January 19, 2008

Run your Portfolio as a Business

With the market prices declining very rapidly and it seems that we are entering a bear market territory, declines of 20% or more, the question is what to do?


I am going to continue along in my process: find undervalued companies, hold for the long term and buy incrementally into them by purchasing small position frequently. I have been doing this with LOW, RioCan and BofA. With every 10% decline in the stock price, I bought additional shares. I will continue doing this until the company reaches my maximum limit of 10% of my portfolio value.

The economic climate we are in can persist for 6 months or 2 years, who knows. However, the one thing that I have learnt while running a start up is you do not close shop because the economy is tough. You continue along implementing the same process and in the long term the business will succeed. If you like me you will look at your portfolio as a business. I did not close my business when news papers said we are in a rescission, I kept plugging along. Your portfolio should be no difference.

The figure to the right is courtesy of Barron's that shows rescission duration and associated market declines. Recession duration has varied from as little as 6 months to 18 months. And market declines have been as little as 13% to a whooping 48% decline. That gives you some measure of the era that we are entering right now.

Actually as value oriented investor, I am finding more companies that hit my screens. Right now I think small cap space is way undervalued. The Russell 2000 has declined by more than 20% and several good companies have been brutalized since mid last year. The space can offer generous returns for the long run. My task now is to dig through some of these names to find companies with strong competitive advantage and strong management teams. However because the space is large one and sifting through it all will take some time, and for the fear of missing on a good opportunity, I have started buying the IWM, the ETF representing the Russell 2000.

Small caps over the long run have produced strong return and they are easier to understand and analyse compared to their brethren large caps. Moreover, if you do your due diligence correctly you will have an information advantage over analyst, as they tend to neglect these names as they do not bring much of investment banking revenues (Analyst dirty little secret: potential banking revenue is the criteria to initiate research on a stock).

I will bring some ideas that I like and present them here in the near future so stay tuned.

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