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.

New position: Fortress Paper

Recently, when looking at the 52 week low list, I was surprised to see Fortress paper (FTP). The last time I came across this business, it was a high flying stock in 2011.

Fortress has had the worst set of luck lately. Their news release page is a great way to get a sense of the timeline of events. While the series of unfortunate events continue, the management remains highly resourceful.

Without going into the very interesting history of this business, let me get right to some numbers.

The book value per share is about $24.50 (Q3 2013), while the stock last closed below $4. The price to book ratio is 0.16. Market is assuming that the book value is going to be severely impacted as the business bleeds cash while waiting for dissolving pulp prices to recover. Market is probably right, but where I disagree is in the degree of the expected loss.

Mr market is very focused on the Canadian dissolving pulp business and seems to be ignoring their Swiss banknotes business.

It must be noted that majority of the assets on the book are locked up in property, plant and equipment; which is hard to unlock, but it is also far less likely to be squandered, unlike cash.

To determine a margin of safety, I performed a private market value analysis of the banknote subsidiary. This business now has a positive EBITDA and has tangible assets marked on the balance sheet at a discount. Furthermore, the intangibles of this business aren't on the balance sheet since they have been developed internally. Intangibles such as patents and customer relationships are incredibly large for this currency printing business. For example, this business is the sole producer of swiss francs in the world. They also print Euros for 10 countries. They own much of the technology behind the security features that are prevalent on modern banknotes.

Even if I assign $0 to the intangibles, I estimate a very conservative $150m for this business.

Now, on to the Canadian dissolving paper mills.

Let us assume an orderly liquidation of their dissolving pulp mills. I assign $100m for Thurso mill and $0 for LSQ mill. On the books there is over $300m of PP&E at these two locations.

Add in cash of $102m and pay down all debt of $227m, and we are left with $125M or 8.59/shr.

Last closing price was $3.9/shr.

Market is saying that this business is worth more dead than alive!

Not that I wish for fortress to liquidate all assets, I know something wonderful can happen if a living business is purchased at half the price of its liquidation value (which is a worst case scenario).

Disclosure: I am an owner of Fortress paper at the time of this post

Market observations -- mid 2013

As the number of undervalued securities disappear from the US market, I can't help but observe Mr Market's antics. This isn't to trade but rather for enjoyment.

Recently when the federal reserve announced possibly reducing the pace of quantitative easing, Mr Market had a small convulsion. The impact to the equity market is well known, however I find the impact to two other markets the most intriguing.

The long treasury bond dropped in price, raising the yield. Supposedly, this response is because Mr Market expects higher inflation in the near future. However, in a classic schizophrenic fashion, the price of gold also dropped significantly, implying expectation of deflation!

Only one these two avenues must be the right one.

For those who are so inclined could investigate the economic fundamentals and determine which of these are more likely in the near future-- deflation or inflation.

In either case, insurance to protect from either of these scenarios is available for cheaper than it recently was! Gold is the classic inflation insurance; while US treasuries are the deflation insurance of choice.

Disclosure: no position.

iWent

It is incredibly rare for me that a thesis pans out within a year. In the case of iGo, it only took about 3 months.

I initiated a position in iGo at half of tangible book and below 2/3 of net current asset value. My primary motivation was the very large margin of safety being offered by Mr Market for this loss producing business.

It paid off.

On July 11, there was a tender offer announced for 44% of iGo. The premium was 71% above the day's closing price. The stock promptly started to trade high next day and I started selling into it.

Why didn't I wait to tender my units?

The complexity of the deal and other factors compelled me to sell early. The biggest holder of iGo, Adage, has offered their units for tender. This doesn't leave much room for the rest of us. Also, the business has had further impairments and will likely release a horrible Q2 report. This information was buried  in their 8-k disclosure.

I sold because I didn't want to be holding a business with significantly small margin of safety.

54% return over 3 months isn't too bad at all either.

Full Disclosure: no position in iGo at the time of this writing

Going for iGO

One of the perverse effects of being a value investor is having a portfolio full of "uglies"!

As the market price of a stock rises (and starts to look beautiful to the lay person), a value investor sells it. He then uses those proceeds to purchase another "ugly" name.

This means that at any given moment, a snapshot of a value oriented portfolio will have nothing but mostly ugly names. Hopefully, if the manager does their homework well, these uglies will have been purchased at lovely prices. That is, lovely to a value investor.

This brings me to a recent position that I have initiated in the portfolio. I came across iGO Inc. (NASDAQ:IGOI) from Saj's blog. iGO's stock price has been quite ugly over the last year-- it has lost ~77% of its value.

But let us look under the surface.

