It therefore pays to assess one's own performance and learn from the mistakes made as it's not just the winners that count - the whole point of equity investing is to pick the right companies at the right price in the first place or why bother - but learning from the errors.
I would hazard an educated guess that I am not the only one going through this mental process right now as the market environment has made it far from easy for both large and small-cap investors alike: at the time of going to press, 25 of the 44 sectors in the FTSE 350 index have fallen in value, posting an average loss of 12.5 per cent. The 19 sectors in positive territory have gained an average of 6.7 per cent. The sell-off on a company basis has been pretty even, with no fewer than 185 of the companies in the FTSE 350 in negative territory, posting an average loss of 19.3 per cent. That far outweighs the 14.8 per cent average gain on the 165 FTSE 350 winners. Big has been far from beautiful this year. The same can be said of the small-cap segment of the market in which I specialise.
Although I have made some good calls over the course of the year - maintaining a strong presence in UK housebuilding and real estate, for example, as both these sectors have been among the best performers in 2014 - I, like many, have been wrongfooted. In the circumstances, it pays to reflect on why some of these investments haven't worked out. It's also important to decide whether it's worth holding on to them.
A crude awakening
For starters, the 45 per cent slump in crude oil prices since mid-June was completely unexpected. This has sent shockwaves through the oil sector, and rightly so as a price drop of this magnitude will have a dramatic impact on the profits of oil producers, and subdue demand for oil services companies and investment in capital projects, some of which will no longer be viable at the current depressed price of $63 a barrel for Brent crude. West Texas Intermediate breached the $60 level last week for the first time in five-and-a-half years, a price point at which the economics no longer add up for some US shale gas producers which based their business models on oil prices north of $80 a barrel.
It has undoubtedly wrongfooted economists at the European Central Bank, who acknowledged earlier this month that the slump in oil prices has wiped 0.4 per cent off annual inflation and sent the region ever closer towards dreaded deflation. The important lesson I have learned here is that it pays to take greater notice of the bigger picture when making company-specific calls and in particular on a micro basis.
For instance, escalation in the Ukraine/Russia conflict, leading to EU and US sanctions on Russia, has been far worse than geopolitical analysts could have imagined. Furthermore, the impact on trade between the EU and Russia could not have come at a worse possible time for a single market facing anaemic growth prospects. It has also had a knock-on effect on companies operating in the region, one of which is Aim-traded marine services specialist Thalassa (THAL: 41p), which I bailed out off 10 weeks ago, albeit on corporate governance issues.
With hindsight, I should have seen the geopolitical situation as a major risk to earnings, an oversight on my part. Going forward I plan to write more bigger-picture macro articles, which should help unearth more companies to target on a micro level, and also help to keep abreast of the macro risks to shares on my watchlist.
Be ruthless in cutting losers
Another important lesson for me to learn from this year is to be more ruthless when it comes to exiting holdings when the tide turns. A gain is not a gain until it's banked, something I was too late in doing in the case of Thalassa. Indeed, by the time I advised selling, the shares had fallen below my original recommended buy-in price and had completely wiped out a 125 per cent paper gain!
The same can be said of shares in online gaming companies 32 Red (TTR: 38p) and Netplay TV (NPT: 7.5p). For instance, I let slip a 100 per cent gain on the latter and a 60 per cent gain on the former by not banking profits and trying to eke out more gains. Moreover, I should have heeded the negative sentiment towards the sector as this created an almighty headwind. That said, there is no point selling out at such depressed levels as both cash-rich companies are priced on modest single-digit PE ratios and offer decent dividend yields. In particular, NetplayTV looks a sitting target for corporate activity in my view.
Small-cap overseas companies
Another valuable lesson I have learned this year is to be more cautious when investing in some of the smaller foreign companies traded on the Alternative Investment Market. I have been badly caught out by the share price declines of clothing retailers Naibu (NBU: 13p), a company I bailed out of after the board axed the dividend despite holding cash in excess of the company's market value, and Camkids (CAMK: 24p).
