SINLetter - October
Welcome to edition 38
of Suria Investment Newsletter (SINLetter), a free monthly
investment newsletter. The objective of this newsletter
is to provide you with unbiased initial research and
basic facts about individual stocks and other financial
instruments so that you can research them further before
deciding to add them to your portfolio or not. If you
are reading this and are not a subscriber, you can subscribe
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September Blog Entries:
Breaking out of blogging hibernation, I started writing again
to address some of the turmoil we experienced during one of the worst months we have seen in years.
If you do not subscribe to blog entries by email or in case you missed them, here are the blog entries for September.
If you do not receive blog entries by email,
you can still subscribe to receive
blog entries by email here.
We posted the worst monthly
performance since the inception of this newsletter with
a drop of 9.92% in September, worse than the drops in
the Dow and S&P 500 but a little better than the
12.05% drop the Nasdaq experienced as you can see from
the table below. The first week of October has lead
to further drops and all three major indices are in
negative territory since the inception of this newsletter
in August 2005, while we are still holding on to a gain
of 67.25% in the SINLetter model portfolio. Watching
the sea of red in my personal portfolios has been painful
and it is little consolation that as of mid-September
only 5 out of the 9,100 US mutual funds had positive
returns this year. I still believe we are yet to see
the bottom and it will take years for this global bubble
to deflate but have confidence that our portfolio which
represents a broad range of sectors from consumer staples
to pharmaceuticals, is positioned well for a recovery
if and when it occurs. A 13% cash position gives us
some ammunition to either hedge the long portfolio against
further declines or add positions that look like bargains.
|Third Quarter 2008
|Since Inception (Aug 2005)
The much anticipated,
hated and perplexing bailout bill, which ballooned from
the original $700 billion to $850 billion was approved
by the House of Representatives and signed by President
Bush (who incidentally happened to call Wall Street
drunk just a couple of months ago in this
amusing video). Wall Street reacted by sending the
Dow down another 157 points or 1.5%, probably on concerns
about the 159,000
jobs lost in September. Warren Buffett decided to
some of his billions into GE (a very sweet deal
that pays him a 10% dividend and 5 year call options
to buy GE at $22.25) and the market rewarded GE with
a 12% drop over the next two trading sessions. GE's
decision to dilute existing shareholders by raising
$12 billion caused investors to lop off $29 billion
from GE's market cap. These are treacherous times for
investors and the following cartoon from the 1997 cover
of The Economist perfectly captures the mood swings
of Mr. Market from manic depressive at one instant to
euphoric the next.
Rather than focus on developments
related to individual stocks in the portfolio like I
usually do (everything took a hit on little or no company
specific news) in this section, I am going to focus
on the broad theme of asset allocation in this newsletter.
Gold continued to maintain
its inversely correlated relationship with stocks by
rising $40.1 or 4.83%, closing the month of September
at $870 per troy ounce.
I am making no changes to the model portfolio at this
time. As discussed below, I am adding Intel (INTC) to
The importance of asset
allocation is sometimes not as obvious as it would seem
to many retail investors who often mistake investing
as picking a bunch of stocks or funds and periodically
rebalancing this portfolio. While I was aware of the
role asset allocation plays in portfolio performance,
I was taken aback by the following paragraph from the
Success by Yale University's Chief Investment Officer
A number of well-regarded studies of institutional
portfolios conclude that approximately 90 percent
of the variability of returns stems from asset
allocation, leaving approximately 10 percent
of the variability to be determined by security
selection and market timing. Another important
piece of research on performance of institutional
investors suggests that 100 percent of investor
returns derive from asset allocation, relegating
security selection and market timing to an inconsequential
As an investor who does
not believe in the efficient-market
hypothesis and feels that individual stock selection
can help you outperform the market in the long-term,
the research that David mentioned in his book was shocking
to me. When I read the sentences again I realized the
key words in the paragraph were "institutional portfolios"
and if the same study were done on retail portfolios,
the results may be different but probably not by a whole
lot. Studies done of the performance of mutual fund
investors have shown that not only do most mutual funds
underperform the market, investors in these funds tend
to do even worse than the numbers posted by these
Asset allocation if done
properly can reduce the volatility of your portfolio
and reduce the impact of a bear market. A class of funds
commonly referred to as lifecycle
funds, can take all the guesswork out for you and
automatically adjust asset allocations (primarily between
stocks and bonds) as you approach your retirement date.
For example, if you plan to retire in 21 years from
now, you could pick the Fidelity Freedom Fund 2030 (FFFEX)
or the lower cost Vanguard Target Retirement 2030 Fund
The Fidelity fund is down 27.29% since the start of
this year, while the Vanguard fund has lost 24.85% when
compared to a 24.95% YTD drop in the Dow.