Starting from the balance sheet, I see the book value at 7.26/shr with no debt outstanding. Net current asset value (NCAV) is 6.69/shr. The liquidation value of the business is about 4.86/shr.

The price at the time of this writing is 2.28/shr, which is 53% discount to liquidation value or 66% discount to NCAV. This is a very large margin of safety being offered by Mr. Market.

Looking at the income statement it is quite obvious why this business must sell at a discount to book. They have negative net income and free cash flow over last couple years.

My investment thesis is that over the next year, this business will, at the very least, slow the cash burn rate. Even a rate reduction will be enough to make this stock sell close to the NCAV; which is a reasonable value for a chronic loss making business.


Full Disclosure: I am an owner of iGO at the time of this writing.

Leaving money on the table

As the market makes new nominal highs, I have been slowly shedding positions as they approach my estimated intrinsic value. In fact, due to various central banks' actions, I believe this market rally is not an accurate reflection of the underlying economy. Due to this concern, I have been very fearful as I saw the DOW hit the all time nominal high followed by the S&P 500.

Being fearful has prompted me to take profits early-- as in, I have been selling position(s) at a 10 to 20% discount to intrinsic value estimates.

I am knowingly leaving money on the table; but it helps me sleep better.


Full Disclosure: N/A

Walter Schloss' maxims

It has been one year since Walter Schloss passed away, aged 95, due to leukemia.

Walter had an incredible investment return record that hasn't been matched by anyone else. He managed investor's money for 47 years, on average beating the S&P 500 during that time frame by an annual average of six percent.

Walter outlined some of his best ideas in a list of 16 "Factors needed to make money in the stock market". On the anniversary of his passing, here are his 16 simple and elegant maxims.

1. Price is the most important factor to use in relation to value
2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.
3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).
4. Have patience. Stocks don’t go up immediately.
5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.
6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a scale down and sell on a scale up.
7. Have the courage of your convictions once you have made a decision.
8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.
9. Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E ratios high. If the stock market historically high. Are people very optimistic etc?
10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years before the stock sold at 20 which shows that there is some vulnerability in it.
11. Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.
12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money, it is hard to make it back.
13. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
14. Remember the work compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.
15. Prefer stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.
16. Be careful of leverage. It can go against you.

Five year performance update

During the early days of 2013, I quietly updated the portfolio performance page. I didn't do the obligatory blog post with explanation of the results, until today.

End of the 2012 marked five full years I have been managing my portfolio. Five year is perhaps the earliest milestone in the long investing journey ahead. It is also a good time to look back and introspect. The annualized performance record is shown as follows.

Ironically, five years is a complete career for professionals-- going from scratch to stardom and bust before the end of the fifth year.

Is it beginner's luck? It is certainly a possibility, but I hope that there is some genuine skill involved. Only time will tell. I certainly do not expect the 30+% yearly returns to repeat very often as time goes on.

Asset allocation

As of Dec 31, 2012, the portfolio had 27.2% in cash and equivalents, which continues to earn a pittance. It continues to be a drag on the portfolio's performance-- a risk that I am willing to accept. The large allocation to US listed equities is largely due to the healthy rise of some of the US equities in the portfolio, specifically Bank of America (BAC) and Cisco (CSCO). I continue to hold these equities.

Winners

The biggest winner in the portfolio would have to be Bank of America. I started buying a significant position in BofA in mid 2011, as it was trading near 1/3 or tangible book value. During 2012, BofA rose close to 100%. I continue to view this giant bank as significantly undervalued in the market. It continues to sell at a mild discount to tangible book. I believe the market will slowly but surely realize the continuing improvement of BofA's earning power.

Other winners included Canam Group, Cisco and Markel.

RIM: Final exit

Since my me culpa post regarding the investment in RIM, I have sold off my entire position.

In hindsight, this could have been a very profitable investment for me. But it didn't turn out to be. Over all, this position was sold at a loss.

The big thing that stopped me to buy more during the sharp price decline of 2012 was my lack of deep conviction regarding this business-- leading me to limit the size of this position. In my heart I did, and still believe that RIM/Blackberry is not going to survive in the long run. I have no reason behind this, but it is a feeling.

The core mistake I made was that I was thinking of RIM position in an emotional way, rather than rationally.  This connects with the mistake I outlined in my last post-- the mistake of not focusing on the balance sheet. Which further exacerbated the problem because the margin of safety I demanded was based on an analysis of cash flow rather than the balance sheet.

I have learned my lessons from this, and have survived to live another day. In spite of the disaster that was RIM, the portfolio had a very favourable 2012. I can only hope that future years continue to offer such returns.

