Portfolio Update – Down 3.00% in August 2011

My portfolio balances at close of trading on 31st August were:

Ticker Price (C$) Price Change Percentage Industry
BHP $ 83.39 -4.67% 7.2% Materials
COS.TO $ 23.41 -10.34% 6.7% Energy
ERF.TO $ 28.67 -3.76% 6.8% Energy
GS $ 113.80 -11.77% 0.0% Financial
INTC $ 19.71 -7.63% 6.5% Technology
MFC.TO $ 13.39 -11.79% 4.0% Financial
PHY-U.TO $ 15.59 16.19% 8.1% Gold
SVU $ 7.80 -5.04% 4.9% Services
TD.TO $ 77.47 1.28% 6.7% Financial
IBM $ 168.32 -3.13% 0.5% Technology
KMP $ 68.70 n/a 4.9% Energy
S&P Fund $ 97.99 -3.07% 14.8% US Equity Fund
Bond Fund $ 209.04 1.14% 28.6% Bond Fund
Cash     0.3% Cash
Total     100.0%  

Overall my portfolio is down 1.96% since last month, despite additional cash contributions. Without these cash contributions the portfolio would be down 3.00%.

For comparison the index is down only 0.13%, the DOW is down 4.36% and the TSX is down 1.37%.

The major factor this month was a large and unexpected retreat on all major stock markets caused by US and European debt troubles, and the surprise downgrade of US debt. The S&P500 (^GSPC) was down 13% at one point during the month, and the TSX (^GSPTSE) was down 8%. Indices rallied before the end of the month and, without this rally, my losses would have been far worse.

In mitigation, gold has performed very well: my gold fund is up over 13%. My bond fund performed well too, and is up 1.14%.

Key stocks that performed especially poorly are:

  • Canadian Oil Sands (COS.TO), down 10%
  • Goldman Sachs (GS), down 12%
  • Manulife (MFC.TO), down 12%

Key statistics:

  • CAD$ = 1.0213 US$
  • Thoughtful Investor Index = 96.97
Advertisements

Goldman Sachs taken to the Woodshed

The fall of Goldman Sachs (GS) continues with news today that CEO Lloyd Blankfein has hired his own, personal lawyer. The stock fell below US$107. Based on earnings I still feel that Goldman has strong value, but that does not mean that the market will agree. Is Goldman a good company but a bad stock? I sold at US$114 and I am staying away from Goldman, and all US financial companies.

Image

Since I bought Goldman at US$155 in April 2011 it has fallen 30%. For comparison, the S&P is down 15% in the same period.

Getting out of Goldman Sachs

I bought Goldman Sachs (GS) at $155.17 on 15th April 2011. The stock trended downward through April and May and on 22nd May I predicted that the legal risk (real or perceived!) relating to Goldman’s actions during the 2007 mortgage bubble and 2008 stock market crash would drive the stock down to $100.

Today the stock traded as low as $110.04 with no bottom in sight. Goldman is indeed being sued by National Credit Union Administration over risky mortgage securities, but legal risk is the least of Goldman’s troubles. It seems that we are looking at a new recession in the US and significant debt-related risk in European banks. Both of these issues are significant risk factors for banks such as Goldman.

I have struggled with this decision more than any other. It’s tough to take a loss on a stock that looked so promising on paper, but I have to set aside my emotional need to hold until the stock comes back and make a fact-based decision. It’s time to sell.

What to do with the proceeds? We look for non-cyclical, non-financial stocks with minimal European exposure and a significant yeild. There are few better than Kinder Morgan Energy Partners (KMP), which operates pipeline systems and offers a 6.6% yeild at current prices.

  • SELL Goldman Sachs (GS) @ US$114.00
  • BUY Kinder Morgan Energy Partners (KMP) @ US$70.05

POSTMORTEM

One month after these trades, on 10th September 2011, this looks like a good call. Goldman Sachs is down 13% since I sold while Kinder Morgan is down only 2%.

Image

Goldman Sachs is now down to US$102 on global debt worries and mortgage bubble lawsuits. This is very close to the prediction I made back on 22nd May 2011 that Goldman would be beaten down to US$100 before recovering.

UPDATE

Goldman broke US$100 today, 12th September 2011.

Fear and Loathing … of Goldman Sachs

Goldman Sachs (GS) closed at $135 on Friday on rumours of a Federal Investigation into mortgage securities sold prior to the 2007 mortgage bubble and 2008 stock market crash.

Goldman is certainly guilty of shorting mortgages while selling them to customers, and for selling them for more than they thought they were worth, but that’s not illegal. (Hey, here’s a tip: don’t get investment advice solely from the people selling the investment!). Much was made of internal emails indicating that some Goldman staff thought that one of their deals was “shitty”. I’m pretty sure I could find a guy at Microsoft that thought Vista was shitty: does that mean that anyone who sold Vista was a crook? Of course not. Some products are good, and some are not.

