It was a
mixed bag for me - stock picking was almost 1.5x better than market but excessive
hedge position, obviously, materially lowered the returns. I cannot complain –
mid teens with low downside risk is quite good (longs were covered with 1.5x
index shorts for most of the year). I would settle for 10% pa with limited risk
given the elevated valuations because of high margins and multiples.
As I
wrote before, this year I have spent little time on my portfolio. Probably, it
was in the spirit of Charlie Munger (documented by Value Investing World): “We use a lot of experience and do it [investment
returns] in our heads. We don’t like
complexity and we distrust other systems and think it many times leads to false
confidence. The harder you work, the more confidence you get. But you may be
working hard on something that is false. We’re so afraid of that process so we don’t do it.” Devil is in the details and footnotes but more and more I notice
that the first hour of reading gives 80% of thesis. The most important is if
I can build a constructive opposite thesis – if I feel that something was overdone with price movement, I act.
When I see that insiders are on my side, position gets bigger.
Almost all
returns came from 2 boring cellular telcos. No moat, no profit (almost no).
Value investors were skeptical. However, in such cases, holding period is not
forever and IRRs are quite good. I hope (a very important word) that UNTK and
EZPW will be similar.
Macro is
another topic hated by value investors. It is an interesting time when long-term
interest rates are going up together with homebuilders. Mr. Market is saying
that higher interest rates will not affect the recovering housing market. The money printing was reduced by ~10% and
its annualized run rate now totals ~6% of US GDP, while interest rates went up
40-80%. That was a price discovery of roughly 7 months, which will continue.
TNX is 10Y yield, TYX is 30Y yield and XHB - homebuilders.
Many many investors think like me; therefore, it is not that contrarian and quite painful at the same time while it should be painful when alone. They think and act with hedging their portfolios and keep on fighting the last war. Understandably, perma-bears continue to capitulate. Hugh Hendry did that in kind of a funny way. He thinks it will get much much worse but it will get better before that, which is worth a try to gamble. Those who were unhedged are definitely winning, so far. WEB is among them but he is in his own long-term game (he is not exiting the market before crash like the most intend to do). Correct me if I am wrong but the last three horsemen standing are John Hussman, Gary Shilling and Hoisington. Still await for G. Shilling's 2014 outlook, which should come in the first weeks of January. It should be an interesting read because he ended his 2013 mid year views: “So here’s my “risk-off” quartet: short stocks and commodities, long the dollar and Treasuries.” So far, so bad…
I will
speculate that surprisingly the world cannot withstand a higher long term
interest rates and a complete stop to QE would not anyhow influence rates (I am
talking about longer term as in a short term market would correct and people
would fly to safety).
This year I
started to practice a basket of “option” stocks (stocks, which are priced like
options, usually close to $1). I will see if my stock picking instincts are
worth a dime as so far the score is 0:2 (thanks to PNCL and GAXC; long DM and
ABM.L). However, mathematically, I am sure I should continue. I will decide
after 10 or so attempts and positions should be closer to 0.5% (now larger) for now. On the
positive note, such things absorb natural inclination towards activity and
gamble - modern man needs variety and to have at least some fun. Discipline is
boring and painful.
After writing
this, I got a little better regarding my short XHB position (hurting in the last few weeks). It is painful but feels like a right thing to
do given another interest rates run up attempt, which I believe (a very
important word) to be another fake. I should at least reduce it at $28, though.
I am afraid for pent up demand and normal household formation, does not matter
how slow it is. Something similar to what is going on with autos.
I am intrigued about NLY. LOJN is coming back to a trade-able range.
I am intrigued about NLY. LOJN is coming back to a trade-able range.
A few
reminders:
> Next crash
will come from something not known or too obvious.
> General trend of the market is up - roughly 3/4 of the time. White men will do everything to preserve status quo and inflation is the key element of this.
> The world has not deleveraged, yet (it is beautiful but takes very long or another 3-6 years,
remember EU bank leverage ratios…).
It is getting
too long, so Happy New Year!