Full Disclosure: No position in Blackberry / RIM.

Ray Dalio on Deleveraging

Even if you are a pure value investor who ignores the macroeconomics, it is valuable to at least be aware of the understanding of the flow credit in the economy. The credit is the grease that makes the economic machine run, and it enters every nook and cranny of the economy, including the balance sheets of every business out there.


Please do ignore or tolerate the interviewer (Maria from CNBC), because when she finally does let Ray talk, it is well worth the listen.

Market outlook for 2013

Howard Marks of Oaktree fame believes that a value investor must macro-aware but not macro-led. It is very sensible advice.

Long term investing is like navigating a ship across an ocean with unpredictable weather. The navigator cannot afford to ignore the weather, but he does not let the weather dictate the route either. If the navigator let the weather dictate all decisions then he may never leave the port or worse, arrive somewhere that he didn't intend to.

I try to be macro-aware when making bottom up investing decisions. If I look forward to the macro environment in 2013, I can't help be nervous.

I imagine the following three scenarios that can play out in 2013.

Much ink has been spilled over the various central bank quantitative easing manoeuvres around the world. I don't intend to repeat that here. Summing up all the unorthodox central bank actions, I get the distinct impression that they are trying to spike the punch at the dead party that is the world economy. They may actually succeed and unleash a massive debt growth with requisite inflation.

Second possibility is that the central banks are marginally successful, just like all the years since 2010; and we all muddle along. Market makes more highs with sharp reversals when the underlying weakness periodically shows up.

Third possibility is that deflation truly shows up unexpectedly, greeting the central bankers and governments sitting with little or no firepower. This scenario would be disastrous for equity investors, and great for government bond holders. With the market hovering near Shiller P/E of 22, the fall would be rather significant and sudden.

The underlying reason behind the weakness out there is the deleveraging process that has just begun around the world. United States is ahead of the pack with their private sector and household deleveraging. All of Europe joined in the process in 2012. China may be following quite soon, as the real estate bubble popped in 2012. 2013 may be the year when the market realizes that Japan's debt is unsustainable and starts to demand yield that reflects the risk. Other rich world is going to join in soon. Real estate bubble in Canada started to deflate this year. Australia is going to feel direct pain from a deleveraging China.

Deleveraging isn't fun for the borrower. It requires paying excess income towards reducing debt, thereby always feeling poorer.

Portfolio Positioning

Since I have no idea what lies in the future, all I can do is prepare for the unpredictable. I believe second or third scenarios are the most likely. Due to the lack of ideas out there, the cash position of the portfolio is rather large and has been slowly growing through 2012. This would act as ballast in the case of scenario three and will also help me scoop up equities if they are available on sale.

I still have some undervalued equity positions that should continue to do very well in the second scenario, and even the first. In either of the first two scenarios, I will have lots of cash undeployed and earning nearly nothing. This will continue to erode portfolio returns, but I believe that is an acceptable risk.

Canam Style

Canam Group (TSE:CAM) has been previously discussed on this blog and I still believe it to be an undervalued business. Whenever I would listen to Canam's bosses on their conference call, I could always detect friendliness among them. It always seemed to imply that they and their employees genuinely like to work there. But I didn't think much of it, and certainly never considered that as a factor in the valuation.

When I stumbled upon this spoof of the very famous Korean Gangnam Style video, appropriately named, Canam Style, I was convinced that this must be a great place to work.

Great businesses are also a great place to work, not only for the owners but also for the employees. Furthermore, it shows just how progressive the management is when it allows content like this to be published on Youtube.

It also takes a lot of confidence to publicly make fun of oneself.

Full Disclosure: I am an owner of Canam Group (TSE:CAM).

To tender or not to tender

Terravest Income Fund has announced a tender offer to buy back 5 million units (representing 25% of all outstanding units) directly from shareholders for cancellation. They are offering $2.75 per unit, which is 51% premium of today's closing price of $1.82.

It must be noted that the three major unitholders of Terravest comprise of close to 50% of outstanding units. The largest of them being Clarke Inc which commands ~33% of the votes (which includes George Armoyan, CEO's units).

As of my original post on Terravest, the company has paid two special dividends totaling $1.65. These dividends were categorized as return of capital, which are taxed very favorably.

Based on my 2009 purchase price, if I were to tender my units at $2.75, it would represent about 83% profit

Decision Time

On the surface this sounds like a great deal, but digging slightly under the surface reveals more.

Based on the company's Q1 numbers, the book value is 3.27/unit and tangible book is 3.11/unit. The business is profitable and is regularly producing a nominal profit. Based on very modest estimates, I computed that the intrinsic value of this very simple business is between $3.6 and $3.8.