However if you are like
me and prefer coming up with your own asset allocations
and selecting stocks/instruments within the asset classes,
it may be well worth the effort it takes to get a few
points of extra performance (alpha). Even do-it-yourself
investors have multiple tools at their disposal. The
Engines founded by Nobel Prize winning economist
and creator of the Sharpe
Ratio, William Sharpe, offers low
cost retirement solutions. Another monte carlo simulation
tool that lets you play with asset allocations is the
Portfolio Planner by Dr. Geoff Considine.
With the availability
of exchange traded funds (ETFs) that not only cover
almost every imaginable sector and country but also
let you slice and dice within a sector, creating a sophisticated
asset allocation model is no longer out of the reach
of informed retail investors. Understanding the tax
consequences and correlation between asset classes (gold
is usually inversely correlated with stocks) is probably
as important as picking the right securities and percentages.
Based on my current convictions about the macro economic
environment, given below is the asset allocation I came
up with for my family's tax-deferred (retirement) portfolio.
In case the above diagram
is not clear, I have also broken out the various components
in the following table.
||AIV, AVB, DRW?
||PBW, STP, ALTI, HOKU?
||INTC, GE, SBUX, CTXS, UMPQ, BAC, BCS,
ATVI, TWER, ALVR, LGF, MCS?
||SCHN, SID, SLT?
||GLD, NEW, ABX?
||PHO, CGW, PICO?
||PCL, RYN, WY?
||EPI or IFN (India), EWM (Malaysia), EWS (Singapore),
EWZ (Brazil), EFV (Europe Value), PGJ (China)?
The absence of bonds from
this asset allocation is intentional due to personal
preferences and has nothing to do with my future expectations
related to bonds. I have also decided to break out alternative
energy into a separate asset class because I think the
sector holds a lot of potential irrespective of who
wins the elections come November. Within each asset
class my goal is to allocate no more than 5% to individual
ETFs and preferably less than 2% to individual stocks.
Please note that this
allocation may only make sense for my age and financial
conditions and has not been tested or refined using
a simulation tool. I will probably tweak the individual
security/instrument selections, run some simulations
and post the results on the blog at a later date. This
article should not be construed as personal investment
advice and I am only sharing this to foster discussion
and obtaining constructive feedback.
It has been well over
two years since we featured Intel in the July 2006 edition
of SINLetter and sold it roughly a year later for $23.23
a gain of 22.26%. The stock has dropped significantly
since then and is currently off more than 40% from its
December 2007 peak. Unless you believe in financial
armageddon, troubling times such as these are the perfect
time to pick up financially strong companies that are
leaders in their sector. Given the financial problems
competitor AMD is facing, Intel at this point is not
just the leader in its sector but pretty much is the
only game in town. Opportunities to pick up
virtual monopolies at less than 12 times 2009 earnings,
while collecting a 3.2% dividend yield rarely present
The company currently
has nearly $12 billion in cash and short-term investments
on its balance sheet as well as $5.29 billion in long-term
investments when compared to just $2.83 billion in both
short-term and long-term debt. Intel generated nearly
$1.6 billion in net income just last quarter and while
no one expects jaw dropping growth rates form Intel,
expectations of nearly 15% growth are still respectable
and may even be aggressive.
As companies like Intel
kept packing more and more transistors into chips that
kept getting smaller, electricity leakage and heat became
a big problem. Intel lost market share to AMD in the
server segment primarily because AMD's chips were running
cooler and consuming less energy. Intel's answer to
this was its new "high-k"
material, which in Gordon
Moore's own words is "the biggest change
in transistor technology since the introduction of polysilicon-gate
MOS transistors in the late 1960s." This
new material has helped reduce "gate leakage"
more than 100-fold and the chips based on this high-k
material were picked by Time magazine as one of the
inventions of 2007.
The risks of earnings
expectations getting revised downwards and this recession
lasting longer than most people originally expected
certainly exist but most of those risks already appear
to be factored into the stock price. Consider the fact
that even during the dot com bear market of 2000-2002
that took a severe toll on most technology stocks, the
lowest Intel dropped to was $13.22 in October 2002.
Intel had a much stronger competitor in AMD at that
time than it does now.
I am going to add Intel
to our watchlist and will post
an update on the blog if I decided to start a position for the SINLetter model portfolio. I currently
hold Intel in my personal portfolio and am planning on adding to my position.
Every month we add featured
stocks into a model portfolio started with a cash position
of $100,000 on August 2, 2005. To keep calculations
simple, trading costs and regular dividends are not
Model Portfolio - October 3, 2008
||Number of Shares*
* Price and number of
shares adjusted for Activision Blizzard (ATVI)
and ICON plc (ICLR)
to reflect splits on September 8, 2008 and August 13,
From the stocks that are currently in the model portfolio,
I own shares of Activision Blizzard (ATVI),
Lionsgate Entertainment (LGF),
Tata Motors (TTM),
PowerShares Water Resources (PHO),
Suntech Power (STP),
and Marcus (MCS).
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