Going on vacation

I am off to my honeymoon for the next two weeks. These two weeks, I will disconnect from the Internet and the noisy world of finance.

The benefits of doing this, you ask?

1. I get to relax and unwind. Vacation involves vacating the mind. What better way to do that than cut off the noise entirely.
2. Maybe, when I return the market would be even cheaper, and I get to average down or buy into new positions, at significant discounts to intrinsic value. I am comfortable with my portfolio and I can sleep at nights without thinking about it. I think it isn't much of a stretch to be able to sleep for 14 nights without thinking about it.
3. In times of market turmoil, I am naturally drawn to the market noise. This can lead me to make emotionally drawn decisions, which is something I wish to avoid. Explicitly disconnecting from the world is a good way to reiterate to myself that changing ticker prices from minute to minute don't matter.

I suspect that if there is a big enough shakeup in the market, the news will find me.

Watching David Sokol

This post is not to comment on the whole "Sokol Affair". It wasn't the most favourable public relations incident that Buffett ever experienced. The affair is largely in the past and frankly, I don't know enough to comment on it.

Although, I did notice that when Sokol was asked why he was leaving Berkshire, he answered that he wanted to focus on his family's investment affairs. Consequently, I started watching his actions on SEC. Evidently, he owns 21.5% of a firm called Middleburg Financial (MBRG). MBRG is a thinly traded bank holding company.

Sokol has been making purchases around the $15 mark, and he hasn't stopped as the market prices have come down.

This is highly speculative, but I suspect that Sokol is busy buying enough stock in this organization to take over the helm, in some shape or form. MBRG is currently selling at about book value. If, and that is a big if, Sokol is someone who has the mettle and temperament of a long term value investor, this may be a good opportunity for a casual investor to join him in on the ground floor. This could be akin to buying into Berkshire Hathaway in 1962.

This isn't the idea for me, because it is highly speculative. But there is a decent chance that MBRG at this price is a reasonable long term investment, even if Sokol's ownership doesn't materialize into anything substantial.

Full Disclosure: No position

Advice from Tweedy Browne

As the market volatility shoots through the roof, here is some excellent, rational, and timely advice from the smart folks at Tweedy Browne.

Uncertainty, in our opinion, is one of the most difficult factors
for professional as well as individual investors to deal with,
and it is dominating the markets currently. Uncertain markets
are characterized by increased volatility and correlation between
asset classes, as well as increasingly shorter time frames for
investment decisions. None of this, in our opinion, will improve
the probabilities of earning a satisfactory return over a
reasonable period of time. Rather, we think that in most
instances, these will improve the odds of the opposite outcome.
Emotional and behavioral biases tend to win out over objectivity.
Today’s 24-hour news cycle doesn’t contribute much to rational
thinking. The adage in the media industry that “airplanes
landing don’t make news” has an element of truth. One relatively
new factor contributing to this volatility (and we admit that we
do not have a lot of empirical data to back it up) is the impact
of algorithm driven trading which, in the U.S. equity markets, is
upwards of 60% of volume. It is largely driven by
arithmetic-historical correlations volatility, and holding
periods measured in minutes if not seconds.

Couple this with day trading and you end up with completely
irrational price movements. By way of example, the price range
of Bank of America (a stock that we do not own) from its high to
its low on August 5th was 11%, and the company had a market
capitalization of $90 billion. Yesterday, the stock was down
another 20%. Another example is Royal Dutch Shell with market
capitalization of almost $210 billion. The price range of the
stock from high to low on August 4th was about 5%. It is
unlikely that the value of those businesses changed by this much
in one or two days, in our judgment. There are numerous other
examples, some we own and others we do not. The ability to
predict this sort of swing movement is virtually impossible and
the ability to explain them is equally so. In order to function
and make objective decisions you must have other parameters for
decision making. In our view, it is ultimately the economics
that win out, and in our case, the economics of the underlying
businesses we own. It certainly has been the case historically,
and in our opinion, profits and cash flow will remain the
fundamental long term drivers of equity valuations. The
probabilities of objectively valuing the economics and
sustainability of a business are far better than the alternative
of predicting the movement of “markets” over any given time
period and we think the empirical evidence supports this view.
This is not to say that we simply ignore “global” questions. We
do consider how larger trends will ultimately impact the
businesses we own. For instance, what do a large emerging middle
class or price controls mean for a business, etc?

So while we don’t enjoy this type of environment – to say the
least – we keep our focus on trying to buy a good business at a
very attractive price. In doing this, we seek to avoid highly
leveraged businesses and businesses with obsolescence risk.
These environments create some real cognitive dissonance – the
ability to buy into a company at a great price usually goes along
with having the ones you own go down in price. Nonetheless, to
put it simply, the investment framework at Tweedy, Browne does
not change – the number of companies to look at, not
surprisingly, has increased and some averaging-in on existing
investments is occurring. Most of what we do rests on the
process coupled with a realistic time horizon.

(Original Source)

Market Climate Update

As mentioned in previous posts, I was and am of the opinion that the market, as a whole is over priced. In the last one to two months we have seen macroeconomic risks emerge, largely in the form of sovereign debt issues. These have shaken the foundations of the optimism in the market. And now the fear of another recession have taken hold of the market sentiment. This shouldn't come as a surprise to anyone. Balance sheet recessions (and this one is a major one) are followed by long feeble recovery. It is not uncommon for economies to dip bank into recession a few years later, only to emerge out of them very soon. The deleveraging process for economies is painful and long (on average 7 to 8 years long).

I must remind myself, as I see my equity portfolio shrink, that this market sell off is good! Even though the market as a whole is still overvalued, there are plenty of pockets of severe to moderate undervaluation. I can sleep well at night, knowing that about 60% of my portfolio is a collection of undervalued businesses [that happen to be getting cheaper every day]. And, the other 40% is cash.

I prefer to run a fairly concentrated portfolio, with 5-10 positions. I look forward to add more weight to my most undervalued positions and, depending on valuation, build new ones.