Last week something special happened in my life. My first child, Enzo, was born. This is one of those events that makes you stop and think about life and the future. Warren Buffett once said “someone’s sitting in the shade today because someone planted a tree a long time ago,” and nothing is more real than that.
In the stock market as in life, everything is about time (not timing). I have always considered myself a value investor because I always make my investments by looking at the world at least 5 or 10 years ahead. I’m not sure if my son will have a brighter future than any of us, but what I do know is that the tree I have planted for him is already growing with forward looking investments.
I’m very surprised by how short-sighted people can be sometimes, and how frequently they buy and sell in a panic for no other reason than that a stock is currently going up or down. People rarely focus on the bigger picture, and they have very little understanding of the role of human cycles in economics.
Human cycles are long-term and they control the ups and downs of the stock market. Making money on the stock market overnight it is just not realistic, but it is also a very dangerous game. The larger the risk you take, the better the opportunity for big returns, but also the greater the chance for extreme losses.
It seems that everything in life is balanced by risks and returns – not just in finance and economics. I’m not a risk taker, and when you have a newborn, risk is the last thing you want. That’s why my investments take a very conservative approach. Investors in my portfolio shouldn’t expect to become rich overnight, but they can expect consistent positive returns in the long run.
This balanced approach in my portfolio is informed by a few simple rules:
1. No one investment accounts for more that 25% of my total portfolio
2. My top 10 positions account for 66% of my total portfolio
3. I have fewer than 40 positions in total
4. 70% of my portfolio is allocated among companies with $10B or more in market capitalization
5. I generally never sell a position before I’ve had it for at least a full year
6. Most of my investment are long-term (a minimum of a 3 year investment)
7. I focus on stocks of good companies that I believe are undervalued
So far this strategy has worked fairly well. Since its inception on January 18th, my Dividend Paying Large Caps portfolio was up 11.8% net of fees as of October 31–or 3.7% more than the S&P 500. (Since then, the portfolio has given up some gains and is up 5.5% since inception as of Nov. 15)
After the US election, stocks tumbled to their lowest levels in three months amid concerns about the U.S. political landscape. It is time to prepare for turbulence ahead. From this point forward, the stock market will be under pressure as the U.S. deficit will once again be at the center of the conversation.
My plan for 4Q is to strengthen my position in a few key sectors that are getting ready for rebound as well as in consumer goods companies, which are better suited to the turbulent winds ahead.
In particular, I plan to strengthen my positions in Pepsi (PEP), Coca Cola (KO), and Dupont (DD) – all three of these companies are trading at a reasonable PE and yielding around 3% in dividends. I believe this conservative approach in Q4 will allow me to finish 2012 above the S&P 500, but we shall see. In my next letter to investors, I will share a review of these investments.
Performance discussed is net of advisory fees. The investments discussed are held in client accounts as of October 31. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Any index comparisons provided in the blogs are for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors.