The tender offer is at a 11.5% discount to tangible book, which is akin to the management buying a dollar for 88¢. This is an accretive buyback decision for the business, but not a very good one for the unitholder who tenders their shares below book value.

What would you do if you find yourself in this position?

I look forward to comments or messages on twitter.


[EDIT (July 13, 2012): After above announcement, the stock jumped a sizable amount and very close to the offered tender price. I sold all my units today for a nice profit. Total gain: 77% (over 3 years). Annualized gain: 21%]

Dangerous quest for yield

Over the last year or so, a lot of well respected [value oriented] fund managers have successfully identified the danger of holding US Treasury bonds. The yields are at or close to their all time lows. The supposed "risk free returns" come with a "return-free risk"-- an eloquent quip from James Grant, I believe.

I must say that I don't disagree with that.

When asked how to mitigate this risk, some but not all, fund managers have suggested the answer may be US stocks that have a long history of increasing dividends and currently yield much higher than the 10 year treasury. This sounds like an excellent alternative to the bonds of a heavily indebted nation.

But caution is warranted here.

According to the Q2 2012 commentary from Oakmark funds:

...over the past 60 years, the 100 highest yielding stocks in the S&P 500 have on average sold at about three-quarters of the S&P 500 P/E multiple. The high yielders[sic] are typically more mature, slower growth businesses that deserve to sell at a discount P/E... Historically, high-yield stocks have been cheap stocks.

Today’s high-yield stocks are quite a different story. The 100 highest yielders in the S&P 500 have a much higher yield than the index – 4.1% vs. 2.5%. The S&P 500 today sells at 12.9 times expected 2012 earnings. If the high yielders sold at their 60-year average discount, they would be priced at less than 10 times earnings. Instead, today’s top 100 yielding stocks sell at 13.9 times expected earnings, more than a 40% relative premium to their historic average. The only reason they yield more than the rest of the S&P is that they pay out so much more of their income – 57% vs. 32%.

It appears that the well meaning advice those fund managers has worked. The valuation of these high dividend payers is well above the historic norms, thus exposing them to major price correction.

An intelligent investor must not sacrifice valuation in favor of yield, no matter how reliable the dividend appears.

Full Disclosure: N/A

Excuse for the recent inactivity

I have been quite inactive lately, and that is really because I became a new dad in late April.

Babies are incredibly exhilarating and exhausting at the same time. In either case, they consume a lot of time.

This particular one is mine and I want to spend all my time with her.

Full Disclosure: I am a dad at the time of this writing.

Research in Motion (RIM): A value trap?

Is RIM a value trap? More importantly, did I fall into this trap? Looking at the constant consistent fall of the stock price of this business I can't help but question where I went wrong.

NCAV or bust!

Reflection

The following advice from late Walter Schloss comes to mind-- emphasis added:

Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.

The corollary is that a lot less has to go right when relying on balance sheet.

That is very sound advice and when looking at my investment in RIM from this perspective it is very obvious to me that I got trapped into a classic value trap. My original thesis was that the balance sheet is very strong with a large cash position and no debt. Furthermore, looking at the income side of the story, the free cash flow was strong and gross margin above 40%. My expectation was that earnings may slow down but RIM will not swing to operating losses. I suspected that the market was being more pessimistic than the reality warranted.

It would be obvious to anyone who has been following the RIM story that Market was quite right in this case. In this case Mr. Market created his own reality. RIM got caught in a vicious cycle of bad press, stock sell off, bad press, and so on. Even though their devices are still very capable and the only sensible choice available to an enterprise user, the bad stigma attached to the blackberry created a self-reinforcing loop that eventually started to scare away business from RIM.

While this has been going on, the balance sheet is still sound and forms a solid foundation under the, what seems at times, an ever-sinking stock. The book value is still around US$19/shr, in spite of the recent goodwill impairment. The tangible book has been quite stable as well.

Going back to Schloss' advice, I made the mistake of placing too much importance on the income statement. The margin of safety that I demanded from RIM was not high enough. I focused too much on the upside and didn't demand enough protection of the downside. Mea culpa.

This is an earnings based investment idea that has reverted to the balance sheet for support.

Is RIM a value trap?

From the perspective of my average cost price of $20, yes. RIM is a value trap and I am trapped in it. But is it a value trap today? I don't think so. Here are the latest numbers from the balance sheet.

- Shares outstanding: 524.1M
- Book: 9.6B or 18.32/shr
- Tangible Book: 6.23B or 11.88/shr
- NCAV: 3.2B or 6.1/shr
- Cash/liquid assets on balance sheet: 2.2B or 4.2/shr
- Market Value: 3.81B or 7.39/shr (USD)

The above numbers are shown below in a graphical form that provides some perspective.

