2013 Q1 – Report

“Believe me, there’s nothing better than buying from someone who has to sell regardless of price during a crash. Many of the best buys we’ve ever made occurred for that reason.” – Howard Marks

money

(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 3/31/2013. 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 20% and need to drop about 40% to be a true bargain.

Emerging Markets: Emerging Markets are fairly priced and need to drop little over 20% 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 45% just to be fairly valued.


 

Current Portfolio as of 03/31/2013:

Name

Symbol

% of Portfolio

Cash and (Cash like Instruments)

64.51%

Berkshire Hathaway

BRK.A

17.99%

ProShares Short Russell2000

RWM

8.54%

Asian and Emerging Market Currencies

8.46%

ProShares Short 20+ Year Treasury

TBF

0.50%


 

My Current Positions:

Cash and Cash Like Instruments – 64.51 %

Berkshire Hathaway – 17.99%
Berkshire Hathaway continues to be my core equity holding. It is also a play on quality by shorting Russell 2000 stocks.

Russell 2000 Short – 8.54%
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 like I did in Q1.

Asian Currencies – 8.46 %
My Asian Currency position is an insurance policy against the falling dollar. I shifted a bit more money into the Singapore dollar over the last quarter, although I suspect that the problems in Europe might push the dollar up.

Long Treasury Short – .5%
A small position to capitalize on any large drop in US Treasuries.


 

Current Market View:

On June 28 1914 Archduke Franz Ferdinand of Austria was shot dead in Sarajevo. The death created headlines but nobody could have foreseen what would happen next. That assassination started a chain of events that eventually lead to World War I and the death of over 16 million people. (See Niall Ferguson War of the World). At times the smallest catalysts can create the biggest and unexpected fires.

I suspect the same thing will eventually happen in Europe or some place else in the world. It will be a completely trivial and unforeseen event that would set in motion a chain of consequences which would cause a great unraveling of the current markets. It might be a default on a bond payment by a small country, or a crash in an obscure bank, but sooner or later some black swan will cause things to become extremely ugly. When that will happen and how big the ramifications will be, is something nobody can predict. My feeling is the eventual stock market crash can be a lot uglier than people anticipate, especially in the US where stock prices are tremendously over priced and most likely will not be a lot higher in real terms seven to ten years from now.

The only problem with my hypothesis is that stock market crashes usually happen when there is complacency and optimism in the market. Currently most of the market spirits are cautiously pessimistic which would lead me to believe that the market crash might not be with us in the near future, even if evaluations would indicate otherwise.


 

Things I am watching:

There are currently about a dozen countries (mostly in Europe) which are within 25% of their buying range. If things become cheap enough I will be more than happy to put my money to work. Emerging Markets are also about 20% from a buy. If the US Stock market continues to climb I would add a bit more to my short position as well as shorting the long bond. These are very strange times to invest. Stocks, bonds, commodities all looked over priced, yet continue to go up. To me it would be tempting to go into the market and chase the trend. Unfortunately, it’s not a game I am good at or fully understand. I am a lot more comfortable sitting in cash and waiting for the market to offer some true bargains. Like it did last year with Italy, Ireland and Greece; all which I bought and sold for a handsome profit. 


 

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 2013 Performance

1 Year Performance

Performance since tracking (1/1/2012)

My Portfolio

1.14%

2.42%

1.58%*

S&P 500 (IVV)

10.47%

11.94%

20.2%

Total World Stock (VT)

5.79%

 8.31%

21.07%

     
       
       
       

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

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