I’ve spoken many times on this site about keeping an investment journal, and have read articles from others suggesting the same; you’re fooling yourself if you believe that, years down the road, you’ll be able to remember your original rationale for an investment without inserting bits of new information picked up along the way (or new justifications for hanging on to a position that no longer fits the original premise).
Unfortunately, I’ve never seen much use or discussion of these journal posts. I’ll be the first to admit that more often than not, I’ve returned to my investment journal to add new ideas rather than to review old ones. Thinking about it earlier today, I realized that this is an utter failure of common sense. I’ve only been keeping the journal for a bit over two years, but some of the information is worthy of review. Here’s a reprint of a few posts with some updated commentary.
June 8, 2011
“Highest Conviction Ideas
BRK.B ($75) – P/E on non-insurance businesses (after backing out other components of value) is extremely low. Concerns about Sokol incident and Buffett’s eventual death are irrational. My estimate of intrinsic value is approximately $100 per share.”
MSFT ($24) – After backing out cash, trades at ~7-8X earnings. Concerns about the decline of Windows (due to tablets & mobile) are overblown; MSFT is priced as if they will never be successful with search, mobile, Kinect, cloud, etc. My estimate of intrinsic value is $32-35 per share.”
Well, Berkshire has turned out to be a real winner, with the return since that time at ~50%. My comments about Buffett’s eventual death were a bit of a stretch, considering I’d never looked closely at Berkshire’s quantitative and qualitative characteristics – and what we can reasonably expect on both levels – until I wrote two blog posts a few months back (here and here); at the time that I made this journal entry, I should have taken a closer look at what impact this event could have.
In regards to Microsoft, things have worked out pretty well with the stock, but the real bummer comes from the fact that Microsoft can hardly be called successful in search or mobile at this point in time (not for lack of trying); I would say I underestimated just how difficult it would be for the company to catch up in these areas after giving a huge head start to competitors.
July 5, 2011
“Bruce Berkowitz is overweight financials, and has got killed; this is his circle of competence and where he made his money in the 1990’s. Today, AIG is ~$30 per share, and has a market cap of $52 billion; book value is over $80 billion, and Bruce believes normalized earnings of remaining businesses is ~$6/share. The biggest issue is transparency and inability to analyze financial statements. Regardless, a double in 3-5 years does not seem overly optimistic.”
Since then, AIG (NYSE:AIG) has moved higher by about 60%; unfortunately, I never bothered to take a close look at the company, and cannot be sure that I would’ve walked away with a real grasp of what was going on even if I did. I don’t think the point in this type of situation is to agonize over a missed winner – it is to recognize the fact that this is a company that I could’ve never made a purchase of shares in at the time and called it an investment.
A few months after this post, I wrote the following: “I’m considering $500 to $750 in BAC, C, AIG, GS, etc; this isn’t an investment, its speculation.” At least I was willing to admit it to myself!
August 11, 2011
BRK.B, WMT, JNJ, Unilever, PEP – all cheap. Markets have been extremely volatile and dropped more than 15% in the last 2-3 weeks; time to buy.
It’s funny looking back on this, because at the time you can tell I thought this drop in the share prices was a huge deal; looking back on the graphs since then, it is hard to eyeball that dip as much different from many others that have occurred in the past few years. That says a lot about how in real time, events that are seemingly immaterial with a longer term view (like missing earnings by a penny) can get blown out of proportion.
August 15, 2011
After adjusting for overfunded pension contributions (at 116%), JCP is trading at 12X recessionary earnings. Bill Ackman and Vornado own roughly 26%, with cost basis near today’s close ($26.55). Company recently hired Ron Johnson, former head of Apple retail stores, as CEO. I believe it is a value at this price.
Two years later, Johnson, Ackman, and Vornado are all nowhere to be found. Those recessionary earnings are looking great today, with the current market price suggesting that J.C. Penney (NYSE:JCP) will never see another year as good as that “bad” one. Over that time period, JCP shares have fallen 70%.
August 16, 2011
R.G. Barry (DFZ) dropped 10% today, market cap is $93 million; I see them making $15M in FY 2012, and think it is worth over $150 million.
The valuation eventually reached $150 million, at which point I liquidated the position. On Sept. 12 of this year, DFZ received a $20 per share bid (in cash) from Mill Road Capital Management; at that price, the shares would be worth approximately $228 million.
In the future, it would probably be useful to get a bit more detailed, or to reference posts to saved documents and Excel sheets that take a closer look at the investments in question. I’ve fallen off a bit as of late with my journal posts, which is why so many are clustered around a short time period in 2011; I’ll pick it up again so that I have some useful stuff to share a few years down the road. I hope you’ve found this useful and will consider starting a journal in the future (or sharing if you’ve already done so).
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.