If you followed my advice, I would continue to hold Camkids' shares on valuation grounds, given that the company has cash on the balance sheet worth 58p a share - or more than double the current share price; and the annual dividend of 4p a share is covered five times over by depressed EPS estimates of 22p for calendar 2015. What's clear here is that, although there is value on offer, only when investor risk aversion towards Chinese companies abates will the company command a more sensible valuation.
The same can be said of Fortune Oil (FTO: 7p), a supplier of crude oil, transportation fuels and natural gas in China. The company's effective 11.3 per cent shareholding in Hong Kong-listed China Gas Holdings (HK:384), an energy giant with a market value of £5.4bn, is in the books for £400m and is worth £600m - or almost four times the £169m market value of Fortune Oil! But investors are not listening and, having seen shares in Fortune Oil rise 50 per cent on my recommended buying price of 9p, they have now fallen below that level. But what can't be disputed is the glaring valuation anomaly and I would recommend holding on if you followed my earlier buy advice.
Stay alert to macro risks
Maintaining the overseas theme, shares in Raven Russia (RUS: 55p), a Russian warehouse developer and investor, have been sold off heavily due to the increased geopolitical risk. The collapse in the oil price and rouble has exacerbated the share price move as it raises the possibility of Russia falling into recession. With hindsight I should have been more alert to these macro risks, something I will always factor into my ongoing monitoring process and investment analysis in future.
That said, on a company-specific level Raven Russia is a quality company and its business is well underpinned by a supply:demand imbalance of Grade 'A' warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk. It is well funded, too, with ample credit lines in place - unlike other companies in the region; and operates in markets where there is a chronic undersupply of suitable space. Voids are only 3 per cent on a portfolio of 1.4m square metres of warehouse space, generating annualised net operating income in excess of $200m. This income underpins a generous 12-month rolling dividend of 5.5p a share.
Importantly, lease breaks and expiries in 2015 are not significant. The tenant base tends to be large, sophisticated organisations and although there will be some pressure on rental levels if the rouble exchange rate remains depressed, Raven Russia's board is "confident that they can manage the situation effectively and, in some cases, to a commercial advantage". It's worth noting that the company has US dollar-pegged lease contracts with its tenants so has largely been insulated from the devaluation of the rouble this year. Moreover, Raven Russia's weighted average term to maturity on debt is five years, it has a free cash balance of $181m and has been refinancing credit lines, so is in a strong position to exploit distressed sales by less well financed property companies.
The geopolitical situation is clearly uncertain, but this is reflected in a 35 per cent share price discount to reported net asset value of 84p a share. A 10 per cent dividend yield is also attractive. Hold.
Technical analysis
By far the most important lesson I have learned this year is to pay greater attention to technical analysis on previous share recommendations, and in particular when the chart set-up is no longer in sync with the fundamentals I follow. A chart is worth a thousand words, which is why I always analyse the technical set-up before making any share recommendation.
True, it's the operational performance of a company that drives its share price over the medium term, rather than money flows from short-term speculators whose selling can lead to near-term sell-offs. And it's the operational performance I always focus on in the fundamental analysis that forms the basis for my articles.
Nonetheless I will keep a far closer eye on changes in the technicals on my watchlist of holdings, and plan to give greater weighting to this area when deciding on when to exit investments in future. That way, I hope to be able to continue to run the winners I have selected, contain losses on holdings that have not worked out and protect the healthy gains made on what were previously successful investments. This year has been a wake-up call. As a new year's resolution, there has to be mileage in that.
■ Subject to availability and for a limited period only, Simon Thompson's book Stock Picking for Profit is available to purchase at a special discounted price of £10.99, plus £2.75 postage and packaging, for all internet orders placed at www.ypdbooks.com. The book is priced at £14.99, plus £2.75 postage and packaging, for all telephone orders placed with YPDBooks (01904 431 213). Simon has published an article outlining the content: 'Secrets to successful stockpicking'
