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The Science of Hitting
The Science of Hitting
Articles (454) 

Investment Journal Review - A Handful of Winners and One Big Loser!

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:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 4.7/5 (24 votes)



20punches - 4 years ago    Report SPAM
Thanks for posting your journal. Interesting note on AIG. I was worried that I could not understand AIG's financial as well but when I read the 10ks from 2007-2011, I actually found I can understand the 2011 10K much better, especially with the derivative disclosure. And you can also tell the improved transparency over the 5 year period. I didn't understand everything but I understood the things that I thought were important.

"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.”Great notes. Sometimes I find the best ideas are unbelievably simple like this one.

Koheleth - 4 years ago    Report SPAM
I keep a note in my iPhone with my brief reason for buying and holding and my assessment of today's and the future intrinsic value and a maximum price I will pay for my favorite picks, which are just a handful.

Your journal idea makes sense. Peter Cundill kept one, and a book was published from it.

I haven't kept a journal because I've felt I should keep a strong enough memory so I don't have to rely on paper notes. Also, I keep my long-term holdings to no more than 7. I tend to work out on a single sheet of paper my thoughts and calculations when I contemplate an investment. I don't always save them, guess I'm lazy, but the numbers change over time as well. I do tend to ruminate over why I bought something as a way to reinforce my memory.

I understand Buffett keeps voluminous files, but I haven't heard that he keeps a journal. Alice Schroeder never said he did. And Buffett always said that you should be able to say in one sentence: "I'm buying 100 shares of General Motors because...." and fill in the blank. He may be an anomaly however, because part of his genius is his encyclopedic mind.

But memories do fade and AAII had an interesting but disturbing article on how aging can have a negative impact on our investments as our mental faculties tend to deteriorate. It is scary to think that we could become our own worst enemy by fiddling with our portfolio at a time when our thinking is not as sharp. A journal could be the remedy for this.
SeaBud premium member - 4 years ago
Thank you for the article as I think a journal is a great idea for any long term investor. There is much clarity to be gained from writing down why you make decisions rather than mulling them in your head (and losing the thoughts over time).

A side thought on the AIG discussion. In situations where a government has stepped in to reform an entity, either directly as with AIG/GM or thru bankruptcy, it is often hard to draw a direct line from past financials to the future. However, in these special situations, debt is usually consolidated and a company is well financed at an attractive capital cost going forward. When companies such as AIG, GM, and IRE emerge from such situations, they often have at least the same business but with improved debt and capital structures. I always give them a long look to see if the business is intact and capable of operating at profit levels similar to before a crisis - admittedly, a broader brush approach but one I feel is supported by history. In other words, a few confusing financial details can be overcome by two factors: is the business intact/functional and do you believe the intervention (bankruptcy or government) cleared the underbrush of financial concerns?
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Did you end up buying AIG? Do you still own it today if you did?

In regards to Microsoft, I think that assessment is spot on; it would be really nice to see MSFT gain some serious traction in those other segments (or at least stop losing so much money), but we'll see...

Thanks for the comment!

The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

I actually got the idea to go review my journal because I just started the book about Cundill :)

I would be very skeptical of the memory idea - to easy to trick yourself - but that's just me; I would at least keep those single sheets of paper for review, but that's up to you to decide.

Thanks for the ideas and the comment!
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Those are some interesting thoughts on AIG/GM, and well worth remembering; thanks for taking the time to add that commentary!
20punches - 4 years ago    Report SPAM
I did end up purchasing AIG around $32 and still hold it. Thanks for responding.
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

Nice; and you're welcome!
Sapporosteve premium member - 4 years ago

Does your Journal say anything about the value of the overall market?

One interesting thing to note is the value of the overall market - August 12, 2011 the S&P was around 1123. It was a great time to buy lots of stocks and I suspect plenty of "bad" stocks went up too. Market now up around 50% from that point.

Sapporosteve premium member - 4 years ago
Sorry 2011.......not 2012
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

In all honesty, I don't look at the market as a whole; but as you suggest, plenty of stocks have gone up over the time period in question, as was the case with the large caps / blue chips I mentioned. Obviously finding multiple high-quality large caps trading at attractive valuations would suggest that the market as a whole is looking pretty attractive, and vice versa; but since I have no interest in buying the market as a whole, I never really look at things like that.

Thanks for the comment!

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