2011 Returns

Yikes.  Ouch.  Crap.  Well, that about sums it up for 2011.  Here's a quick summary:

• I came into the year with $126,967.  During the year I deposited $35,000 into my account.  By year end my holdings had DEPRECIATED by $23,788, leaving me with $138,179.
• My IRR for 2011 was -15.7% vs. +1.0% for the S&P (assumes dividends are reinvested AND the $35K I deposited was used to buy additional SPY shares at that day's closing price).

Although 2011 was a kick in the teeth, my cumulative returns for the past 6 years are still well ahead of the S&P.  Below are the details (click to enlarge):

I also included a waterfall graph that shows a little more detail.  The blue bars are the beginning and ending balances, the green bars show appreciation/depreciation, and the red bars represent deposits (click to enlarge):

And lastly here are my current holdings (click to enlarge):

So what went wrong in 2011?  Three things: SHLD, BAC, and JOE.  And I'm not sure whether to call it stubbornness or arrogance, but I've effectively doubled down on Sears and re-initiated a significant position in BAC.  My hope is 2012 will prove to be a better year for these struggling companies, and with Sears's assets and BAC's core business, they both have a ton of potential.  I'm also optimistic on the rest of my portfolio, but due to macro uncertainty, I'm also keeping a large % of cash.

Questions?  Comments?  Email mevsemt@gmail.com.

Adding to BAC

Another quick update.  I just added 2500 BAC Class A TARP warrants at $2.01 apiece, for a total outlay of $5,030.

More Sears

Just a quick update.  After Sears's gut-wrenching plummet the other day, I decided to add to my position.  Specifically, I bought Jan 2014 $55 call options (20 contracts at $2.00), costing me a total of $4,012.

Questions?  Comments?  Email mevsemt@gmail.com

Trying Something Different... Again

On Friday I swapped out my Bank of America stock with Bank of America Class A TARP warrants.  Specifically, I sold all 2850 shares of BAC at $5.58 (for a total of $15,898) and bought 5000 shares of BAC-WTA at $2.09 (for a total outlay of $10,495).   By the way, if this sounds familiar, it's because I did the exact same thing back in July (http://mevsemt.blogspot.com/2011/07/trying-something-different.html).

And again, my logic for the swap is the same.  Simply put, I feel the warrants now have a better risk/reward profile.  It's actually pretty interesting, the common and the warrants usually move in tandem with each other, but recently their prices have deviated.  Here's what I mean.  I bought BAC on 11/25 at $5.18 (http://mevsemt.blogspot.com/2011/11/bac-my-favorite-mistake.html).  That same day the warrants closed at $2.47.  However, by last Friday, the common had RISEN to $5.58 and the warrants had FALLEN to $2.09.  In other words, in just under a month, the common outperformed the warrants by over 20%.  

Finally, for anyone who wants some light reading, I suggest you check out this 1992 OID interview with Bruce Berkowitz (http://www.fairholmefunds.com/pdf/oid1992.pdf).  The interview took place right after the Savings and Loan crisis, when just about everyone thought Wells Fargo was going bust and California was minutes away from falling into the Pacific.  So why do I bring this up?  Well, from 1991 to 1992, Berkowitz was buying Wells Fargo frantically, paying between $52 and $78 a share.  In fact, according to the interview, he put roughly 1/3rd of his liquid net worth in the stock.  So how'd it turn out?  Well, by 1998 the stock had risen to $374, at which time Wells merged with Norwest.  After the merger, Wells split 10 for 1, and by the end of 1999 the stock had risen as high as the equivalent of $498 a share.

Today, Berkowitz has been pounding his chest over BAC, much the same way he did for Wells over two decades ago.  In fact, he's even said BAC reminds him of Wells, and that he's basically staking his reputation on the company.  Given that he said this earlier in the year, when BAC was trading much higher, maybe it's time to listen?  

Questions?  Comments?  Email mevsemt@gmail.com

Kmart Smart?

I've written about Sears ad nauseum, yet I've got nothing to show for it but egg on my face.  Indeed, over the past year, the company's consolidated operations have gone from bad to worse.   However, I still believe there's a lot of underlying value here (real estate, Kenmore, Craftsman, Sears Canada, Lands End, Home Services, etc.).  Further, anyone who owns Sears common stock is closely aligned with Eddie Lampert (and if you look at Autozone's chart from the late 90's through today, you'll see there could be worse things!).

With this in mind, I decided to sell cheap to buy cheaper.  Specifically, I sold my 625 shares of JCP at $32.34 (originally purchased at $25.47 in September 2011) and bought 400 shares of SHLD at $45.81, making it my second largest holding.  Wish me luck!

Questions?  Comments?  Email mevsemt@gmail.com

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

Sold my MAS LEAPS

Well today I sold my remaining 100 MAS LEAPS at $0.80.  With the market bouncing around a 2 month high I just couldn't justify holding this highly leveraged position with the expiration date only a little over a year away.

So how'd I do?  Well, I originally purchased MAS just over two months ago (http://mevsemt.blogspot.com/2011/08/another-real-estatehousingconstruction.html) for a total outlay of $5,656.  I sold all 125 contracts at $0.80, so I my cash out was $9,960, netting me a profit of just over $4K.  In other words, not to shabby!

Questions?  Comments?  Email mevsemt@gmail.com.

Dialing It Back...

On Friday I made two transactions: I sold my remaining 550 shares of AHS (at $4.25) and reduced my MAS 2013 LEAPS by 25 contracts (sold at $0.80 per contract).

If you click on the "zz AMN Healthcare Services" label on the right you'll see AHS has been a lot of work, a lot of ups and downs, and very little profit.  But I guess sometimes that's just how it goes, right?  Anyway, although I still think the shares are undervalued, they were such a small % of my portfolio that it just wasn't worth holding them anymore.

The MAS LEAPS, on the other hand, have turned out really well over a relatively short amount of time.  I bought 125 contracts at $0.45 about 2 months ago, so selling 25 of them at $0.80 is great!  Unlike AHS, with MAS I'm just trying to be opportunistic and take advantage of the price Mr. Market is offering, so don't be surprised if I continue selling in the days/weeks to come.

The other reason for selling both AHS and MAS was to make my portfolio a little less risky.  The market has rallied nicely since the start of Q4, and as a result the % of my portfolio in cash had fallen to the high 20's.  However, after Friday's transactions my cash % is back in the low 30's, and if the market continues to rally I'll probably continue to trim back some positions.

Questions?  Comments?  Email mevsemt@gmail.com