Author: Sreeni Meka
Covestor model: Long-Term Value
In my last letter I anticipated positive growth in third quarter GDP despite gloomy news in the financial media. In fact, both third and fourth quarter GDP ended up in a positive note. Fears of double dip recession and overwhelming European debt issues rocked the financial markets in 2011 with high volatility. The S&P 500 moved nowhere for the course of the year, but edged up about two percentage points if dividends are included.
2011 was a very tough one, even for professional investors. Unprecedented market gyrations alarmed many investors, made them sell their shares at the wrong time and forced many to realize unwanted and painful losses. Sometimes it pays off to have an iron gut and ignore the noise – as long as you are holding the right equities. If you are a long term value investor, these market downturns may provide fabulous opportunities to acquire good stocks at great prices.
Our economy is clearly showing strength. Recent unemployment numbers are showing the resilience of our gigantic economy. Employers have started hiring, while some sectors including information technology are having a hard time finding resources. On February 3rd, the BLS reported that employers added almost quarter million new jobs in the month of January, which brought down the unemployment rate to 8.3 percent. The trickle down impact should mean improvement in payroll services like Paychex (PAYX), which I’m long, and other temp agency firms. Going forward, the economy may get better and unemployment may further come down. As mentioned in my last letter, I did not make any big changes in my portfolio as I did not expect any issue with our general economy.
Last year my portfolio ended more or less where it started from the beginning of the year, which roughly matched the market performance. Part of that can be attributed to my investment in China Information technology (CNIT). The financial numbers of CNIT looked very good when I purchased the stock and even better when I sold it – after a more than fifty percent loss. My lesson learned was not to bet on companies that end up subject to market deficiency notices.
It was not all that bad last year. I doubled my initial investment in Tractor Supply Company (TSCO) and am still holding it in my portfolio. Another major investment in my portfolio is Berkshire Hathaway (BRK.B), which last year went negative. This was one of the rare performances exhibited by Berkshire. Another investment – Posco (PKX) – also performed negatively. That caused a drag on my last year performance.
In my analysis, both Berkshire Hathaway and Posco are trading at way below their intrinsic values and great companies to hold. Berkshire is of course lead by legendary investor Warren Buffett, consists more than seventy firms run by highly efficient teams and is consistently generating value for shareholders. Sooner or later, Berkshire Hathaway should trade at higher multiples than it is now. As a long term value investor, these minor dips and bumps do not bother me.
As I am writing this letter (2/9/12), my portfolio is up 10.8 percent including dividends since the beginning of 2012.
Finally, in a recent article for Fortune magazine Mr. Buffett noted, “Risk is not measured by beta, but by the reasoned probability of the investment causing its owner a loss of purchasing power over his contemplated holding period.”
Stock prices may fluctuate. That does not necessarily reflect significant risk, as long as you are certain to deliver increased purchasing power over the contemplated holding period. All stock selection in my portfolio is based not on speculation but rather by thorough analysis of annual reports and comprehensive equity analysis.