How I'm (Just) Beating This Tough Market

LONDON -- When you start to build a portfolio, it is a good policy to spread your investment across many different sectors of the economy, rather than putting everything into one type of business. So you buy shares in a bank, a pharmaceutical company, a builder, a supermarket, etc., in order to reduce your dependence upon any one industry.

But nothing forces you to invest in every sector of the stock market. The sectors you avoid can be as important as those in which you invest, as is the decision whether or not to invest overseas.

I really don't like banks
While I use the FTSE 100 index as a benchmark, my portfolio of more than 40 shares looks nothing like it. This is because I avoid financial companies like the plague, while barely more than 1% is invested in one of those multinational mining companies that distort the index. I'd never own shares in something like Kazakhstan's Eurasian Natural Resources, which is down by some 27% on the year as I type this.

I distrust banks and insurers because they are easily damaged by greedy or reckless management, as we saw in 2008 and 2009. If you can quickly gear up your balance sheet by making loans or by selling insurance too cheaply, then things can go horribly wrong, as shareholders in The Royal Bank of Scotland and HBOS found out.

Nowadays, I tend to avoid companies that do most of their business in Britain. This is because I believe British politics is increasingly dominated by a class of professional politicians and advisors who have little experience outside university, politics, and the public sector. This makes Britain an increasingly hostile country in which to do business.

What I do like
I am very overweight in distillers, multinational consumer goods, oil (not such a good idea this year), and North American railroads.

The net result is that the dogs in my portfolio -- and there are a few this year -- have been offset by the good performers to the extent that I'm beating the FTSE in 2012 by almost 2% (including dividends). And while I consider five months to be far too short a period for performance measurement, over the past decade I've beaten the FTSE 100 by several hundred percent, in large part because of my choice of sectors and the decision to increasingly invest overseas.

My big losers
It can be quite cathartic to acknowledge your losers, so here are some of mine for 2012. The price changes for the American and Canadian shares are denominated in sterling, rather than in greenbacks and loonies.

The consumer goods sector is normally a strong performer in troubled times, because people generally don't cut back on these products, but it has had a rough year. A big problem is that Procter & Gamble showed in its most recent quarterly report that it was having difficulties controlling its costs, and this hit the rest of the sector.

Health care has taken a hit, and AstraZeneca is turning out to be a big disappointment. It has been under pressure from its major shareholders because its research and development policy has failed to replace its portfolio of expiring patents, to the extent that its chairman and chief executive officer are both taking early retirement.

That said, I sold almost half of my AstraZeneca shares earlier this year at a much higher price, and the shares recently paid a dividend of about 4.6% of the current price, so the damage isn't quite as bad as it looks.

Seeing Soco International here is rather painful, as it is my largest holding by a longshot, though I'm still very much up on the deal, having bought my first Soco shares more than a decade ago. I am hopeful that Soco -- or its Vietnam operations -- will be bought in the next couple of years at a substantial premium, at which point I shall make my exit.

My big winners

You may not have heard of Beam or Brown-Forman, but you've probably heard of, or perhaps even drunk, their flagship whiskeys: Jim Beam and Jack Daniel's.

I own shares in these two companies because people all over the world will still be drinking Jack Daniels and Jim Beam -- and much more than they are today, long after many of today's corporate titans are just names in the history books. But many investors will be put off by these companies' shares, whose price-to-earnings ratios are just over 23, making Diageo seem cheap in comparison.

National Grid is one of those companies that produce essential goods and services -- in this case, the transmission of electricity. Shares like these are invariably good performers in uncertain times, as many investors will buy them for their defensive qualities.

Canadian Pacific has done well because an activist hedge fund has been turning up the heat on its board since last October. Its recent annual general meeting saw the CEO resign, along with several other directors, and an interim CEO has been installed with the intention that railroad legend Hunter Harrison will take the job later this year.

Hopefully, things will improve in the last seven months of the year!

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Further investment opportunities:

• The One UK Share Warren Buffett Loves
• Eight Stocks Held By Britain's Super Investor
• The Market's Top Sectors