2013 Q4 – Report

“There actually are two risks in investing: One is to lose money and the other is to miss opportunity. You can eliminate either one, but you can’t eliminate both at the same time.” – 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 12/31/2013. My market level valuations are based on historic PE ratios, profit margins and Q-Ratio among other criteria.


Current Market View:

With 2013 behind us, what can be learned and what is the take away? For me, the take away is that markets can be irrational for longer than you imagine. 2013 proved to be a difficult year for me, while a few trades that I made have been successful overall, I simply did not have a lot of skin in the game to make it matter. I continue to stay mostly in cash and my long stock holdings are muted by a small cap short position.

Investing is a tough job because no matter how you do it – you always look foolish. Either by getting out of the market too early and staying in cash (me) or risking and losing money when the markets crashes (not me).

Here is a great example of how Isaac Newton, one of the smartest people in the world, invested during the South Sea Bubble and what I see as the fate of many investors today.

Many thanks to Marc Faber for doing the leg work on this chart.

Newton_south-sea-bubble

Mr. Newton saw an opportunity, entered the tulip bubble and got out with a decent profit. But then, seeing everyone else around him get rich, he went back in the market only to see it crash and go broke. The chase for a few percent more becomes extremely dangerous during over valued markets like the one we are seeing now. I may have missed out on a good return staying in cash, but I find that loss to be a lot less painful than actually losing money.

Markets can continue to climb but by almost any measure you want to use (Tobin Q, Shiller PE, GNP to total market capitalization) the markets are at best overvalued and at worst extremely overvalued.

I see no reason to compound the mistake of missing the rally by risking capital. The time to get into the market will come and when it does there will be a great deal of money to be made but now is not that time.


Things I am watching:

There are bargains to be had, mostly in a few Emerging Market countries (Russia, Turkey) and I may go into them once there is positive momentum but overall evaluations are rich all over.


Current Market Valuations:

International Markets: International markets are overpriced by about 35% and need to drop about 50% to be a true bargain.

Emerging Markets: Emerging Markets need to drop about 20% to be fairly valued and need to drop about 40% to be a true bargain.

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 65% just to be fairly valued.


 Current Portfolio as of 12/31/2013:

Name

Symbol

% of Portfolio

Cash and (Cash like Instruments)

60.00%

Berkshire Hathaway

BRK.A

20.56%

ProShares Short Russell 2000

RWM

9.89%

Asian and Emerging Market Currencies

8.44%

Emerging Market

VWO

0.29%

ProShares Short Small Cap 600

SBB

0.25%

ProShares Short 20+ Year Treasury

TBF

0.55%


 My Current Positions:

Cash and cash like Instruments – 60.00 % – Cash seeking fat pitches.

Berkshire Hathaway – 20.56% – Continues to be my largest stock holding over the last few years.

Russell 2000 Short – 9.89% – I added a bit more to my short position over the last quarter.

Asian Currencies – 8.44 % – An insurance policy against the possibility of a falling dollar.

SBB/VWO – .54% – I am not sure what the market will do in the short run (next year or two) but over the long run I am very certain that emerging market will outperform US small cap stocks by a wide margin. I added a little to my position of going long emerging market and short US small caps.

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

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.


 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 2013 Performance

1 Year Performance

Performance since tracking (1/1/2012)

My Portfolio

-.03%

.92%

.88%*

S&P 500 (IVV)

9.92%

32.00%

47.39%

Total World Stock (VT)

6.92%

 21.76%

37.56%

     
       
       
       

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

 

Did you like this article? Share it!
 

Leave a Comment

*