Hi guys,
Time for New Year's manifesto. :-)
I took some time to read Lowenstein's Buffett and to
think about investing strategy. The lesson to learn from
Lowenstein is that Buffett achieved his success through
phenomenal knowledge and extreme dedication. The guy knows
3000 companies by heart. Of course, later on in his carrier
he knew thousands of executives which only added additional
edge to his decisions. And yet he made mistakes with his
Champion, USAir convertibles, he was almost crushed in
Solomon scandal
(http://www.pathfinder.com/fortune/1997/971027/loo.html).
Of course, it's easier to get outsized returns
with smaller capital, but on the other hand, for a
small portfolio outsized returns do not matter much.
E.g. assuming a portfolio of $100K (which is not small),
outperforming S&P by 5% - no small feat -
equals additional $5K per year, which is probably less
than a potential salary bonus at work (for professionals
like some of us). Or assuming $40 per hour salary it is
equal to 125 hours of work. Which means that to justify it
economically, if you spend 125 hours contemplating investments,
you are better off by working in your job, freelancing or
possibly having a life. And this is the positive scenario.
In others, the return-on-invested-time is much less.
As John Train pointed out, it becomes practical to manage
your portfolio at around $1 mln. level (5% is 50K, so it
is justified to spend half-time attention to it).
I know some people will dismiss this by saying
that investing offers you "fun" value, i.e. you like to
do it. I can't argue with this argument,
but even in this case, the economics may be served best
by putting in 90% of the money into X, and actively
investing only 10% for "fun".
Now, what is X. That's the rub. John Train claims that
finding a good mutual fund is as difficult as finding a
good company to invest in. Let's take a look at couple of
alternatives:
1. S&P500 index. Pros: Market benchmark, mechanical,
no turnover, no manager. Negatives: Overpriced, mechanical
(includes duds).
2. Dow Dogs. Pros: Mechanical, low turnover, no manager.
Negatives: Not clear if outperforms S&P, includes definite dogs
(what if Dow drops IP and replaces it with MSFT), concentrated
portfolio (this is a negative here, because concentrated
portfolio is probably good only when you know why the companies
were selected), yield based approach in era of low yields.
3. Mutual(s). Pros: Active management, may be less
overvalued than S&P, may be better managed than S&P, access
to "other" markets (foreign, convertible securities, bonds, etc.).
Negatives: S&P underperformance, has to buy/sell depending on
inflows/outflows, even in the best case low S&P outperformance
because of the size and diversified portfolios.
4. Stocks. Pros: you select the companies. Negatives:
you select the companies. The return you get is totally dependent
on your picks, while other categories have proxy decision makers.
5. BRK. A separate category. :-) Pros: The best
investor ever manages your money. Negatives: expensive (?),
large, Buffett may die.
First of all, at this point I discard S&P500
approach because the index is expensive. I.e. I agree
with the latest Marty Whitman's missive that S&P500 is
not undervalued (see mjwhitman.com), and I
do not want to be a part of its low performance.
Second, I consider any trading strategies useless, consequently discarding all mutuals with more than 25% turnover.
Third, I believe that at this juncture of the bull
market most growth stocks are fully valued or overpriced,
so I discard all growth mutuals.
Fourth, I do not think that dividend yield is a
good measure in current environment, so I discard Dogs of
the Dow. Additional reason: I don't like mechanical strategies.
What I have left are the following possibilities:
value/Buffett mutuals, stocks and BRK. Couple of notes here:
1. I am uncertain whether it's worth to buy funds
that hold Buffett securities which I have investigated.
I.e. CFIMX, OAKMX and TWEBX are "value" funds that hold
large percentage in NKE, MAT, MCD, MO and UST as
their top holdings. I don't see the reason to buy the funds
vs. the companies themselves. TAVFX is an exception in
that it holds net-nets in Japan and some doubtful net-nets
in US. BRK is an exception because it holds fully owned
subsidiaries including insurance businesses.
2. About BRK being overvalued and large. Its
overvaluation is questionable given the "hidden" value.
Its size is less of concern if we look at
Charlie Munger's discussion about KO on Motley Fool
and at KO's last annual report claiming that KO may
grow to infinity. ;-)
3. Stocks. Considering the lack of time to
analyze the numbers and lack of talent to do that,
I should demand even higher "margin of safety" than
Buffett does. I.e. buy something only when it is
*ridiculously* undervalued. No companies currently fit this
model.
With these notes in place, and with general
Buffett/value investing strategy in mind, here's my plan
for this year and on:
1. I already own BRKb and TAVFX. I will continue
holding them.
2. I already own PEP and NKE. I will continue
holding them, even though they fail to satisfy additional buying.
3. I will decide what to do with LHO. This is
not a "forever" hold, in fact it is a short-term income
and value play with 14% yield. My current opinion is to
hold it until the yield drops to ~1.5 bond
yield (~8%) or some terrible news strike. Alternatively,
I could sell it to switch into something attractive,
though I think that LHO would drop much lower if prices
on other stocks drop.
4. Currently I do not have additional capital
to invest, so I can avoid the question of where I would
deploy such capital. Yet, I will say that I would increase
a cash position first, buy more BRK second,
and TAVFX third. I do not see any attractive equities at
this point, though I would investigate DIS, RAL, LNN and
ELY if I had money to invest. There are also a couple of
value plays but these take too much time
considering that they are not forever holds.
Please take these thoughts with a grain of salt.
My annualized return for the last year was -25%.
In addition, I'm still an IA (Investorholic Anonymous).
:-)
Good luck in the New Year
Jurgis |
