As investors herald in the new financial year, it pays to look back for lessons to learn from the year just gone. It was a very good year for the S&P/ASX 200 Index (^AXJO) (XJO.AX), which was up just over 17%, and investors who managed to keep up with or exceed the index are no doubt smiling.
While picking winning stocks is an important factor in beating the market in the long run, it can actually be more important to avoid the big losers. A scan through the biggest loser lists from FY2012 tells an important story for investors.
Stay away from weak balance sheets
Billabong International (BBG.AX) is a famous global surf brand that for a number of years provided great returns for shareholders. Over the past 12 months though, the share price dropped from just over $1.00 to 15 cents – a wipeout of 85%. Identifying that a company has complex life-threatening issues can at times be difficult but identifying a weak balance sheet and flat out avoiding these stocks can save investors from potential heartache.
After rallying for a number of years, gold ran out of steam and lost around 25% of its value. Investors in many listed gold producers saw the value of their gold-related investments plummet. Newcrest Mining (NCM.AX) lost around 56% of its value with a number peers falling a similar amount. It is a telling reminder that there is no guarantee that something which has been going up will continue to go up.
Cycles really turn
Just as the gold price didn’t glitter in FY2013, neither did resource stocks or resource-exposed sectors. Once again this was a lesson that commodity prices don’t just keep on rising forever, with many miners hit hard by softer commodity prices.
The flow-on effect to the mining-service sector was even more pronounced. Drilling companies such as Ausdrill (ASL.AX) and Boart Longyear (BLY.AX) were particularly badly hit with declining rig utilisation rates, forcing the companies to lower expectations, which in turn led to both companies share prices declining by around 75%.
One of investor Warren Buffett’s favourite lines is “Rule number one – don’t lose money. Rule number two – don’t forget rule number one!” It’s advice worth remembering if the wipe-outs are to be avoided.
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Motley Fool contributor Tim McArthur owns a share in Billabong International.