My Returns as of Oct. 12th 2010

When I posted my returns at the end of Q3 one reader correctly pointed out that I wasn't showing my cost basis for each holding.  At the time TradeKing was doing some sort of behind-the-scenes IT conversion and didn't display cost basis on their summary pages.  They've since finished the conversion, so I thought I'd post a quick update on my returns and update the "My Returns So Far..." and "My Current Holdings" pages. 

I started 2010 with $107,514 and as of 10/12/2010 my account balance is $108,885 (Note: as of Q3 when I last posted about my returns my balance was $104,494, so this is quite a jump in the last 2 weeks).  YTD I haven't made any deposits or withdrawals, so the increase in value was driven by an aggregate increase in my holdings.

• On an absolute basis, my portfolio gained 1.3% YTD while the S&P (w/ dividends reinvested) is up 6.1%.
• I've been tracking my returns for 4 years and 9+ months, during which time my annual rate of return is 14.6%. Over the same period the S&P returned 2.3% annually. In other words, over the last 4 years and 9+ months I've outperformed the S&P by about 12% per annum.

However, I'm still underperforming the S&P for 2010, but as I mentioned last time I have a very concentrated portfolio and I'm pretty optimistic about my holdings - so I'm not overly concerned that YTD I've been lagging the S&P.  Below are two pictures (click to enlarge), one for my current holdings (this is actually 2 displays b/c only the bottom grid shows my cash balance) and one for my 2010 realized gains & losses. 

Some more thoughts on TTT/MCFAF

In my previous post on TTT/MCFAF (click on "zCurrent Holding: TTT" under Labels) I mentioned how the recently announced merger made TTT an attractive investment, so I thought I'd elaborate a little here... 

MCFAF can be thought of as the original Michael Smith investment vehicle, and through countless mergers/acquisitions/divestitures/spinoffs it's been used to generate serious wealth over the last two decades.   Before the merger I thought TTT was cheap, but I never bought it b/c I was worried about any conflicts of interest.  Afterall, with Smith controlling both companies and with both companies dependant on acquisitions to create value, I was worried he would cherry-pick the best opportunities for MFCAF.  Additionally, TTT was basically a mining royalty company that paid MFCAF a fee for administration - perhaps this fee was slightly beneficial to the shareholders of MFCAF at the expense of TTT?   Lastly, from what I've been able to gather (from 3rd party sources, so I can't verify the accuracy), Michael Smith has a large ownership stake in MFCAF and a small stake in TTT, so financially he's much more aligned with MFCAF (and when I evaluate stocks, insider alignment is one of my primary considerations). 

So, my next thought was why the merger and why now?  Afterall, over the last 5-10 years Smith has gone through considerable lengths to put build the company that was basically the sum of TTT, MFCAF, and KHDHF*.  He then spun out MFCAF and a few years later he split up TTT and KHDHF, and now he's merging TTT and MFCAF!  Wouldn't it've been easier to just spin out KHDHF in the first place?  Ultimately there's no way for me to know why Smith has made these transactions so complex, BUT that doesn't matter b/c with the TTT/MFCAF merger I'm comfortable that now I'm directly aligned with him. 

So, all that being said, I do have a conspiracy theory about what might be up Smith's sleeve.  Recently, TTT issued stock to raise cash for the express purpose of pursuing an acquisition.  My blue-sky hope is Smith found an acquisition that's so attractive he, along with his MFCAF shareholders, wants a piece of the wealth it'll generate - and what better way to do this than by merging MFCAF into TTT before the acquisition becomes public?  Also, this is consistant with a nuance of the TTT/MFCAF merger that has a lot of people scratching their heads - Smith is financially aligned with MFCAF, but on the surface the TTT/MFCAF merger appears to benefit TTT shareholders at the expense of MFCAF.  Afterall, on a conference call Smith was very confident he has the necessary MFCAF shareholder support for the TTT merger - perhaps the pending acquisition was how he got it?  Of course this is just IDLE SPECULATION on my part, we'll see what happens...

*KHDHF is a cement/industrial company that trades on the Frankfurt exchange and here in the US on the pink sheets.  This company is being spun out of TTT in 4 phases, three of which are already complete.  After TTT and MFCAF merge, I'll get 1 share of KHDHF for every 9 shares of TTT/MFCAF I own (which is why I purchased such an odd number of shares - it's divisible by 9). 

Can a "Value" Investor Trade Options?

"Rule 1 is don't lose, your option holdings are not consistent with your strategy, unless you changed from value investing to gambling..."

A reader posted this comment, and as someone who considers himself a value investor it's something I wrestled with - afterall, in the world of value investing buying options basically amounts to heresy. 

So what is value investing?  IMHO it's simply buying something at a discount to it's real, or intrinsic, value.  Normally, when people think value investing they think stocks - but really value investing can be applied to real estate, private equity, bonds, commodities, etc.  However, options are a different story because, while a share of stock represents partial ownership of a business, an option has no such claim.  In the world of engineering an option would be akin to a 2nd derivative, i.e. the operations of a business drives the price of the stock, and the price of the stock drives the price of the option. 

So does it ever make sense for a value investor to buy options?  Obviously I think the answer is yes, but only in certain situations - maybe the underlying stock is highly leveraged, or maybe there's some future event that could dramatically change the value of the underlying company.  Rarely, an option is just plain cheap and the risk/reward profile is really attractive. 

Also, the world of options is quite interesting.  First, just about everyone is a trader and they view stocks as pieces of paper (not partial ownership of a business).  Second, just about everyone uses the Black-Scholes model to price options (B-S uses volatility, interest rates, time to expiration, etc. to price the option, but doesn't considers the real intrinsic value of the underlying stock b/c it assumes the market is efficient).   So in the world of common stocks there are plenty of value investors bidding up the prices on undervalued stocks, but in the world of options this simply isn't the case. 

Anyway, just off the top of my head I can name several value investors who've purchased options (or warrants) - Warren Buffet, Joel Greenblatt, and Francis Chou - so while I can pretty much guarantee I won't be as successful as them at least I'll be in good company!