Portfolio Roundup

I continue to hold a handful of positions-- five, to be precise. I believe these positions are significantly undervalued and provide large upside.

1. The largest position I hold is Bank of America (BAC). As the legacy asset servicing dwindles down and litigation expenses come down-- they have to some day; the true earning potential of this giant bank will be evident. I believe that the intrinsic value of this bank is somewhere in the mid 20s.
2. The other large position is own is Markel Insurance (MKL). I view this as a core position that I add to as opportunities present themselves. In 2013 I was able to add significantly to this position in October.
3. Another core position I am slowly building is Fairfax Financial (FFH). This business is quite similar to Markel and is run by a long term oriented able management. Fairfax hasn't had a good 2013 as they were quite bearish and hedged all their investment gains going into the year. I believe they are currently quite undervalued but as the market runs up, they may get even cheaper.
4. The only new position I started in 2013, was Fortress Paper (FTP). This is a hidden asset play that I posted about. It is hard to estimate intrinsic value of this business because of a number of unknowns at this point. This uncertainty and a string of bad luck has caused this stock to drop to all time lows, while the book value stayed quite stable.
5. The last position worth mentioning is cash. This position isn't due to some top-down call, but due to lack of new ideas and maturing of older ideas. This position earns barely anything in the money market, but provides large optionality if and when the markets present opportunities in the future.

2013 Performance and other thoughts

2013 has been a good year. As published on the historical performance page, the portfolio increased in value by about 36%. This was a little bit better than almost 32% the S&P500 market produced for the year-- which is stellar return for the market any year.

I am not too concerned with relative performance, but rather absolute performance. In either case, 2013 was an excellent year.

The portfolio was able to produce these results with minimal volatility and far less downside risk than the market itself. Throughout the year, the portfolio averaged around 40-60% cash, thereby reducing volatility. Cash also provided ample opportunity to start an new position or increase weighting of present positions as opportunities presented themselves.

From an opportunity cost perspective, if the portfolio was fully invested into positions from a year ago, the portfolio would have produced returns of close to 60%.

Hindsight is always 20-20.

As mentioned in the post at the beginning of 2013, I started selling out of positions as they approached my estimates of intrinsic value. It turns out that these stocks (Canam and Cisco, specifically) not only approached my estimate, but also surpassed it.

I knowingly "left money at the table". Evidently, I left a lot of money on the table!

I have no regrets. That would be the wrong lesson to draw.

Outlook

I remain concerned about the fundamentals of the economy and consequently the businesses. The top line numbers have practically stagnated, and the profit margins are at all time highs. Furthermore, the EPS keeps on going up thanks to large stock buyback programs. Market loves rising EPS numbers, and bids up the price of the stock. And since many companies needs to beat EPS estimates, they buy more of this ever expensive stock instead of investing into their own businesses.

This is a value destroying cycle that will end someday.

 As for 2014, as usual, I have no idea what the market would do. And neither does anyone else. All we can do is prepare for the opportunities that arise and be nimble if and when the seas get rough.