Wednesday, September 1, 2010

Portfolio Update: Semi-Annual Report August 31, 2010

In Feb 2010, I liquidated all my holdings since the market had moved up dramatically and the margin-of-safety for the securities in my portfolio then had narrowed. I now intend to track the performance of my portfolio (since Feb 2010) and make it public on a semi-annual basis. However, this performance is not audited (not because I don't want to, but the costs don't justify at this point). Also, leaving such a paper trail is useful to objectively evaluate oneself on a 3-5 year basis. If I don't track it in writing and make it public, there are good chances that I will either not remember the years of poor performance or selectively choose to forget about it. How many things you thought about 3-5 years ago do you remember today in vivid details? To keep this process as honest as possible, I do not have any other trading accounts outside of the one I am tracking. However, I do invest all my family's and my retirement funds (up to the limit allowed as per tax laws) yearly in mutual funds. I am not yet confident of my investing skills to risk my future retirement.

Do note that this is not meant to be viewed as solicitation of any kind. I am not an investment advisor, and do not have any legal authority to advice you or manage your money.  You should seek a professional investment adviser that can guide you based on your risk profile and goals. As usual, this report is not meant to be used as a recommendation to buy or sell any security.

This report is for the period Feb 1, 2010 (inception) to Aug 30, 2010. Here are the top 10 holdings in the portfolio, holdings by sector and performance history:

I have written extensively on a few of the above holdings: Ensco, Viterra, and Edenred. The investment thesis for each of these holdings at the time of the writing in the past continues to hold true.

[Section added on Sept 2, 2010] Winthrop Realty and Leucadia contributed positively to the portfolio with 18.96% and 6.91% respectively. The stocks in the energy sector - Exxon Mobil, Ensco PLC, and Noble Corp - contributed negatively to the portfolio's performance with -2.5%, -3.07% and -5.85% respectively. Accor and Viterra were marginally in the positive category contributing 1.48% and 2.55%. 20% of the portfolio is in cash and it is yielding close to zero. This is very typical of what I expect from the portfolio going forward. A few names that are working out and a few that need time for Mr. Market to catch up on. Also, with 20% cash, it gives the portfolio a chance to be ready to take advantage of any disruptions in the market to add to existing positions at a lower cost or initiate positions in one of the ideas on "deck" (research completed but not met purchase price target).

The investment philosophy for investing in a security is that of buying at a large discount from my evaluation of its intrinsic value and holding it until most of that value can be realized. This is what 'buy-and-hold' investing really means. People often mistake 'buy-and-hold' to mean holding the stock forever which often translates to holding the stock even when it is grossly overvalued. The only time I will sell a security that is cheap is to buy another security that is even cheaper i.e has a better risk/reward characteristic than the current holding or if I realize that the original reason for the investment no longer holds true. Usually, when I buy the security, its near-term outlook is dire at best - there is a good reason why these stocks are cheap. As it applies to the portfolio today, the holdings are cheap because the market at large is worried about unemployment, deflation, uncertainty about deepwater drilling due to the recent BP oil spill, decreased demand in grains around the world, weather uncertainty etc. However, all these factors are already discounted in the price of the holdings and then some. Having said that, I think that the market will take a few years to realize the intrinsic value of the portfolio holdings. I am willing to be patient. This is why value investors get paid - its really a form of arbitrage. Besides, doing so also helps keep the portfolio turnover low, and the tax bill smaller.

Another characteristic of the portfolio is that of being concentrated. Currently, I hold seven stocks invested in three sectors. My portfolio would fail miserably if an asset allocator looked at it. However, there are a few reasons for doing so. I still have a day job that I like and try to put my best in which leaves me limited time to perform high quality in-depth research. It is physically impossible to do so and have more than 10 securities in the portfolio. Studies have shown that a portfolio needs no more than 10-15 securities to get most of the benefits of diversification. If you have 100 stocks in your portfolio (or your mutual funds has that many stocks) then its really just going to mimic the market. In such a case, you are better off just owning an index fund. The downside to having such a high concentrated portfolio is that a single mistake can cause a big dent. I try to minimize this risk by buying stocks that are selling at a discount of 40-50% relative to its intrinsic value, that have very low levels of debt, do not require continuous access to capital markets, and are not reliant on the mercy of rating agencies (lesson I learnt from the mistakes of the investors in AIG during the crisis).

Even though the portfolio has held up well (+5.45% vs -5.85% for S&P500), there are chances that it may under perform the market in the short run. I have no way of predicting what the market will do in the next six months. However, on a long-run, given the portfolio holdings today, I feel pretty good about it. I do not have a target performance goal (because that may cause one to take unnecessary risks without having adequate payoff), I expect the portfolio to return north of 15-20% for each of these holdings.

My next report will be on March 1, 2011.


  1. could you post your average purchase price for the portfolio items? like as a new column in the table next to %ages.

  2. Average Purchase Price:
    Winthrop Realty Trust: $11.52
    Leucadia: $19.97
    Ensco: $42.43
    Noble Corp: $33.03
    Exxon Mobil: $60.60
    Viterra Inc*: $7.62
    Accor+Edenred**: $47.67

    *Viterra Inc quoted above in US$, but purchased on Toronto stock exchange in CAD$.

    **Accor+Edenred quoted above in US$, but purchased in Euros on Paris Euronext exchange prior to the parent Accor's spin-off of Edenred. As per the spin-off transaction, one share of Edenred received per share of Accor and a dividend of 1.25 euros.