Risky moves in 2006 -- my worst decisions

I haven't yet done the math on my whole portfolio, but I expect overall I puttered along somewhere near in line with the S&P in 2006 -- I'll update that here in the coming weeks to continue my full disclosure.

But I do know what some of the smartest and dumbest things I did with my money this year were. Or, to be more charitable, my best and worst decisions.

My worst investment decisions this year all related to the riskiest moves I made -- investing in OTC stocks and buying after hours, both things that I would probably be better off not getting involved with (but sometimes, I just can't resist).

I own three OTC stocks (and a couple pink sheet listings, though those are for big companies that happen to be based overseas and not actively traded here), but only one of them was purchased in 2005. I've owned SpaceDev (SPDV) and Cryo-Cell (CCEL) for well over a year now, and they are two of the worst performers in my portfolio, so they might qualify as big mistakes for 2005, but not 2006.

The worst timing this past year was my purchase of MMC Energy (MMCN) -- shares of which I bought in early December at $1.24, and could now buy for about 80 cents.

MMC Energy shares have been declining because of a big registration for insider selling, which generally wouldn't worry me that much in a brand new company (it doesn't bother me when venture capitalists and insiders want to get paid for their work) ... but in this case, it's a LOT of shares, and a company with a very small float, and those two facts combine to mean that the shares are likely to be under pressure for a while. Add that to the fact that MMC is not yet on the AMEX, an event they predicted to occur by the end of the year, and the steep decline is not that shocking, even in the absence of any bad news about the company's actual operations.

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Regardless, while I still think the rule to avoid penny stocks is generally a good one because of volatility like that experienced by all my OTC shares, I still have hope for all three of these companies -- SPDV and CCEL should be profitable in 2007 if things work moderately well for them, and MMC Energy is in a capital-intensive growth phase that I think has a solid chance of building a good company.

I also know, however, that all the money I put up for these companies is at risk and might all be lost -- that's the price you pay for investing in a tiny company with potential, and I'm willing to be quite patient as these stories play themselves out.

And my second worst investing decision last year was buying shares of a company that reported terrible news in the after hours session. I thought -- and this shows you how smart I am -- that the beating that Imax (IMAX) took following their announcement that they hadn't found a buyer was terribly overdone, so following the news I picked up some shares in the after hours session at about $6. It's never even gotten close to returning to that level since.

So what are the lessons for me?

When investing in OTC stocks that are notoriously hard to value, especially new ones, go in with your eyes wide open and the expectation that you might lose all your money. At this level, you're really investing in business plans and management and potential most of the time, all of which can be a bit ephemeral. I'll continue to wait on these stocks, and to keep them a tiny portion of my diversified portfolio.

And the second lesson, learned after making this mistake several times, is to never ever ever trade in the after hours or pre-open trading. For the few times when an informed investor can make money in these sessions with some lucky timing, you pay with the many times that you had the wrong conviction which, given the time frame allowed for this kind of trading, is almost always going to be based as much on emotion as anything else.

I've learned lots of other things from my mistakes and victories in the past year, but these two risky areas stand out in terms of what they've cost. I'll share some of the better decisions I made, and what I might have learned from those, in the days to come.

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What if Brazil Really Started to Grow?

With several investments in Brazil, principally the food company Sadia (SDA) and the airline Gol (GOL) I consider the country's prospects to be significant to my portfolio's future.

So, will Lula turn Brazil back into a huge growth engine while continuing to tame inflation and help the poor ... or will he, in trying to push additional growth, bring back the freakishly high inflation of the past and sink the Bovespa ... or will he, in trying to help all the helpless of Brazil, go too far injure the homegrown companies that have helped the country become significant on the international economic stage?

I don't know ... but I hope. Lula was just sworn in for his next term, and is now considered by many to be the most successful president in Brazilian history -- and he's certainly still popular, though perhaps not as much so as when he was more of a populist firebrand in his earlier years in office (years that gave Wall Stree the heebie jeebies, for the most part).

