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Track Record: Contest Submission Update

Chandan Dubey

Chandan Dubey

97 followers
One of the reasons why I started writing for GuruFocus was to keep a journal of my ideas and what I was thinking when I took a position in a stock. It is hence imperative that I use the information to improve myself.

In the first few months I was quite active. Given that the market had dropped substantially, I found many stocks to buy. Following is the complete list of my value idea contest submissions. The table lists the price of the stock when I took a position and the return after almost a year.

CompanyPublished DateStarting Price**Price todayDividendReturnS&P Return
ArcelorMittal (MT)Sep 29, 2011$16.05$15.09$0.64-2%24%
ABB (ABB)Sep 30, 2011$17.39$18.81$0.7712.6%24%
Roche (ROG.VX)Oct 15, 2011SFR 142SFR 179SFR 4.42*29.1%15.5%
Novartis (NOV)Oct 17, 2011$58.5$60.62$2.487.8%14%
Transocean (RIG)Oct 24, 2011$54.56$46.29$1.58-12.2%11%
Teva (TEVA)Oct 28, 2011$37$39.71$0.779.2%10%
Autoneum (AUTN)Oct 29, 2011SFR 60SFR 40.7--32%10%
Medtronic (MDT)Nov 02, 2011$33$43.27$0.9934%10%
BDXNov 04, 2011$73$77.73$1.89%10%
Skechers (SKX)Nov 23, 2011$12$18.91-57.5%20%
ITWDec 13, 2011$41$60.62$1.4651.4%16.5%


* Actually Roche paid SFR 6.8 but 35% withholding tax applies in Switzerland. You might have to subtract witholding from ABB, NVS and all the others depending on where you live.

** Price that is mentioned in the article. Sometimes there is none, in which case I use the price on the day the article was published.


Eight of my 11 picks have a positive return. The average return of the portfolio is a respectable 15%. Meanwhile, the S&P has also returned 15% (i.e. the average of the returns in the last column).

So far, you would have been better served by just investing in the S&P and sitting on your bum and not worrying about the market. This is quite a sad realization for me.

It is to be noted that the S&P was punished quite a bit in the months I started. It traded around $11.30, which is the lowest it had been in the last few years. At the moment, it trades within 5% of its five year high.

I would like to say a few words about the stocks in my portfolio which have a negative return.



Transocean (RIG)


Transocean is still feeling the after effects of the BP oil spill. It also got embroiled with the Chevron (CVX) spill in Brazil. It got out of its shallow drilling business and wrote off some $878 million as impairment loss. On the positive side, its utilization rate for floaters is 81% which is the highest it has been after the Macondo spill. Also, it is getting a lot of new business. It was just awarded a 10-year construction contract from Shell, which is worth $7.6 billion worth in revenue. There was also a $8.3 billion increase in its backlog in the last quarter.

ArcelorMittal (MT)

Metal, mining and related stocks are suffering. Look at Rio Tinto (RIO), BHP (BHP), Caterpillar (CAT), Coal stocks, Alcoa (AA) etc. The fear of hard landing of Chinese economy and the world economy playing with the recession has been enough to drive these stocks to low valuations. In a related development David Einhorn is short mining stocks and in his presentation he mentions ArcelorMittal (MT) as one of the stocks he is short in. I on the other hand am sticking with my pick. I concur that Einhorn may be right in the short term but the economy will recover at some point. Being one of the largest Iron & Steel companies with vertically integrated operations, I have tall expectations from MT. If one looks at the fundamentals it will be hard not to be convinced that it is cheap. Given its global footprint and cheap valuations I am willing to hold as long as it takes.

Autoneum (AUTN)

This was a spinoff from a well respected Swiss firm Rieter Holdings. Autoneum is progressing well and was profitable in the first year of its operations. As a part of Rieter in 2010, it had a net margin of -41.3% (it is 2.3% now). Following is a snapshot of its performance.

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With SFR $1.7 billion in sales and $188 million market cap, it has a P/S ratio of 0.11. Compare this to Delphi (DLPH), which sells for a P/S of 0.7 and Johnsons Control (JCI) which sells for 0.4.

The only problem I had with Autoneum was its capital structure, which is 70% liability and 30% equity. For a new spin-off I deem this to be on the high side. With the European economy teetering on recession, I don’t feel too comfortable with this situation. This has not changed and the management does not seem to mind it. There has been no discussion in the report about reducing the debt levels. To be completely fair the LT debt is SFR $142 million and the equity is SFR $293 million. With SFR $41 million in cash and nearly SFR $30 million in operating cash flow, this is manageable. The interest expense for the HY12 was SFR $12 million and as the company has turned profitable, it does not face immediate challenges. But I don't see a very good margin of safety here, in terms of surviving a recession.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.7/5 (20 votes)

Comments

tonyg34
Tonyg34 - 1 year ago
you know the S&P pays out a dividend too.

also, why are you dismayed to learn something that has been proven extensively over the course of the last 40 years. Retail investors tend to earn the market return minus expenses. It is a total fluke that you actually managed to replicate the index return in one year, but over the course of many this outcome is almost a guarantee.

people who are argue that the market is not efficient are 100% correct. They are simple viewing the problem from the wrong angle. The market return is the average result of all the worlds investors over time. Therefore it is a simple mathematical conclusion that most people will end up in the fat part of the bell curve. As the distribution of information becomes more equitable with time, the fat part of the curve gets fatter. Also as more people opt for index fund options the fat part of the curve should fatten, but time will tell.

and yet it remains my second favourite hobby (second only to college basketball)

I believe the secret is to make as few investment decisions as possible. You've been making a contest submission per month. Most people don't have 12 good ideas in a year. Just enjoy the reading and mental gymnastics until you find a really appallingly obvious investment.
cdubey
Cdubey premium member - 1 year ago
@Tony: Thanks for the comment. You are spot on.

cdubey
Cdubey premium member - 1 year ago
The only surviving stocks from the above list in my portfolio are ABB, Roche, MT and RIG. I sold all others. In total I have only 15 stocks now and I plan to sell at least 4 more in the near future.
buynhold
Buynhold - 1 year ago
tonyg34 is right on - the trick is to minimize churn, which forces one to be patient and buy only a small number of businesses one can keep for a really long time. I do this in my long-term portfolio, and it has handily outperformed my medium-term portfolio where I am more active attempting to get a higher return.

