2013 Q3 – Report

 The best way to outperform is to avoid the disasters” – Jim Chanos 


(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 9/30/2013. My market level valuations are based on historic PE ratios, profit margins and Q-Ratio among other criteria.

 Current Market View:

We are indeed living in interesting times. Extremely overvalued markets continue to defy gravity pushing higher and higher regardless of underline evaluations. The big problem in investing during bubbles like this one is that you either look foolish by getting out before the top and watch everyone else make money or you look foolish getting out after the crash. I chose to be in the first category. I took a defensive position in my portfolio last year and I missed a big chunk of the melt up that has taken place. But to me the downside is much larger than the upside and I see no reason to venture onto thin ice to pick up nickels and dimes.

The majority of the time you pay a very high price in the stock market by staying in cash but when the markets are this overvalued I am willing to pay that price. For those who have been reading my market forecasts over the last two years you may get the impression that I am pessimistic perma bear but that is not the case. For most of my investing history I have been almost fully invested in the market. As a matter a fact, the last time I was positioned this defensively was in 2007 and 2008 before the big market crash.

There are currently some decent deals to be found in the emerging markets which are now trading at average historic evaluation levels and normally I would venture into them. But with the US stock market being ridiculously overvalued, I fear that when the crash comes, it will drag other markets down as well. That’s why I feel comfortable staying on the sidelines.

Just how overvalued is the US stock market? It depends on which criteria you want to focus on. For me – I like the Shiller PE ratio (the S&P 500 divided by the 10-year average of inflation-adjusted earnings) along with a few others. If we look at the Shiller PE ratios we see that the market has only been this overvalued a few times in history: before the 1929 crash, before the 2008 crash and at the middle of the dot com bubble.

Over the last 15 years if you were fully invested in the market you would have seen your portfolio lose close to 50% of its value – twice. I suspect that the next market crash will be no different. I do, however, think that the next market crash might be a lot scarier than the last two. During the dot com and real estate bubble crashes the investor had some silver lining of hope that the Fed would move in to protect the system and lower rates to spur growth. Unfortunately, at current historic low rates, there is very little that the Fed can do. For this reason, I think the next crash will be truly scary for investors as they realize that there is no safety net and nobody there to save them.

When will the crash happen? That I cannot predict. I do know that sooner (rather than later) the markets will offer some truly amazing deals which will allow an investor to make a very generous return on their investments. Unfortunately, now is not that time.

Things I am watching:

Emerging Markets are about 25% from a true bargain. I also see a lot of opportunities in a number of countries in Europe as well as Russia and Brazil. I hope to go into them once they hit new lows and establish momentum.

Current Market Valuations:

International Markets: International markets are overpriced by about 30% and need to drop about 45% to be a true bargain.

Emerging Markets: Emerging Markets are trading at a slight discount.

US Large Caps (S&P500): S&P500 is overpriced by about 50% to fair value.

US Small Caps (Russell 2000): US Small Caps continue to be tremendously overpriced and need to drop over 60% just to be fairly valued.


Current Portfolio as of 09/30/2013:



% of Portfolio

Cash and (Cash like Instruments)


Berkshire Hathaway



ProShares Short Russell 2000



Asian and Emerging Market Currencies


Emerging Market



ProShares Short Small Cap 600



ProShares Short 20+ Year Treasury



 My Current Positions:

Cash and cash like Instruments – 61.01 % – Dry powder waiting to be put to use.

Berkshire Hathaway – 19.64% – My largest stock holding over the last few years.

Russell 2000 Short – 10.02% – I added a bit more to my short position over the last quarter.

Asian Currencies – 8.42 % – An insurance policy against the possibility of a falling dollar.

SBB/VWO – .37% – It is tempting to wade into the markets, unfortunately there are very few bargains to be had. In those situations I tend to prefer to play the spread (going long and short). One such play which screamed as a bargain is the spread between returns of emerging market stocks and small cap US stocks. Based on evaluations EM should outperform by about 10% a year on average over the next 5 to 10 years. (How it will do over the next year or two is anyone’s guess). I established a small position going long Emerging market and Shorting S&P SmallCap 600 which I hope to add to if the spread widens.

Long Treasury Short – .54% – Small insurance against a drop in treasuries.

At the start of the year I established a small position of going long gold miners and shorting gold. I closed out my position last quarter at a small gain after I started to become more and more uncomfortable holding Deutsche Bank ETN. (DGZ) (ETN unlike an ETF is only backed by the faith of the bank issuing it). With Deutsche Bank’s current leverage of close to 50X, I did not think I was being compensated for taking on that much risk. 

Brazil Equities –  I closed my position in Brazil equities last quarter for a small gain.

 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.


3Q 2013 Performance

1 Year Performance

Performance since tracking (1/1/2012)

My Portfolio




S&P 500 (IVV)




Total World Stock (VT)





* 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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  1. Hey Mike love the blog.

    Any reading you would recommend in terms of investment?

    • Thanks for the kind words. Some of the best books on investing that I have read are from Larry Swedroe. Check out The Only Guide to a Winning Investment Strategy You’ll Ever Need, The Successful Investor Today: 14 Simple Truths You Must Know When You Invest and What Wall Street Doesn’t Want You to Know. You can’t go wrong with any of them.

  2. Thanks

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