And while Brazil is a founding member of BRIC (or CRIB, if you prefer), the big emerging countries that stand as the bulwarks of the developing world (Brazil, Russia, India and China) ... it's certainly been, in recent years at least, the least followed one in that group.

Brazil has been the kid in the back row of the BRIC class, with much slower growth than India and China who sit up in the front and raise their hands all day long ... and thankfully, with more integrity than Russia, which, to continue the strained metaphor, is the kid selling cigarettes by the loading dock (you know he's got tons of money and all the chicks, but you're pretty sure you'd get burned if you got involved with him ... just ask your friends Belarus or Ukraine).

And really, if you consider that Brazil has grown at only 2.6% during Lula's reign in office, it seems odd to consider them to be part of this fast-growing emerging group at all -- except the stock returns have been sometimes spectacular, and the future might be more spectacular still.

Brazil doesn't have the massive population of China that makes all fiscal daydreams seem possible, nor the huge wealth of educated and English-speaking labor of India ... and they don't have quite the massive buffet of natural resources to snack at of the Russians. Really, in some ways all they've got is what the US had 100 years ago -- a growing, diversified economy based on cheap(ish) labor and lots of great arable land.

They have a large population of workers that are growing in level of education and, thank to the progressive policies of the government, slowly climbing out of poverty ... or at least, from really bad poverty into just plain run of the mill poverty. And that means they have, potentially, the second largest market in the Western Hemisphere.

And most significantly, for investors, is that the country seems to be hitting a sweet spot. Lula's regime has, by most accounts, tamed inflation. Ethanol and successful offshore drilling by PetroBras mean they're less subject to oil shocks than many markets. And because much of their trade is in agriculture and other natural resources, they might not be as susceptible to a dip in US or Japanese or European demand for finished goods the way China, India, Taiwan or Korea should be.

But make no mistake, Brazil is still a risky place to invest -- and my investments are primarily domestic in nature in Brazil, since it remains to be seen whether they can become an important player in multiple industries the way China has.

But it seems that Brazil does have, at least, a population that is slowly becoming better off, a good handle on inflation, and political stability -- that's something, and if they just continue on the path to development there will be plenty of money to be made even if they don't catch fire in quite the way their more popular (or notorious) BRIC brethren have of late.

In addition to my investments in Brazilian agriculture and airlines, which depend primarily on a building domestic and regional market, I'm intrigued by Lula's promise to liberalize financial markets and make investment in Brazil easier as a way to help spur some growth. This brings to mind a few companies that might benefit.

The first ones that come to mind with that environment are the banks, of which Brazil has two biggies that are traded in the US in Banco Bradesco (BBD) and Banco Itau (ITU), both of which have been awfully successful (though BBD has a bumpier chart than ITU). I don't know a lot about those companies, but I'm not terribly interested in investing in a bank at this point.

And second is the investment banking business ... the investment houses all have interest in Brazil too, of course, including Goldman Sachs and all their Wall Street brethren ... but the one that stands out for me in Brazil is a Canadian company, Brookfield.

Brookfield Asset Management (BAM), which I looked at for a few minutes when I was pondering the next Berkshire Hathaway, has a surprisingly high (and growing) level of involvement in Brazil (and has for most of its history) -- which intrigues me. They recently IPO'd a homebuilding business on the Brazilian exchange, which if financial markets and mortgages are going to be liberalized might be one of the more prescient moves of late, and they have a growing interest in Brazilian commercial real estate. It really feels to me at times as though Brookfield is becoming the Macquarie bank of the Western Hemisphere -- and if so, that would be fine indeed for BAM investors.

I don't know if I'm ready to become more exposed to Brazil than I already am -- I think it's unlikely that I'll invest in another Brazilian company at this point, but the more I've looked at Brookfield in the past few months the more I like it ... I just wish the valuation was a bit lower, but perhaps I shouldn't get hung up on things like reported earnings when the company has such a vast portfolio of assets ... including some juicy ones in Brazil.

full disclosure: I own shares of Sadia and Gol as of this writing, and LEAP options on Goldman Sachs. I don't own any other companies or investments mentioned.

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