State of the Portfolio - 7/31

I try to run a very concentrated portfolio despite my tendencies to nibble at the latest investments that seem promising. My current top 10 holdings include MSFT, FAF, HD, MMM, DELL, PFE, AEA, BUD, FDC, and FII. I would not hesitate to add to any of these holdings at the current market prices. For disclosure, my other positions include COP, UNH, RCII, LKI, GPS, ENH, DHOM, TYC, JBSS, DISCA, DRL, and ACUS. I hope to get around to discussing these smaller positions, but I will be spending most of my time analyzing and updating on my largest positions.

A number of my holdings have been beaten down over the past 2-3 months. My portfolio has suffered and I am currently flat for the year (lagging the S&P by 4% for this year's cash flows). Despite these "setbacks", I am ecstatic about the opportunity to buy more of these stocks with such a large margin of safety, i.e. discount to its my estimate of the intrinsic value.

Mega-caps like MSFT, DELL, HD, and WMT should prove to be good buys for the long term. The stock prices have been stagnant the last few years, not because the businesses have been performing poorly, but because investors paid too much for growth during the bubble. The PE ratios have now fallen into the low teens. The PEs are at historic lows and seem inappropriate for superior businesses like MSFT and WMT. Microsoft and Walmart in particular have huge moats and should provide excellent returns for many many years to come.

Currently, all of my top 10 investments are Motley Fool Inside Value newsletter picks. Some of these stocks I owned before the recommendation, but many of them were introduced to me by the newsletter. Inside Value is a great service and well worth the $150 I paid for the subscription and for access to the discussion boards. Their recommendation prequalifies a stock for me and it immediately earns a spot on my watch list.

For my next post, I will analyze either Home Depot or Dell. I think these are currently the best buys on the market. I'm crossing my fingers that Dell will drop down to $19 a share again.

Welcome to the Worst-case Scenario Investing blog!

This is the first entry in what I hope to be a very illustrative blog used for documenting my own investment decisions. I graduated from college two years ago and am currently a software engineer in a large corporation. I've been investing for a little over two years, have had some luck, but also have made some investment mistakes along the way. I am by no means an expert in the investment field, but i have been an avid reader over the last two years of great investors like Warren Buffet and Benjamin Graham. I am currently ploughing through Damadoran's Investment Valuation textbook to familiarize myself with common valuation models instead of just using black box implementations available from the web.

Every investor has an investment philosophy. I want to be a value investor who runs a concentrated portfolio with 75% Buffet-type investments and 25% Graham investments. In other words, 75% of my portfolio should be in my top 10 best investments for the very long term. These should be companies that have wide moats and throw off tons of cash. The remaining 25% of my portfolio will be diversely invested in either small Grahamian NCAV cigar-butt companies or possibly special situations like the ones documented by Greenblatt. These allocations are not hard rules, but I intend to stay close to them. The main motivation of a concentrated portfolio is to avoid my own tendency to collect different stocks, i.e. diworsification.

As a student of machine learning and pattern recognition, I am also interested in taking advantage of the short-term through programmatic technical analysis, but I realize that long-term movements are mainly governed by fundamental qualities of a company. This means that I will reap the most benefit from concentrating on fundamental analysis while I am starting out. Technical analysis will be a hobby that gets very little of my investment dollars.

To distinguish this blog from the other value investing blogs out there, I will attempt to pinpoint what the worst-case scenario could be for different stocks that i am interested in. This type of floor analysis will give me the confidence I need to run a concentrated portfolio. For cigar butts, I'll probably look at what's on the books to calculate a liquidation value. For growing businesses, we can perform a discounted cash flow valuation with a range of possible growth estimates. The lower end of the range will constitute what might be the worst case scenario.

I hope I have piqued your interest with my investment philosphy and background. The next post will disclose the components of my current portfolio and I will briefly explain my top picks.