2012 Q1 – Report

“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” – Seth Klarman

(Photo: 401K)

This is not a recommendation to buy or sell any security, this is simply how I am managing my money and how I see the market. It is also a record to track my performance.

All commentary based on market levels at 3/31/2012. My market level valuations are based on historic PE ratios, profit margins, Q-Ratio among other criterias.


Current Market Valuations:

International Markets:

Currently International Markets are at slight premium. They need to drop another 15% or so (about 20% for Intentional small caps) to be fairly priced, and roughly 30% and 35% (for International Small Caps) to be a true bargain.

As of this writing (March 2012) I don’t think the markets are pricing in all the dangers that exist in Europe. I suspect that financial cracks will soon become a lot more visible for the markets to ignore.

Emerging Markets:

Emerging markets fairly priced, and would need to drop by around 20% or so from these levels to be a true bargain.

US Large Caps (S&P500)

In the US, the markets are over priced by about 35% and would need to drop by about 45% to be a true bargain.

With all the recent problems in Europe, the US looks like the skinniest kid at fat camp, which is not saying very much. Eventually the problems in the US will become more visible, specially when good opportunities will become available in other parts of the world (such as Emerging markets). I suspect US might remain strong longer that people imagine but when things turn ugly they might turn ugly pretty quickly.

US Small Caps (Russell 2000)

US small caps are tremendously over priced by about 45% and would need to fall about 50% to be a true bargain. That is not to say that they will do so in any near future, it might simply mean that Small caps might go nowhere for 5 to 10 years and allow evaluations to catch up to their price. But in any case I do not see any reason to venture into broad US stock market at current levels.


Current Portfolio as of 3/31/2012:

Name Symbol % of Portfolio
Cash and (Cash like Instruments) 68.20%
Berkshire Hathaway BRK.A 14.30%
ProShares Short Russell2000 RWM 9.60%
Asian and Emerging Market Currencies 7.60%
ProShares Short 20+ Year Treasury TBF 0.21%

 


My Current Positions:

Cash and Cash Like Instruments – 68.2 %

I don’t hold cash happily. Currently I am earning a little over 1% on the money, with inflation around 3% it means that each year 2% of my money disappears into never never land.
Last time I had a cash position this large was back in early 2008, by March of 2009 every penny I had was in the market. Unfortunately at current evaluations the downside risks far outweigh the upside in owning stocks. I patiently wait for a day when markets will offer some true fat pitches for me to swing at, till that day I am begrudgingly keeping my powder dry at -2%.

Berkshire Hathaway – 14.3%

Berkshire Hathaway is my oldest stock holding at almost 10 years. I added a little to my position last year, when the stock price dropped below book value very briefly which was a true anomaly. I would be happy to add to my position if the price again drops below book value, which is a bit over 20% below the current stock price.

Russell 2000 Short – 9.6%

With US Small caps being roughly 45% over valued I hold a Russell 2000 Short position (If stock prices fall I make money). If the small caps were to increase another 5% or so I would be happy to add to my short position.

Shorting is always a risky endeavor since even if markets are grossly overvalued they can go nowhere for a long time eventually allowing evaluations to catch up. So spotting a bubble does not always produce a profitable trade.

Asian Currencies – 7.6 %

My feeling is that over the next few years, the dollar will play a much smaller role in world currency market. I developed a small position in Asian currencies (specially asian emerging market currencies) which I feel offer the best protection against the falling dollar. As the dollar strengthened due to the problems in Europe I used it as a buying opportunity. I plan on establishing a position of around 20% in emerging market currencies over the next 6 months to a year.

Long Treasury Short – .2%

As the US long term bond yields hit all time lows I established a small position in shorting the long term treasury. I feel comfortable adding to my position if opportunity presents itself, which I suspect is a likely outcome if Europe truly unravels. If the yields go back to their last 10 year average I should see a gain of about 30% on this position although I suspect the yields will over shoot by a lot more. But one only needs to look at treasury yields in Japan to see just how long yields can go nowhere. I see this and the Asian currency position as an insurance policy against ugly outcomes in the US.


Things I am Watching:

  • Buying Emerging Market equity if the markets drop around 20%
  • Adding to my Long Treasury Short Position if yields continue to drop
  • Shifting money into Asian Emerging Market Currencies
  • Adding more Berkshire Hathaway Stock if it falls below book value
  • Adding to my Russell 2000 Short Position if markets go up about 5% more from these levels
  • Any other opportunity which might present itself or do absolutely nothing.

My Performance:

I consider myself a buy and hold investor and judge the success of my investing over a full market cycle. The performance over a quarter or even a year is pretty irrelevant in the long run. But I am including it just for reference and record keeping.

Portfolio 1Q 2012 Performance
My Portfolio -0.44%
S&P 500 (IVV) 12.11%
Total World Stock (VT) 11.79%

 

Michael Page

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