The difference is higher when you add in the impact of taxes. The table in the link below from one of the best funds, Sequoia Fund, was an eye opener for me when I saw it in their report some years back. Compare the totals in Column 1 and Column 2 (Column 2 is a result of churn, and you pay taxes on it as the churn occurs, reducing your investment):

http://www.sequoiafund.com/Reports/Quarterly/SemiAnn12.htm

And this is when Sequoia holds its investments much longer than the typical mutual fund or the average investor!

vgm
Vgm - 1 year ago
CD - didn't you buy HPQ? I remember you wrote something on it quite recently.
ecotycoon
Ecotycoon premium member - 1 year ago


Good article great comments, personally i use investopedia.com simulator to keep a track reccord, it's really the best simulator i've found, use it for more than 4 years, when i read Inteligent Investor i fall in love with the idea of value investing, it seem to be a great way to invest i decded to try it in simulator to see how i was able to do in it before doing for real, i use to made a couple of mistake there at beginning it cost me less than in real life :)

investopedia.com simulator: Good distribution of dividend, ralistic you can't take position that are more than 10% of the daily trading volume of a specific stock, there are some diversification rules ex:max allocation of 25% per stock, when there is a merger your position will do like in real life. Only problem you can't trade bond indiviually unless going with ETF (it's what i do) and stock that are not trade in america are not there either, altough there is a canadian game that trade canadian stock. If you feel to invest in stock option and short selling you can do it too, to validate your skill in this domain for a couple of year before trying it for real.

As the time go on and that i have more cash in real life for the portion of my asset i can allocate with safety to stock i tend to do exactly the same investment in my virtual account and in real as Jason Zweig have talk about it's a good way to invest more rationality, find it to be great method.

denggi
Denggi premium member - 1 year ago
Chandan, what about Peugeot? I remember you making a recommendation and later another article about the government intervention. Have you exited the stock?
graemew
Graemew - 1 year ago
Hi Chandan,

Thanks for your feedback on your portfolio. I agree with a lot of the comments above. In fact when I assessed my performance versus the MSCI World for the last couple of years I found that I also would have been better just ''sitting on my bum'' and so I have begun to do more of that. Joking apart, I changed my objectives. My objectives now are to aim for more modest returns with capital protection being my key objective. I now trade less often and avoid stocks which are anything but bullet proof...if that can be said to apply to any stock. Each quarter I check the stocks my favourite gurus have bought as a starting point for ideas. This year I have only bought around 6 new positions.
cdubey
Cdubey premium member - 1 year ago
@Vgm Yes, I do hold HP, in fact I added when it went to $11.44 few days back.

@Denggi: I exited Peugeot as soon as the new government started showing its true colors (around June, if memory serves right). It was a high regulatory risk stock. It seems that there has been too much state intervention. The stock has dropped and is now trading at nearly half of the price where I recommended it.

It might be a good idea to buy it now, but I am not adding any more companies. It is hard for me to follow them.
cdubey
Cdubey premium member - 1 year ago
This article lists only the stocks I recommended last year (before Jan 1, 2012). I wanted to write this article to have a look back and reminisce about the picks I made a year ago.

When analysts recommend stocks they do not tell you about their history. I did not want to be one of them :)

batbeer2
Batbeer2 premium member - 1 year ago
>> I believe the secret is to make as few investment decisions as possible. You've been making a contest submission per month. Most people don't have 12 good ideas in a year. Just enjoy the reading and mental gymnastics until you find a really appallingly obvious investment.

Yes! but please don't stop sharing your investment ideas. Including the ones you personally pass on after doing the work. I for one am a loyal reader of your articles.


>> So far, you would have been better served by just investing in the S&P and sitting on your bum and not worrying about the market. This is quite a sad realization for me.

Why care about some benchmark? I certainly don't. You have been doing this for three years. You are less experienced than most and your picks made 15%! As a stock picker, you yourself know the risk (or lack thereof) in that portfolio.

Turning over all those rocks is fun. Keep at it! In a decade, there will be very few out there able to match your knowledge and skill. With luck, you will still enjoy the process.

In short, as a stock picker, your skill and knowledge grows as the size of your funds gradually expands. This is important if you are in it for the long haul.
yvonne.fu
Yvonne.fu premium member - 1 year ago
Thanks for the helpful article and comments. As for the comment re investing in as few good ideas as possible, that has certainly been the practice of many successful practitioners of Grahm and Dodd, such as Warren Buffett. There are also others such as Walter Schloss, who had a long and successful track record by owning "far more stocks" than Buffett.
cdubey
Cdubey premium member - 1 year ago
@Batbeer2: Thank you for the compliments. I enjoy reading your comments, especially ones which are made on my write ups.

@Yvonne.fu: One should do what one feels comfortable with. For me, few is definitely the way to go. I find myself unable to follow more than 10 and so I am trying to whittle down my number of holdings to around 10. As we speak, I have positions in 18 different companies. A few are mistakes from my history past and they need to be fixed. Others, I will try to merge by moving my money to "obviously more undervalued and less risky" picks.

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