CI Outlook - Archives

May 2012

A recent client letter written by Barton Biggs, the manager of Traxis Partners, addressed many of the problems associated with investing in today’s markets.  The most important takeaway is that investment psychology has never been more important.  In today’s world central banking credit policies are creating an atmosphere far more prone to bubbles and panics than at any other time in our investment careers.  Additionally, combining the extreme volatility created by momentum traders with the current focus on short term results and any manager focused on value or the longer term will occasionally question his own sanity.  Mr. Biggs stressed that in this situation deep understanding of your investment thesis and certainty of the facts it is based upon can help us triumph over the panic or euphoria so common to today’s markets.  Our current portfolios contain several examples of this type of investment circumstance. 

For example recently we bought both Microsoft and Intel.  For ten long years these were two of the most hated and then ignored stocks on Wall Street.  In fact many managers said these two stocks were where you “sent money to die”.  However while these companies were being ignored their sales grew, earnings tripled and the stock prices shriveled.  Even as the price shrank the companies paid off debt and stockpiled cash.  Finally they started to pay dividends which are now rising.  Since we believe these are solid businesses we bought these two “dogs of the Dow”.  At purchase the yields approximated 4% and we believe those dividends will be steadily increased.  So much for that bit of insanity.  And because we really are not crazy we did not want to completely miss out on other growing tech companies.  That is why we bought the NASDAQ 100 ETF and the SPDR Technology ETF.  In both cases we bought funds with high exposure to Apple, Qualcomm, Google and other faster growing but established technology companies. 

As Mr Biggs stressed another important part of the investing process is the constant study of the economy, the news, and changes at the companies you are invested in.  When conditions change companies bought based on prior assumptions must be sold in order to protect capital and improve portfolio performance.  That is why we recently sold both Spirit Airlines and Devon Energy.  Although we like everything about Devon Energy we could not continue to hold it as natural gas prices declined to multi decade lows.  It was liquidated for a small gain and has subsequently declined in price by almost 20%.  There is nothing wrong with the company itself and at some point it may become attractive to own Devon again.  Unlike Devon Energy, Spirit Airlines was sold due to conditions particular to its own internal circumstances.  We bought the earnings growth story of Spirit Airlines and thought it might become a good long term hold.  Upon analyzing the last earnings announcement we realized the growth was far too dependent upon a steady increase in very unpopular add-on fees.  It was sold the day before Spirit announced a $100 per carry on bag fee.  In our opinion this is not a sustainable business model.  The fees are just too unpopular and that will impact our assumptions about its growth.  Since it was bought for earnings growth and that has changed it was sold.

We plan to continue the process of selecting investments based on their relative attractiveness given the economy and their particular prospects.  We also plan to sell those investments as events dictate.  And while we agree with Mr. Biggs that volatility will continue and even increase we hope to remain rational as others are swayed by the noise around them.

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