As we have pointed out on our blog profile one of the reasons we believe we are good at running a personal hedge fund and trading with the big boys is that we have made about 90% of all the mistakes one can make trading and investing. The year 2012 will push that level up to around 92% or so as we made another big mistake that hopefully we will learn from and move on. That mistake is holding onto underwater positions too long. This goes under the rule we pointed out in trading mistakes as not being able to take a loss. Oh, it is hard to begin with, but even more so in our fund since even with a paper loss carried forward many positions we were holding still produced positive cash flow. We take great pride in the fact that unlike other hedge funds ours is built to avoid the worse killer of profits in hedge funds and that is forced liquidation. However in 2012 we took that too far and continued to carry forward losses that should have been taken earlier.
We could have continued to carry forward a good portion of those losses into 2012 and produced regular monthly cash flow and recovered some capital paper losses. However since we believe there will added opportunities to make higher monthly cash flow and profits going into 2012 we made a decision to dump all but three positions in our fund in December. The last three positions are losses but they are so small we would not be able to start a put position on them now so keeping them was a normal decision for the fund. So the losses we took in December will result in a much below normal year for the fund. However we are highly encouraged by the much higher than normal cash flow for December that should move us into 2012 in a solid position for additional higher profits.
The final net percentage gain for 2012 is 8.7%, which as noted is much lower than our expected annual results. Frankly this is not a performance to be proud of in any year. Of course if we take the three years the fund has been in existence it does look much better. 2009 the results were 32.2%. 2010 results were 17.2%. The average for three years is 19.4%. We also note that almost all hedge funds operated at a loss for 2011 so we still beat the market averages and anything one could do investing in bonds or stocks alone. We also enjoyed the competition this year as usual.
As noted going forward we anticipate a better than average 2012. That coming from a tighter universe of trading stocks now down to 15 from our normal 25 or so. Even thought that will concentrate our holdings into larger shares of each security we believe the stocks we have selected to continue forward are much stronger and less volatile in a very unsteady market. Europe will likely continue to shake up things in the US with the ECB printing money it simply is a fact that using more debt to cover up debt Europe already can not service is a losing bet. Sooner or later that house of cards will fall.
We also believe the economy in the US will only get marginally better. Nothing in Obama's plans, or actually lack thereof, bodes well going forward. I do believe there are more risk takers taking chances with capital investments. However much of that is not long term investing, just people taking short term trading positions. The small uptick in housing is nothing more than some investors picking up serious bargains at what some believe is near the bottom of the real estate market. Much of the improvement in the stock market of late has been mutual funds taking window dressing positions for the coming year end reports. It is also a fact that many savers have completely given up on extremely low CD savings rates and low government US Treasury rates and finding other vehicles for yield. Note that most of the movement in stocks in the last month has been higher yielding DOW stocks and electric utilities which are considered safe investments. Tobacco stocks have made a huge move upward and now in our opinion have reached dangerous territory with their implied risk profile. Utilities are reaching that level as well.
There are actually few real values in stocks currently in our opinion excepting for one area. That area is agency reits, yes we are noting them again. The fund now has it's largest position in thesereits it has ever held and we are looking to add to that position in January likely making it our largest position going forward. The Fed is likely to do a QE 3 in the first quarter and those buys could be in mortgages so that will buoy these stocks even more than the implied Fed's point that rates are going nowhere until 2013. The only risk for two years is if Obama goes nuts and decides to end US government guaranteed mortgage programs, which we think highly unlikely. So why not earn 15% on your money via dividends even without the added derivative premiums.
We will be posting our trading stocks and a brief summary soon so others can see where we will be placing our capital in 2012. The addition of GG is the most obvious add and we opined about that addition in an earlier posting. If risk profiles improve in 2012, we will look at SCCO as an add back. Otherwise we will stick with the updated trading stock list.
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