A year ago, I wrote an article featuring my favourite 10 large and mid-sized companies. Since then the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen 4.81% whilst an equally weighted portfolio of my 10 picks would have delivered capital gains of 23.48%.
It is no surprise that my hypothetical portfolio has also performed better than my real portfolio over the past year. When money is at stake, stock picking becomes an emotional rollercoaster which is one of the main reasons it is so difficult to invest successfully.
In my case, at times over the past year I succumbed to greed by purchasing tiny, poor quality businesses hoping for large and quick gains only to end up with equivalent losses.
At other times, fear got the better of me as temporary share price falls led me to overemphasise minor risks and sell prematurely. Worst of all, I have even been guilty of trading simply because of boredom.
Personally, I find that talking to and reading the views of savvy investors helps me maintain perspective and refrain from trading. It is also useful to continually revisit the original investment thesis to consider if anything has fundamentally changed or if recent price moves are sentiment driven.
Although a year is a relatively short time to judge performance, the results of my theoretical portfolio appear to highlight the advantages of investing in high-quality businesses combined with a buy and hold approach.
9 of the 10 stocks generated positive returns with Flight Centre Travel Group Ltd (ASX: FLT) the exception dropping 28.10% as company profits continue to stagnate despite strong sales.
REA Group Limited (ASX: REA) was the standout performer delivering returns of 64.84% before dividends and looks on track to record yet another year of high-double-digit earnings per share growth in 2016.
The reasons for holding each of the 10 stocks as laid out in my original article remain true today and so I expect the same portfolio to beat the market over the next year. In particular, I fancy Breville Group Ltd (ASX: BRG) and Austbrokers Holdings Limited (ASX: AUB) to do well this time around.
Breville is set to continue growing overseas and could benefit from a more stable Aussie dollar as many of its input costs are in US dollars. Meanwhile, if the insurance cycle turns and premiums recover, profits should improve at Austbrokers' main broking division.
"Form is Temporary Class is Permanent"
The above is simply my best guess for what the next year has in store for these two businesses and there is a good chance that I'm wrong given predicting the timing of currency moves and industry cycles is tricky.
However, I'm pretty sure that at some point conditions will improve for Austbrokers and Breville even if I can't say it will definitely happen next year. Furthermore, over the longer term, all 10 stocks should perform well as they are well run businesses which enjoy advantages not easily replicated by their competitors.
