Yesterday I sold out of my ExxonMobil (XOM) position and bought Total SA (TOT). XOM is approaching my estimated fair value so my selling discipline forced me to sell. TOT is definitely one of the uglier houses on the energy block but the market seems to be over discounting the company just on a reserves basis.
With markets remarkably resilient in the face of continued euro region troubles, an anemic US economic recovery and growing concerns of a crash in China, investors may want to consider deep value stocks for possible investment. While cheap stocks can always get cheaper, true value stocks (as opposed to value traps) will probably fall less than the average equity due to already depressed valuations. But if purchased at low enough prices, the possibility also exists that the stock could go up even if the broader market is struggling. As discussed in my 2011 portfolio performance review, all of my new buys in 2011 posted gains for my portfolio even as they registered losses for the whole year due to my purchases near bottoms.
Hence, I ran Zack’s deep value screen, which includes the following criteria:
I have been looking to sell PWE around $20 for some time … for a rundown of my reasons, please see this article. Investor optimism at the start of a new year provided that opportunity but instead of outright selling the shares (and missing out on future gains), I instead sold PWE $20 June 2012 call options for $2.00 premium — possibly adding a 10% gain to my exit. If shares close above $20 at the expiration date, I will be out of PWE at an actual price of $22. If shares fall below $20, I retain the shares but note that I’ve protected my downside down to $18. In the meantime, I will collect at least one more dividend (in addition to the payout this month).
- Enlightened-American Portfolio: +7.6% in 2011 (my actual IRR, including cash balance)
- Dow Jones Industrial Average:+5.5%
- Nasdaq: -1.8%
- S&P 500: 0.0%
- DJ Wilshire 5000: -1.4%
- Russell 2000: -5.5%
Warren Buffett once stated an investor needed 5 years minimum of track record before any judgment on investment acumen can be made. I have now cleared this hurdle during the toughest trading markets in at least a generation, so some expectations to meet investment objectives may be reasonable at this point.
While beating the market is gratifying, I must reiterate my primary investment objective is not to beat the market every year. Rather, I seek to outperform the market during down years (2011 may be included in this category) and to remain within shouting distance of the market during bullish years. These were the objectives laid out by Buffett during his hedge fund years and if accomplished over the long term, should lead to preservation and growth of capital.
While year-end recaps are customary with the new year, it may also be instructive to review 2011 for clues on how to continue gains in 2012.
- Enlightened-American Portfolio: +9.5% through Nov 30, 2011 (my actual IRR, including cash balance)
- Dow Jones Industrial Average:+4.0%
- Nasdaq: -1.2%
- S&P 500: -0.9%
- DJ Wilshire 5000: -1.9%
- Russell 2000 (smallcap): -5.9%
New adds to the portfolio included Applied Materials and rolling over the Telefonica naked puts. Also added to my GE position. More commentary to follow.
With the turbulence in Europe and questions of US economic growth, markets seem particularly susceptible to headline risk, subjecting investors to massive volatility and major political risk. One of the appeals of activist investing is the possibility of a situation-specific catalyst, which allows results to de-couple from the broader market. Of course, activist investing requires a great deal more effort and resources than passive investing and is beyond the ability of retail investors. But we can still track notable activist hedge funds, piggyback onto their best ideas and allow them to do the heavy lifting for us. And we don’t have to pay them any 2+20 fees to boot.