That's right-- RIM is officially selling below two-third of tangible book (which ignores the huge patent wealth), forming a sizable margin of safety. If RIM just decides to go private and split up, it would most definitely sell for at least tangible book, which is 50% above today's market price.

The big risk is that the management will continue to invest into blackberry 10 and whittle away the margin of safety. This is exactly what the market is discounting when it sells this multi-billion dollar business under tangible book value.

As Schloss would say, very little has to go right for this stock to turn around at current prices.

Full Disclosure: I am an owner of RIM at the time of this writing.

McElvaine Investment Trust 2011 Annual Report

Canadian value oriented fund, McElvaine Investment Trust posted 2011 Annual Report.

It wasn't the best year for the fund, but it is well worth a read for anyone of value orientation.


Disclosure: No position

Curious case of Consolidated Tomoka Land Co

I came across Florida based land and property owner called Consolidated Tomoka Land Company (CTO). CTO owns:

• 11,000 acres of contiguous Daytona Beach land, 
• 25 single-tenant properties, 
• two multi-tenant office complexes (with anchor tenants such as Bank of America Merrill Lynch and Walgreen), 
• subsurface mineral rights to 490,000 acres of land, and 
• 22 billboards.

CTO also operates two 18-hole golf courses in Daytona Beach (known as LPGA International).


CTO's book value is 113.16M or 19.41/shr. At the current price of 29.32/shr, CTO is available at a P/B of about 1.5, which is certainly not cheap by any measure.


In fact, tangible book value is close to 18.79/shr, which makes this company even more expensive.


But digging further into this company I have discovered a hidden asset that is grossly understated on the balance sheet. Specifically, the 11,000 acres of land in Daytona Beach is recorded on the book at around $3900/acre. That isn't a typo. Daytona Beach land, touching the I-95 is on the books for about $4000/acre. (see March 14 investor presentation)

The company's land straddles Interstate 95 for approximately 6.5 miles between International Speedway Boulevard (U.S. Highway 92) and State Road 40.

I see CTO has an hidden asset play which may not go anywhere in the short term. Although, interesting catalyst is already at play (read latest string of press releases), the company is hemorrhaging cash due to their Golf operation. I suspect that this will stop at some point over the next year.

That being said, this organization of just seven employees is quite a simple business to understand. Even if the company never realizes the intrinsic value represented by the land, once the company gets back on the profitability path, market will eventually reward the patient investor.

In the meantime, to wait for that day, CTO pays a nominal dividend of 4¢.

Disclosure: No position, yet

Market Climate Update

Equity markets have risen significantly since the local minima in autumn of 2011. However it is very important to note that this market rise is one of Mr. Market's classic mood swings.

Underlying Problems
Nothing of fundamental nature has changed since the autumn of 2011. The risks still abound. Euro crisis is still a clear and present danger-- albeit European banks are enjoying the vast liquidity injection in form of the ECB LTRO action. It is important to note that Euro zone has a solvency problem, of which a symptom is lack of liquidity.

Providing liquidity brings temporary relief, but this only removes the symptoms until they present themselves again. This is because the underlying problem isn't addressed. The underlying problem is large amounts of debt and an incomplete political union structure.

I believe that it is just a matter of time before the symptoms of the problem are visible again.

As for other risks, there are too many to explain here, but I will just run down my list:

• Unsustainable debt levels in Japan
• Unsustainable debt level at the U.S.
• Chinese economy slowdown
• Immense scale-back of Chinese infrastructure spending 
• Housing at very high valuations in many of the developed economies
• S&P 500 CAPE over 23

Portfolio Strategy
What is an intelligent investor to do in this scenario? With so many dangers on the horizon and the market valuation at relatively high levels, the best thing to do is wait it out. The portfolio strategy I am following is to sell my fully priced positions now to raise cash, which is about 30% of the portfolio.

My particular problem is that the market rise that started late 2011 and into Q1 2012 has raised market value of my positions significantly, but most of them are still not close to my [conservative] fair value measures. Unfortunately, my portfolio businesses have not received any buyout bids in the recent M&A activity.

This is almost exactly the same position I found myself back in 2011 when I posted these two posts.

That tactical move to build up cash in early 2011 helped me deploy it to build sizable position in Bank of America (BAC) when the pessimism enveloped it. I intend to continue to own BAC even after the recent 90% rise, since I believe the real value of this structurally crucial institution is much higher than the market is realizing. That move to cash also helped me average down on some of my other positions.