2012 Q4 – Report

We can only enjoy the rewards of long-term investing if we are prepared to tolerate short-term losses” – NG Kok Song

(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 is based on market levels at 12/31/2012. My market level valuations are based on historic PE ratios, profit margins and Q-Ratio among other criteria.


Current Market Valuations:

International Markets: International markets are overpriced by about 15% and need to drop about 35% to be a true bargain.

Emerging Markets: Emerging Markets are slightly overpriced and need to drop little over 25% to be a true bargain.

US Large Caps (S&P500): S&P500 is overpriced by about 40% to fair value.

US Small Caps (Russell 2000): US Small Caps continue to be tremendously overpriced and need to drop over 50% just to be fairly valued.


Current Portfolio as of 12/31/2012:

Name

Symbol

% of Portfolio

Cash and (Cash like Instruments)

65.58%

Berkshire Hathaway

BRK.A

15.65%

ProShares Short Russell2000

RWM

8.91%

Asian and Emerging Market Currencies

8.68%

ProShares Short 20+ Year Treasury

TBF

0.50%

Greece

GREK

.69%


My Current Positions:

Cash and Cash Like Instruments65.58 %

My cash position increased slightly due to the selling of my Italy and Ireland holdings in 4Q.

Berkshire Hathaway15.65%

Berkshire Hathaway continues to be my core equity holding. It is also a play on quality by shorting Russell 2000 stocks.

Russell 2000 Short – 8.91%

US small cap stocks have been grossly overpriced for over a year now. If the markets continue to go up, I will add to my short position.

Historically in situations like this stocks eventually reach fair value either by going nowhere for many years and allowing inflation to lift all boats or the more likely scenario a sharp decline which allows stock prices to drop to fair market values. I suspect we will see the later scenario eventually. (Although the irrational exuberance can go on much longer than most imagine.)

Asian Currencies8.68 %

My Asian Currency position is an insurance policy against the falling dollar. I have been wanting to add to my Asian currency position but with a steady rise in their evaluations I have been reluctant to do so. Hopefully I will get another chance.

Long Treasury Short.5%

A small position to capitalize on any large drop in US Treasuries.

Greece – .69%

Even though I have made over 50% on my Greek stocks since my purchase in Q3 I continue to hold them since I feel there is still a larger upside.


Year in Review:

Things I got wrong:

2012 was a year of being defensive. I was hoping that US markets would drift more towards fair value, instead they continued to rise. I don’t know how much longer US stocks can continue to defy gravity but I am willing to accept that it may take place for much longer than I anticipated. Instead of being long I played it more safely. I stayed mostly in cash which earned about 1% and going long Berkshire Hathaway and shorting Russell 2000 which produced around a 1.5% return, compared to the Dow which rose over 7%. My underperformance was over 5%. Although for me the downside of going all long was a lot larger than the upside of a few percentage points, it nonetheless caused an underperformance to the overall portfolio.

Things I got right:

2012 was a year for staying in cash and waiting for fat pitches to come to me. Unfortunately there were very few fat pitches which came my way but the ones that I did swing at I managed to hit out of the park.

I purchased Ireland stocks in Q3 and sold them in Q4 after a 21% gain.

I purchased Italian stocks in Q3 and sold them in Q4 after a 36% gain.

I purchased Greek stocks in Q3 and continue to hold them with over 65% gain.

Unfortunately the markets did not allow me an opportunity to take on much larger positions so the great outperformance was not a large factor in my overall portfolio.


Things I am watching:

I continue to stay in cash and wait for fat pitches to come my way. I sold off my Italian and Irish holdings in Q4 and hopefully will get another chance to pick them up at bargain prices in 2013 if Europe unwinds. There are a number of countries (mostly in Europe) all within 20% of being a true bargain, if problems persist I hope I will be able to put a lot of cash to work.

Hopefully 2013 will be the year where amazing bargains will become available, until then I am disciplined and happy staying in cash and waiting for the markets to come to me.


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

4Q 2012 Performance

2012 Performance

My Portfolio

-.01%

0.84%*

S&P 500 (IVV)

-.87%

13.64%

Total World Stock (VT)

2.92%

14.44%

* My performance was actually a bit better but for simplification I am not counting the return on my cash which was around 1%

Michael Page

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