INVESTING UPDATE (i)

This year I am trading a lot. Made 9 trades already (compared to 12 in the entire 2010 and 14 in 2009). Sold big 2011 winners (CRYP, INSW, TLB) and shorted XHL and IWO (R2000 Growth) last week to the tune of 40% of portfolio equity (in addition to 35% existing short ETFs).

With S&P @ 1,400, the market climbing a wall of worry (China, Europe, Japan, USA, oil/Iran) and profit margins at all time highs mainly fed by government deficits (James Montier of GMO – link), in support to mean reversion concept I decided to initiate a more aggressive hedging stance. It was painful to do, which gives a feeling of rightness.

I followed RSH for a long time and initiated 5% long position @ $7.06. The stock traded at this level back in 1982, 1984, 1990-1992, and 2009. Radio Shack will have to reinvent itself (between formats, hardware & service providers) once again but long term rear view mirror provides comfort for an investor with 2-3 year horizon. A vast convenience network must have higher value than 0.15x sales. The stock now is priced as if business would not generate any economic value in the future (priced at less than tangible equity) but it is making money. I would be happy if RSH delivers $0.5-0.6 EPS in 2012 (lower than consensus for what it is worth). In the meantime, it is paying 7.5% dividend and I plan to average down if RSH drops the dividend.

Other outstanding company longs are: CSC, CSCO, LOJN, IPAS, BRK.B, and GCA.

2011 Overview

2011 was exceptionally good generating 23% returns. I had small leverage, so equity returns were even larger. This was achieved despite having almost 50% of portfolio in SH and RWM (inverse S&P and Russell 2000 ETFs), which cost me dearly because of lack of diligence. A few spikes in intra year volatility knocked correlations down, which resulted in almost the same annual return for Russell 2000 and its supposedly inverse ETF of -5%. SPY and SH relationship was even worse – 0% (S&P) vs. -8% (SH). There are no limitations for human folly.

Fortunately, 4 holdings (KSP, INSW, CRYP, and TLB) were taken out during 2011 for quite a nice premium. Well, TLB is not acquired yet but it got a strong offer, which lead to my exit. At the end of 2010, I had only 6 company stocks (PCS and GCA in addition), so impact of takeouts was meaningful. Additionally, at the peak of EUR/USD in the end of April, I initiated 5% position in EUR/USD put option @ 1.45 maturing in January 2013 (via FXE), which generated 85% return in 2011. I plan to sell it on anniversary, and initiate a new 2-year option position.

Track Record

This spring is the 4^th anniversary of my active practicing of value investing, which started after a few years of extensive theoretical preparation. I am all my conscious life in finance but this does not mean anything because real things started only around 2005.

So, how am I doing? 22 positions initiated in total, 4 closed losses (incl. 1 “hedge”), 3 open hedge losses, 1 open loss (RSH), 13.5% IRR (xIRR Google Finance function), 50% portfolio return, and average weighted xIRR of 32%.

Seems like quite a lot of things happened since the spring of 2008.