Thursday, April 15, 2010

Feeling Fearful

It's been quite a ride over the last year! I remember in March 2009 the fear in the market was almost palpable. Now, 13 months later, all the major indexes continue to soar, seemingly defying gravity. IMO the market, in aggregate, has turned greedy - so is it time for the individual investor to turn fearful? I think so...

These days I find myself asking, "Where is the opportunity, where is the value, and most importantly where is the risk?" I've been struggling to find individual stocks that offer an acceptable margin of safety and potential return. Additionally, several portfolio holdings of mine are approaching my guess of their intrinsic value. As a result, my portfolio's cash position has grown to about 30% and I'm very seriously considering selling several more holdings. Specifically, these are USG, WTM, and COV. However, this is only half the story. I have found a small handful of stocks that seem attractively priced. Among these are GENZ, EXC, SD, MON, ISCA, APOL, and FNF.

My sense of it is that a lot of investors spend a great deal of time picking stocks at the expense of portfolio management. David Swensen is the master of this - in his excellent book, "Unconventional Success," he lays out a fairly simple but powerful plan based primarily on portfolio management. Additionally, I'd argue that one of the main reasons the Magic Formula works so well is because there is a defined, rigorous plan around portfolio management (although everyone seems to focus on the stock picking aspect).

I have to admit, holding on to USG is tempting because it has the potential to be my first 10-bagger. And it was difficult for me to sell SHLD because I kept thinking it might be the next Berkshire. But the fact of the matter is "hope" isn't an investment strategy. SHLD hit my estimate of its intrinsic value and USG is quickly approaching it. IF I can find stocks that are priced at a greater discount to my estimate of their intrinsic value then, by definition, they have a better margin of safety and better potential return. Of course I could turn out to be wrong for any given stocks I buy/sell, but I think the process I've laid out is right.

As always I'll post about any stocks I buy or sell.