could be worth a look. It goes without saying that it is, potentially, quite a cyclical investment though. 
• Housing/Retail – I have lumped these two together as they are really the main value areas in the UK market. At the moment, I think the outlook for housing could be slightly better but the reliance on bank recovery is worrying. Regardless, I will be looking through the sector in the near future. The picture is the same for retail however, I think the upside is more limited. I have been watching through Debenhams, one that I held through most of this year, and Home Retail Group, in particular. Marks and Spencer Group, another one that I held, is also looking interesting but the upside probably isn't too large despite the quite decent earnings yield of 12.5%. 
• French Connection Plc – one that has been recently added but has not featured on the site but will shortly. Good cash position and a decent wholesale operation seemingly weighed down by high overheads in retail. 
• Shipping – I have held a very small position in Diana Shipping since inception. 2012 will probably be worse than 2011, massive oversupply still a problem. 
• Daiwa Industries – my first (small) foray into Japan, already ably analyzed by Oddball Stocks. Massively undervalued, underlying business making 30% returns with Y23bn in cash, and all selling for Y19.7bn. 
• Value investing – as general value stocks have had such a tough year overall I thought it makes sense to give my brief opinion on how I think they will perform in 2012. At some stage, I think there is scope for a significant revaluation however, I don't think this will come before stuff gets a lot worse. I think money will continue to flow towards "safe" stocks. As a result, I have only added "deep value" or "special situation" positions. Of the value situations out there I do not own, I would guess that housing offers the best risk:reward for 2012 (although I am sure I will shortly be consuming those words).

General – My previous analysis of the Euro situation made at the start of August proved largely incorrect and it has only got more outdated since. My general position was that the more serious things got, the more likely some solution was which didn't prove to be right although I did guess correctly that they would try some kind of union as an ultimate solution (and that France wouldn't like this, although that wasn't too difficult to see). Likewise, I was generally right that China would come down hard on inflation although we still haven't seen the impact of this.

Going forward, I am more bearish on the Eurozone situation although LTRO does appear to go some way to solving the problem. The problem of competitiveness hasn't gone away and it is still true that Germany and the like have been exporting a ton of capital down there which leads me to think more could be coming. I still am miffed about the situation in EMs but the downside potential seems quite large esp. as any slowdown may end up, eventually, with a monumental UST sell-off (at least, it doesn't seem logical/sustainable that a country as poor as China is bankrolling the US…or that Europe would ask for the same deal) . My basic view is the same though, just like the imbalance in Europe, there is an imbalance between EMs and DMs, at some stage, this will have to reverse and I think this will be good for countries like the US/UK (although it will probably cause a big equity sell-off). In short, although it really isn't the job of the value investor to be poking around these issues the downside potential is so significant that I think it makes sense to keep some hedges and so the equity short is staying for the near future.

Good luck to all for 2012!