Goldman is down 13% from where I purchased it last month, making the return even better from this inherently good company, but I think this Federal Investigation will beat the stock up for months to come. I predict that the Government needs to make Goldman suffer. They will keep after them until the stock hits a low at around $100 and then say, “Look how low the stock is…they have been punished enough.”. Meanwhile the earnings will have been as strong as ever and, once people’s gaze moves on to the next shiny object, the stock price will come roaring back.

UPDATE

Goldman Sachs has indeed gone below $100 but this has had little to do with the fuss surrounding the firm and more to do with the debt crisis in Europe. Writing today, on 30th December 2011, Goldman is at $90.43 (67% of book value!) and in the doldrums along with all other major financial stocks.

Image

UPDATE

Today, 15th March 2012, Goldman is at $123. A decent recovery, but not as good as its peers. Negative press continues and Goldman has not shaken it’s reputation as the selfish banker. They need to work on their PR!

Image

UPDATE

Writing today, August 10th 2012, it seems that the second part of my prediction has come true: the US Department of Justice has indicated that it will not be prosecuting Goldman for any alleged wrongdoings in the 2008 stock market crash or the preceding mortgage bubble.

The price has yet to recover.  GS is still at $122.

UPDATE

Writing today, 15th February 2013, GS is at $155.  Prediction has come true, but it took a long time.

Vampire Squid or Tall Poppy?

I just read Too Big To Fail by Andrew Ross Sorkin, so I am aware what happened to the US investment banks (and the global economy) in the 2007 mortgage bubble and 2008 stock market crash. My conclusion? Just another bubble!

In Australia they have a phrase, “Tall Poppy Syndrome”. This is the self-defeating practice that some societies have of bringing down those who have achieved success, especially those who display their success. Australia and the UK are enthusiastic practitioners of Tall Poppy-ism: possibly a reaction to monarchy and the class system. The US tended to celebrate success and “The American Dream” so it seemed to me that it was less inclined to participate in Tall Poppy-ism. I think the crash of 2008 changed this. Perhaps the US considers Wall Street to be their monarchy? In any event, some want to tear down the tallest poppy of Wall Street: Goldman Sachs (GS).

Chief poppy cutter is Matt Taibbi, whose recent piece in Rolling Stone entitled The People vs. Goldman Sachs is causing a stir this week. I read the piece. It’s overly dumbed-down (his analogies are silly, even for a non-financial audience) and populist, but he does have a point: dealing with a bank should not be a “buyer beware” situation. As a new shareholder, I like Goldman’s earnings growth prospects and their strong position in the industry. I think the spectre of litigation and new regulation (neither of which will amount to much) is depressing the share price, making it good value. I bought it on 15th April for $155. Taibbi and his adherents have driven it down to $142. My opinion? I just wish I had known to wait a couple of weeks until Taibbi’s article came out to buy! Or would that be insider trading?

My Intelligent Portfolio

Armed with my new knowledge of investing I set about reviewing my portfolio. My portfolio was in pretty good shape. My financial advisor had been applying much of Graham’s theory for me (e.g. advising me to keep a portion of my portfolio in bonds). There were two securities that were speculative and I decided to sell them: the Indian and Lithium ETFs. On 15th April I replaced these with two new stocks.

  • SELL Lithium ETF (LIT) @ US$21.95
  • SELL India Nifty Fifty ETF (INDY) @ US$29.82
  • BUY Goldman Sachs (GS) @ US$155.17
  • BUY Intel (INTC) @ US$19.618

I selected these two stocks by analyzing the fundamentals of a range of stocks. I began with a basic screen to identify stocks that met the following criteria:

  • Dividend: yield of 0.5% or more
  • Growth: expected 5-year annual earnings growth of 8% or more
  • Popular: consensus analyst opinion of “buy” or “strong buy”
  • Large: revenues of $40B or more
  • Value: PE ratio of between 8 and 18

I then took a few names and did a more detailed analysis of their earnings forecasts to estimate the return (dividend and appreciation) I could expect given the share price. I decided that I would not buy anything that has a estimated annual return of less than 12%. Next I used MSExcel to do an IRR calculation to understand what my maximum entry price would be for this return. Finally I applied a 20% margin of safety to the maximum entry price to obtain my buy price. This is the kernel of what Graham would call my “Investment Policy”.

Using this method I predict a return as follows.

  • Goldman Sachs will provide an annual return of 15.83% over the next four years
  • Intel will provide an annual return of 17.7% over the next four years

With these changes, I consider my stock portfolio “Intelligent”.

POSTMORTEM

One month after these trade, on 15th May 2011, these trades are mixed. Intel is up around 20%, while Indy and Lithium ETFs were down 7% and 9% respectively, al of which are a good call. Goldman is down 9%, which is a bad call.