Author: Chris Rees, TenStocks
Covestor model: TenStocks
Disclosure: Long BAC, BRK.B, ACW, TOT, AVEO
After over a year sitting heavily in cash, in August as the market fell we made multiple buys. We entered September fully invested and found ourselves in a veritable meteorite storm of falling prices and bad news.
The worst company-related news and share price drop came from Accuride (ACW), which slashed earnings guidance (.pdf) from around 40 cents a share to around break even. Accuride called the change dramatic and surprising. We used slightly stronger words but will keep them to ourselves. They also said the events that led to the sudden outlook change were unique, one time, and would be mostly over by Q4 2011. Many investors didn’t want to wait that long and sold the stock aggressively. We will stay with the company for what we think will now be a late 2012 story. This should give management ample time to learn to shoot straight.
The portfolio has been buffeted on many fronts and has underperformed the market. Up until August we underperformed mostly due to being underinvested. Since August we have underperformed partly because we are now fully exposed to market risk with increased beta, and partly due to poor timing on our investment purchases.
Over the two decades we’ve been investing there have been times when we’ve felt like geniuses and times we have felt like complete idiots. Right now we are in the idiot camp. When the pendulum swings from one end to the other we try to remind ourselves we are neither genius nor idiot. We are hopefully somewhere between the two, or if taken over a five year time frame, like the kids at Lake Wobegon, a bit above average.
While the portfolio got buffeted in August and September it also got Buffetted.
We currently hold nine investments in the portfolio, selected out of a universe of some ten thousand stocks. We invested in Bank of America (BAC) (at higher prices), and in late August Mr. Warren Buffett through Berkshire Hathaway (BRK-B) invested $5 billion in the troubled bank. We think this puts a floor under BAC’s stock price at around $5 a share, and virtually guarantees BAC’s ultimate survival because we think Mr. Buffett is ready and willing to put in more cash if needed. He will, of course, extract his pound of flesh.
At the same time, Berkshire Hathaway itself fell to a price we thought compelling. We added Berkshire ‘B’ shares to the portfolio on August 26, paying around $68. On September 26, Berkshire announced they would begin buying back stock due to its undervaluation. We think this effectively puts a floor under Berkshire’s share price at around $65.
We don’t know how the portfolio will perform over the next few months or even over the next few years. But if we build value into each investment and diversify across different sectors, then ultimately we believe that value will be priced correctly by the market.
We are pleased Mr. Warren Buffett sees value in two of our nine investments. Now we’d just like him to buy the other seven.
