The Stock Scribe Portfolio surges ahead

On 5 December 2008, I selected a portfolio of 11 stocks using techniques detailed by Benjamin Graham in his book The Intelligent Investor, (see the original post in my 2008 folder - A Portfolio selected using Graham’s techniques).

The initial portfolio value was $1 million with approximately $90,909 invested in 11 companies (see table).

As can be seen above, as at 18 February 2011 this portfolio had appreciated by 22% (compound) to $1,550,870. The All Ordinaries Index had appreciated by 19% (compound) over the same period. So I’m a bit ahead of the index (and I haven’t included dividends of approximately $70,000 over the two or so years).

An unmanaged index has returned 19% and one selected with some Graham and Dodd metrics has exceeded that. It’s a testament to ignoring so called experts.

When the above portfolio was selected, various “experts” were telling us that the world was about to end (I remember someone sending me some particularly apocalyptic articles that appeared at the time on the aptly named Business Spectator web site. I’ll say it again and again, don’t waste your time reading opinion pieces written by journalists).

Many of the companies in the above portfolio were priced as if this apocalyptic scenario was actually true. Of course smart investors were thinking the exact opposite – it was a magnificent time to invest, perhaps a once in generation time to invest. And invest we did.

When I saw companies of the quality of Soul Pattinson, Sims Metal, Caltex, Austereo and Flight Centre selling for the prices that they were in December 2008, I just knew it would be very hard to go wrong buying these companies at those levels. In other words, the odds were well and truly stacked in my favour.

I did sell WA News from my own portfolio at prices ranging from $6.79 to $8.08 (it closed at $6.34 on 18 February 2011).

Hills Industries was a mistake (although they may bounce back in time). Suffice to say, one mistake out of 11 equally weighted picks is of no consequence at all.

Austereo is now the subject of a takeover offer at $2.00 per share plus an additional 10 cents if the acquirer gains acceptances for 90% of the shares.

I knew that Austereo could not be acquired for less than $2.00 in a takeover and that is one of the reasons that I bought it for $1.11 in late 2008.

Austereo has a dominant market position, has been a very consistent performer, paid a very high (sustainable) dividend, and (in late 2008) was purchased at less than 9 times earnings. There was a very high margin of safety.

The ASX is also subject to a $48 per share takeover offer by the Singapore Stock Exchange, but there are doubts as to whether this takeover will gain government approval.

Most of the companies in the portfolio are no longer undervalued and I would be content to sell some of them at these levels.

Happy investing.


Note: None of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).

The S&P 500 gives reason for optimism

In his recent letter to investors, John Paulson stated that the most relevant indicator that they track in the current environment is the Equity Risk Premium (compiled by JP Morgan). Paulson states that the Equity Risk Premium is the highest it has been in 50 years, which indicates to him that equities will rise further to close the gap with bonds.

The JP Morgan data shows that the Equity Risk Premium has only exceeded 5% on five occasions since 1957, these years being 1958, 1974-75, 2009-10.

Of course the Equity Risk Premium can always be closed by bond yields rising rather than equity yields falling. However, for the time being that is probably not a likely scenario and that is why Paulson is enthusiastic about equities.

Paulson states that he believes growth will continue and will accelerate and that this is the part of the cycle where they want to have long event exposure and do not want to be under-invested.

I note that Robert Shiller (of Yale University) does not share Paulson’s optimistic view and is more or less forecasting anemic growth for the S&P 500. While I have a lot of respect for Shiller, I think he is more likely to be wrong than right. I’m not saying that I expect spectacular growth to occur – I don’t, but nor do I expect anemic growth.

An added dimension for those of us who live in countries with very strong currencies, is the play on the $US by going long US equities. For example, the Australian dollar ($A) is a highly volatile currency that has on average traded at around $US0.73 throughout its 27 year history as a free floating currency. Now the $A is trading at around parity (or more) with the $US.

Australia is highly dependent on commodity prices (largely iron ore and coal), has an under-performing anti-business federal Labor government in power and a grossly inflated housing market. These are not factors which would inspire enormous amounts of confidence in the $A staying at parity or above with the $US.

I don’t want to sound overly pessimistic, but economic conditions in Australia will not get much better than they have been in recent times – the risk is very much to the downside. The reverse is true for the US.

It has also largely gone unnoticed (by those outside Australia) that the Reserve Bank of Australia has been pushing out potential interest rate rises further and further into the future. Those foreign funds holding the $A would have predicated their investments on a current cash rate of approximately 50 basis points more than it actually now is. In other words, they are getting “suckered” into holding $A for much longer than they initially intended.

The US is slowly emerging from a very serious recession, there is cause for optimism. And I don’t mind at all having an exposure to the S&P 500 especially when I can buy that exposure with an $A that is worth more than the $US.

Note: None of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).

Is the Gold bubble about to burst?

Recent weakness in the price of gold would be sending a few jitters amongst those hedge funds that have built huge positions in the commodity.

I must confess that through 2009 and 2010 I actively traded gold. At one point I was fortunate enough to capture a $A163 upward move per ounce in the gold price in only 39 days. I would have captured even bigger profits, however, in recent times, my home currency (the Australian dollar) has largely risen with the gold price and taken out $US profits.

Why was I trading gold? Because it was logical to conclude that quantitative easing and sovereign debt problems would be positive for the gold price. Further, I had noticed that both John Paulson and George Soros had been doing significant buying. I have great admiration for both of them.

However, in recent months I have become less convinced that I can make money from trading gold. I unwound my final position in the week commencing January 24.

The gold price is being held up by three factors: sovereign debt issues in Europe, quantitative easing in the US (accompanied by extremely low interest rates) and ETF buying. The third factor (ETF buying) is creating artificial demand for gold that will disappear very quickly once sentiment turns bearish.

In the absence of another European country needing a bail-out (likely candidates Portugal and Spain), the gold price may well weaken further. And it is by no means a certainty that either of those countries will require a bail-out.

I am also not convinced that the $US will depreciate a lot further. It seems to have already done most of the depreciating it is going to do. It’s just my opinion. But if I’m correct, the gold price is not going to get further easy boosts through an even weaker $US.

The other problem is the massive positions in gold that various hedge funds have built up through ETF holdings. Once they sense that they are going to lose significant paper profits they will head for the exits. And they are likely to do this en masse. Individual investors do not want to be holding gold when that day comes. (And I can’t tell you when that day will come – but it will, unless of course you believe that they are going to hold their non-income producing gold forever).

So all I’m saying is be cautious.