Portfolio Management, Part I

A lot of investment blogs talks about their investment ideas and make suggestions. Few of them actually show that they follow their own advice, or at least not disclosing their positions. There is no way to gauge how well they do. The one thing that almost all of them do (this including the news magazine columnists too) is to have a hypothetical "return" of their picks for the year. These are usually equal-weighted, time-neutural return, as oppose to actual value invested, and annualized. So a list of picks that show a 20% equal-weighted return, could in real life have a 5% return due to the allocation of capital, the time the positions were acquired. It also takes the human emotional factor out of the equation. When you are just human, your greed and fear hold a lot of weight in your decision making ability. In other word, when your own money in on the line, your ability to make a decision is a lot weaker than playing with fake money.

For those reasons, I don't really give a lot of crap about their claim of money they would make you if you follow their picks. So the motto here is simply, "show me the money".

So, let me start with my own. I will only mention my money that I personally manage. This excludes the money in my retirement accounts, the other accounts that I hired a money manager to mange. For my own portfolio, I remember in Nov last year, my long positions (I rarely have short positions, I still haven't master the hedging techniques) was about $80K, plus a sizeable cash position. At this point, my long position is above $110K (needless to say, I had a wonderful December and so far a rocketing January). Interstingly, my cash position has a large injection as well. Two factors, I have some rather large dividends came in in the beginning of the year. I also sold off most of my dogs in the portfolio. Here's a short run down of my postions:

AVP	2.85%
BBW	6.15%
BER	2.88%
BMY	4.51%
CORI	1.30%
CVH	2.97%
DRIV	3.28%
DWA	1.30%
FAF	4.56%
FDC	1.77%
FII	3.88%
FNF	2.31%
FNT	0.24%
HIG	4.16%
HRB	1.46%
INTX	2.81%
JNJ	2.30%
KMP	2.44%
LTD	4.52%
MHP	5.01%
MMM	7.13%
MRK	9.54%
NUTR	1.19%
ORCL	0.43%
PG	2.81%
PGR	1.55%
PIR	0.59%
SHW	1.29%
SLE	3.65%
SNP	2.14%
SPY	3.66%
USG	3.92%
WRLD	1.40%
	100%

As you can see, my top five position are MRK, MMM, BBW, MHP, FAF. By the way, if you look at the list, you might think that some of them are losers. Such as MRK, MMM invoke a lot of pain for other investors. For me, they are all hefty winners. All, except BBW, also gives me a large bonus, a superior dividend yield that beat any bond fund.

My top 5 gainers are USG, SNP, FAF, BER, and BBW. In the following blogs, I will examine why, and when I aquired these postions. This will not only help myself reexamine my decisions, thus reinforce my view or if situation changes reduce my positions; it will also give a chance to whoever is reading this blog (I know there aren't a whole lot, probably just 1 or 2) to take a peek at what my internal thinking is like.

Johnson & Johnson

The big new for me today is that J&J had declined the matched Boston Scientific's $80/shr offer for Guidant. Wall Street Journal was all over this story and played it as if it was a shrewd move for Boston Scientific to bid so high a price for the legally troubled Guidant. It really is typical of Wall Street bullshit and it's sad that many read the paper, including myself. For me, I was relieved that J&J didn't get stupid and pay a hefty price for a dud. It doesn't hurt to get a nice $700 million windfall for Guidant to break their previous deal with J&J either.

Guess what? This MarketWatch article agrees with my point of view. This event also confirms my view that J&J management is indeed a very responsible, and far more mature than a lot of companies out there.

Fruitful day

This has been a very good week for me. For the fourth straight day that my portfolio has beaten the market. Yesterday while the index was down 0.17%, my portfolio was up 0.33%, making it "only" 0.5% ahead of S&P500. This morning I am about a warping 1% ahead of the index. But as I have seen before, the difference between what the market performs and how my portfolio perform against it could vary dramatically throughout the day. While this is exciting, only the closing bell can have the final say. That said, I never outperformed the market by this kind of margin in a single day, so it is a very exciting thing for me, even if it's short-live.

A quick note

A quick note.

Just noticed something. What do JP Morgan Chase, EBay, and Apple have in common? Nothing, other than they all reported better than expected number, and their prices fell after the announcements. Folks, the Christmas Rally is done, and we are seeing prices coming back from the moon.

Some Rambling

Today's SP500 index went down almost 0.4%. My margin account with Ameritrade went down 0.16%. While I am not happy that I had a down day, I always take comfort in beating the market. The real drag was DRIV. Today's a NASDAQ dog day, probably a lot of tech stocks got hammered. Especially, the smaller you are (which DRIV is) the harder it's got hit. I recall seeing a short position in Russell 2000 index in my other portfolio that my money manager manages. I am guessing the small cap future doesn't look very bright the next 6 months, according to the experts.

