A Tale of Two Years

For equity investors, 2008 and 2009 were night and day. In 2008, stocks were pummeled, as the S&P experienced its third-worst performance ever, falling -38.5%. The only two worse years were during the Great Depression, with the index down -47.1% in 1931 and -38.6% in 1937.

After a difficult start to 2009, which saw the S&P fall another -26% to a low of 666.79 on March 6th, stocks staged an unrelenting and monumental rally. After all was said and done, the S&P finished up 23.5% for the year.

Before we review the Recommended List’s 2009 performance, we wanted to take a look at the two years combined, as they will be inexorably linked. Despite the strong rally in stocks this year, the S&P is still down -24.1% over the past two and given the prevalent doomsday predictions from pundits, many investors probably find themselves still deeply in the red. The Recommended List by contrast is up 6.4% over the past two years, a huge 30.5% difference.

In late August 2008, with the S&P down -12% year to date, we outlined a strategy for Bull Market subscribers at what could very well be the seminal moment of our long-running publication. Expecting a fairly large market dip – although not nearly as big as the one as the market ended up delivering – we laid out a game plan in which recommended subscribers raise cash, start identifying their favorite stocks for the long term, stay diversified, wait for the dip, and then to start dollar-cost averaging into the market weakness. We followed this strategy up with a call for investors to take advantage of the market’s high volatility by writing (selling) puts as another way to dollar-cost average into stocks.

In the end, the strategy proved to be a great success. In 2008, we added 13 new positions to our Recommended List. While not all of them were winners, the average return of the group through the end of 2009 was up 40.0%.

The biggest winners of the Class of 2008 were Apple (AAPL, $214.01, 3.28), up 129.2%; Darden Restaurants (DRI, $35.00, -0.07), up 81.6%; Kinder Morgan (KMP, $62.25, 1.27), which returned 76.8%; and Annaly (NLY, $17.41, 0.06), which generated a total return of 62.9%. Notably, the four stocks are from completely different sectors: tech, consumer discretionary, energy, and financials. The biggest loser was Latin American wireless giant America Movil (AMX, $48.81, 1.83), which we dumped after about 3 months for a -19.2% loss in September 2008.

Our nine new Recommended List selections in 2009 have also proved to be solid contributors, returning an average of 39.2%. The biggest winner was Psychiatric Solutions (PSYS, $21.42, 0.28), with a 109.4% gain, followed by Linn Energy (LINE, $28.45, 0.57) up 100.2%; NuStar Energy Holdings (NSH, $27.73, 0.81), which gained 46.6%; and Synovis Life Technologies (SYNO, $13.11, 0.20), up 38.5%.

Combined, the 22 new Recommended List selections for 2008 and 2009 have generated an average return of 39.7%.

BMR Take: Overall, we’re very pleased with our performance over the past two years. 2008 was an extremely difficult year for investors, us included, and while our -23.8% return that year wasn’t anything to write home about, it was 14.7% ahead of the S&P and positioned us well to get back to even. With a 39.6% return in 2009, we did just that and more, giving the Recommended List a combined 6.4% return over the two-year period.

What’s also important is that we achieved these solid results using a balanced approach without taking undue risk. The Recommended List was not only well diversified across sectors, it also had a nice mix of growth, value, and income stocks ranging from mega caps like Microsoft (MSFT, $30.95, 0.47) to small caps like Anworth Asset Mortgage (ANH, $7.04, 0.04). We’ve also never tried to chase the hot sector or invest in a lot of speculative names.

Of course, not everything we’ve done over the past two years has turned to gold, and if we didn’t dump auto parts supplier Tenneco (TEN, $19.42, 1.69) at year end 2008 for tax-loss considerations — a stock we said new investors should consider — our very strong 2009 return would have probably been down-right eye-popping. There were also several “watchlist” stocks we really liked that we wrote about — such as WMS Industries (WMS, $40.90, 0.90), Akamai Technologies (AKAM, $25.92, 0.58), and Bed Bath and Beyond (BBBY, $39.03, 0.42) to name a few — that we cut too fine and never got around to adding that would have boosted returns.

With that in mind, our goal for 2010, as it is every year, is to not rest on our laurels; to learn from past mistakes; to strive to become even better investors; and to give our subscribers the best research we can provide.

We’ll examine the Recommended List’s 2009 performance in more detail tomorrow.

A daily investment service that identifies winning long-term growth, value, and income stocks, BullMarket.com’s winning trades in 2008 boasted an average return of 77.4% last year.

Tags: AAPL, AKAM, AMX, ANH, BBBY, DRI, KMP, LINE, MSFT, NLY, NSH, PSYS, SYNO, TEN, WMS