BAC... My Favorite Mistake

Sometimes, things don't turn out as expected.  As an individual investor, there will be plenty of times when my picks are just flat out wrong.  The trick is knowing when my thesis is "broken" vs. when I'm having a knee-jerk reaction to a falling stock price.  If the thesis is broken, maybe it's time to sell.  If the thesis is intact, maybe it's time to double down.

With this in mind, I've been reevaluating my position in St. Joe.  In a nutshell, I viewed JOE as a "jockey" bet on the capital allocation skills of Fairholme manager, Bruce Berkowitz (http://mevsemt.blogspot.com/2011/05/new-coattails-to-ride.html).  However, Fairholme is in flux right now.  With recent redemptions and the departure of co-manager Charlie Fernandez, I'm guessing JOE is very far down on Bruce's list of priorities.

Coincidentally, while my confidence in JOE has been waning, my interest in another Berkowitz pick has been growing.  Further, it's a holding that I'm somewhat familiar with, after all I've lost money on it not once, but twice!  I'm talking, of course, about Bank of America (click the "zz Bank of America" label on the right for my previous posts).

It's worth noting that when I finally sold BAC back in August, I was just swapping it for a position in AIG (and locking in a tax loss).  Additionally, I made the point that BAC (and other big banks) could still be compelling values.  Since then, my big-bank-thesis hasn't changed, but BAC's stock has fallen by a third.  For anyone interested, check out Fairholme's most recent presentation on the company: http://www.fairholmefunds.com/pdf/fairholme_stays_the_course.pdf.

Now let's take a step back.  Generally speaking, I want to keep a high % of my portfolio in cash due to the significant macro uncertainty.  After all, when you have someone like PIMCO's Mohamed El-Erian saying an Italian default would be "worse than Lehman" and calling the U.S. political dysfunction "terrifying," I think it's safe to say that caution is the name of the game.  Nonetheless, I still want to position the rest of my portfolio for the best possible risk adjusted returns (duh).

So where does this long, rambling post leave us (or as my wife says, land the plane)?  Well, on Wednesday I decided to swap JOE (sold at $13.45) for BAC (bought 2850 shares at $5.18).  With BAC, I'm hoping the 3rd time's a charm.  Additionally, JOE is going to stay on my watch list - once things settle down at Fairholme, JOE could once again become an interesting opportunity.

Questions?  Comments?  Email mevsemt@gmail.com

Reshuffling the Deck

Generally speaking, some of my best stock picks have happened when the company is under duress.  Assuming the company is able to survive/turnaround, you've made several times your investment simply because so much of the perceived risk has disappeared.  For example, I bought Fairfax back when it was at $100 and sold several years later just shy of $300 (pre-blog).  I bought USG at the height of the financial crisis, and here's how it turned out: http://mevsemt.blogspot.com/2010/04/transaction-alert-sold-usg.html.

In fact, if you look at some of the best investments made by the great investors, you'll see they've done the same thing (Buffett - Geico & American Express, Berkowitz - Wells Fargo).  Of course there's a risk to this approach - maybe the market is right, and there's always a chance the company could indeed fail!  In fact, I bought AIG just as the financial crisis was hitting the fan, and lost over 50% before selling.

With this in mind, on Friday I decided to add to two of my "stressed" positions, and sell one of my holdings where I may have overestimated the upside.  Specifically, I bought an additional 500 shares of JEF at $9.92 and 1000 AIG warrants at $5.37.  The stock I sold was MIL (formally Terra Nova) at $6.80 (2268 shares).

Questions?  Comments?  Email mevsemt@gmail.com

Couldn't Resist

If you've been paying attention to the financial markets, then you probably know MF Global declared bankruptcy earlier this week.  Jefferies Group (JEF) is a similar company, and much like Lehman followed Bear Stearns, people are concerned JEF will follow MF.  

In fact, JEF plummeted over 20% today before trading was briefly halted.  When trading resumed the stock recovered somewhat, but is still down about 10%.  Having a significant % of my portfolio in cash, and being a big fan of JEF's management and a huge fan of their largest shareholder (Leucadia, which also happens to be a big holding of mine), I decided scoop up some shares.  More specifically, I bought 1250 shares at $11.11 for a total outlay of $13,886 (including commissions).  

So what's going to happen with JEF?  Frankly, I don't know.  However, my guess is they'll be just fine.  If so, JEF could be a huge home run.  But in the meantime I'll be keeping my fingers crossed!

Questions?  Comments?  Email mevsemt@gmail.com