What's pleasing today is the fact that three of my favorite holdings went up, FII, AVP, and LTD, with no particular news about them. LTD got hammered yesterday, so it's not a surprise. FII has a very nice run last year as my patience pays off. I bought this stock just a little less than 2 years ago. It was going side ways for a year while collecting a measly 1% dividend pay off. Though I can use the excuse that it's not much worse than putting the money in a savings account, the fact is savings account doesn't have the risk of losing principal. With a the stock market melt down in 2001, it took a lot of the financial stocks with it. In a previous post I mentioned the investment firms appeared to be undervalued at this point. The trick is who to pick. Investment banks are notoriously bad business to own. You can ask Warren Buffett about it. He's got his hands full when he was the majority owner of Bear Sterns. It's nice to speculate. But I don't have the urge to shuffle my portfolio too much now. Maybe I will do a market analysis one of these days and replace one of two positions (like PIR, which I bought 3 months before Berkshire Hathaway announced their accumulation. And got burned twice, once from my own holding, another indirectly from BRK's holding through my ownership of BRK stocks)

New Observations

Couple of things.

First, when it comes to my IRA account, I am always a big wussy pulling the trigger. Why do I say that? I have been thinking, and thinking about MHP and not click that buy button. Guess what, someone else also spotted the stock being undervalued, and the price has moved back to $50 in the last couple of trading days.

Golden opportunity missed? Maybe. I am waiting for it to drop below $48 again. I know I am not supposed to nickel and dime about the entry point for a great company (for those wonder where that came from, read "Common stocks and uncommon profits" by Philip Fisher). But that just me. If MHP doesn't work out, there are other fishes in the sea. Besides, it's not like it's a bad thing. After all, I own MHP for a substantial portion of my margin account.

Speaking of other fishes, I pulled up one of my model lately. (it's nice to be a software guy. You can basically write your own software, scrape the internet site for all the latest up-to-date financial data, and build a mathematical model that gives you the real value plays you want) I noticed a lot of interesting things.

1. Investment corps big and small, such as JPM, C, LEH are holding enormous amount of cash. JPM can almost buy itself back, LEH can buy itself back twice, and C has a huge amount of cash on hand too. I asked my friends that work for these companies why they are holding on so much money? They haven't a clue. I don't think all the bonus in the world would amount to hundreds of billions of dollars. So why that much cash?
2. Insurance companies, a lot of them, are trading at or near book value. Certainly, two years of natural disasters have chased investor to the high grounds. Most don't want to touch any insurer with a 9-and-a-half-foot pole. That partially explains why BRK, the investment vehicle company that Warren Buffett owns, didn't move the price point much the last couple of years. BRK owns a lot of insurance business. The biggest of them all are GEICO, and General Re. I think it's the General Re part of it scares investors.

BRK is in the so-called re-insurance business where insurance companies pays the re-insurers a premium to mitigate their own policy risks. With the record amount of claims raining down from all walks of life the last 2 years. The re-insurer might be taking some hits as well.

Could these be value plays? We have to ask the question, what is the risk? I don't know yet. I will write more about it when I come to some sort of conclusion.

More thoughts on MHP

The way the stock price goes, you think there is something up and we just don't know it. You think the boys in wall street know something and are dumping their shares .

I am willing to bet (which I am going to with my own IRA money) that it's not the case. Here is a story I will tell, proving the Efficient Market theory is a piece of crap. Around this time last year, (actually more like October 2004) Coventry Health Care (CVH) announced that they will acquire First Health (FHCC). I happened to be a FHCC owner due to its share price was severely discounted to its intrinsic value. I guess what I saw in FHCC and like was the same thing CVH liked. The deal was a stock+cash, meaning I would get a special dividend along with CVH stocks. Immediately after the announcement, my FHCC share went up 20% and CVH went up. It was normal due to Risk Arbitrage. What was not expected was the idiots that didn't like the merger, thought it would be a shorting opportunity, ignoring all the long term growth prospects and the capability of CVH management. The stock went for a free fall, from around $53 to around $37. I could not believe it. It was too bad I was fully invested at the time. Otherwise I would have scoop some shares of CVH up. The price has gotten so low on a such good company, the Margin of Safety was so immense, it was almost a guaranteed situation to make money.

Sure enough, the price recovered by December of 2004 and rocketed upward since. It is right now sitting at 150% return from the low point in Oct 2004. Anyone bought at the time was handsomely rewarded. I held on to my CVH shares, and will be holding on to them until the economic situation for the industry, and the company change dramatically. I am holding on to my shares so I can collect my ever increased dividend stream. I am holding on to my shares, so I don't have to pay tax on it (more about tax and its damage to your return in another post, some other day)

Days like this

Days like this makes me want to have a portfolio full of short positions. But I don't. I still can't bring myself bet against the idiots. When I said Wat*Mart will go down back before Christmas, I should've put my money where my mouth was. But I didn't. Longer term WMT will go up again. Just don't know when that trend will start. I'd like to buy some WMT, it's just not cheap enough for me. It's cheap enough for Warren Buffett, so he bought some for me through my BRK holdings.

For the first 2 weeks of the year, MHP, a solid company with excellent growth, is being hammered. This makes me both pissed off, and happy. Pissed off because the idiots are jumping the gun after the CEO expressed concerns over the education segment, having a single digit growth for 2006. The stock price went from almost $54 in early december to today almost touch $47. A $7 swing, 13% drop.

Interestingly, what the idiots do to this stock has created an opportunity for me. I have just fully funded my ROTH IRA for 2006. I need to buy a comany that gives me decent yield, with excellent business model, good enough management, and cheap enough stock price. This is a once a year decision. One stock a year for my ROTH account. The idiots makes this possible