Feedback/comments on my current portfolio

I have 18 in cash and bought 17 different stocks

I will hold these forever with no stops: MMM, MSFT, GOOG, YHOO, NAV, MCP, SCHW, BAC, BCS , SPLS

I will hold these at different ranges of 20% - 50% stop loss: INWK, KITD, BC, JOY, SWN, MIND, IPGP

My horizon is longer term(5 years) for the no stop companies and 12-24 months for the stops.

I’m just wondering if anyone has insightful comments about the quality of my positions or risk management. Thank you.

Hold forever with no stops doesn’t sound like sensible risk managment. It can be hard to imagine the world getting to a point that you might part with certain positions, but you should at least attempt to figure out what “unimaginable” damage would make you decide not to follow something to 0.

How much risk can you tolerate in your portfolio? Either as volatility or (more realistically) as maximum drawdown?

There’s no way to evaluate a portfolio’s sensibility without - at the very minimum - a level of risk to judge by.

How did you choose the stocks you bought? You have what I would describe as a somewhat haphazard collection. I mean you have a pool table manufacturer, a couple of banks, and a truck manufacturer, just to start. I like to concentrate in a <6 industries that I can get to know well. As far as the quality of the stocks, I’m not familiar with many of them but I can’t see myself wanting to own either YHOO or SPLS.

Yes, krazykanuck brings out a good point. It’s your selection process and how you implement it that will be most impressive to a potential employer. If the portfolio rocks the returns, that’s even better, but great returns without an underlying logic that defines how you came to the portfolio you chose is still essential.

There are lots of possible answers: you wanted diversification, so you chose a lot of industries. Or you expect to ride consistent growth over time. Or you are following a trend. Or you feel they are underpriced relative to assets, earnings power, and growth.

I also dont see holding BAC or BCS for that matter.

BAC has severe operational and management issues. This sort of company relies on acquisitions to grow. BAC tends to mess up the integration process more than its peers (i.e. Wells Fargo and JPM). If they install competent management that fixes the operational stuff, I don’t see why they can’t turn around within the next 5 years.

I am not deeply familiar with most of these tickers (and not up to date on the ones I am familiar with) but quick thoughts:

SPLS: Is this even going to be around in 10 or 20 years? They supposedly have a great internet platform or something, but the space is pretty crowded – why isn’t Amazon going to mop the floor here? (Could be a good reason). Who is the winner between Office Depot, Office Max and Staples (society doesn’t need 3 + Amazon, someone will drop out – who will it be?).

The other large caps are too big for me to focus on.

BC: good company, great management team (I met these guys outside of Chicago a couple of years ago and bought stock around $10). Very cyclical stock, would not have a 50% stop loss, just sell if the economy starts to tank again.

IPGP: Not up-to-date on this one, but the market is very competitive – do they still have a leading technology? Fiber lasers or whatever they had. Looked at this in 2010 as a short and passed fortunately. Believe mgmt is probably full of shit (CFO lied to me on the phone but I think he knew I wanted to short the stock). If they have good technology, is this a buyout?

KITD is a popular short and one of the highest ranked ideas on Sum Zero. I have not done work on this but it sounds like a real piece of shit. See post below (this is not my work):

Update (4/16/2012): KITD’s Chairman/former CEO Kaleil Isaza Tuzman just resigned. I think there is a trend here…

Stick around… the party is just getting started

We believe Czech-based KIT Digital remains a compelling short. The much-anticipated 10-K finally came out on Friday, March 30. KITD did not disappoint as we found several surprises buried in the filing. Specifically, we found (1) a discrepancy in its cash balance; (2) newly-revealed SEC subpoenas; (3) default of its debt covenant; and (4) material weakness in internal control over financial reporting. These troubling findings, along with recent board resignations, are highly reminiscent of those at certain foreign-based U.S. listings, such as China MediaExpress, Duoyuan Global Water, and Longtop Financials. The short interest may be high and the borrowing may be tough, but we found those were the case with the above-listed Chinese companies before they completely unraveled.

For a recap of KITD and recent board resignations, please review past write-ups and Q&As in SumZero and VIC. Last November, the Wall Street Journal also discussed KITD’s questionable operating model and CEO, including his recent arrest in Dubai. See the WSJ link here:

The crux of the bull thesis now rests on the board’s ability to sell the company at a higher valuation than it is today. However, if you were in the shoes of a potential buyer, would you trust what is being sold?

KITD’s 10-K surprises:

  1. Discrepancy in cash balance

In the Q4 earnings release dated March 15, KITD reported $47.764 million in cash as of Dec 31, 2011. But in the 10-K, KITD reported a lower cash balance of $45.660 million as of Dec 31, 2011. Restricted cash and investments accounts were unchanged. We can somewhat understand why certain financial items may have been adjusted from unaudited numbers to audited financials. However, CASH IS CASH. How did KITD lose $2.1 million in cash? It’s not as if KITD hastily reported its balance sheet a few days after the close of the year. They had 2.5 months after the close to figure out how much cash was in the bank. Not surprisingly, the company did not disclose the reason for this discrepancy.

If you were a potential acquirer of KITD, would you still believe the company’s balance sheet?

  1. Newly-revealed SEC subpoenas

“Our company and Mr. Isaza Tuzman have been required to produce documents to the SEC under two simultaneous February 24, 2012 subpoenas issued by the SEC. The investigation includes and we believe may focus on June 2010 transactions in company common stock and a related Form 4 filing by Mr. Isaza Tuzman that reported a purchase of 54,645 shares of company common stock, but we cannot be certain of its scope or outcome. We are cooperating fully with the SEC.” (page 28, 10-K dated 3/30/12)

Isn’t this material information that the company should have disclosed promptly in an 8-K? These subpoenas obviously open up more questions about the extent of the SEC investigation as well as the company’s credibility.

If you were a potential acquirer of KITD, would you still want to touch this potential ticking time bomb?

  1. Default on debt

“As of December 31, 2011, we were in default of a debt covenant on all of our secured notes payable which states that we must maintain at least 75% of the dollar value of worldwide cash with one or more banks located in the United States. We have received a waiver from the lender for the period through March 31, 2012. No adjustment was made for the default due to the waiver from the lender. Additionally, we are currently in discussions with the lender to ensure that we are in compliance with this debt covenant in the future.” (page 41, 10-K dated 3/30/12)

We are left wondering: Does the company actually have enough cash? What if the lenders do not extend their waiver by March 31, 2012? How did the company not have enough cash in the U.S. to meet debt covenant? What are the tax implications if KITD needs to repatriate foreign cash? How competent is the corporate finance/treasury team? Is the cash really being accounted for? Perhaps this explains the cash discrepancy issue discussed earlier.

If you were a potential acquirer of KITD, would you be assured where the company’s assets are and whether those assets are really there?

  1. Material weakness in internal control over financial reporting

“A material weakness was identified in our internal control over financial reporting due to lack of finance personnel with understanding of US GAAP to ensure that all transactions were reported in accordance with US GAAP on a timely basis. The Public Company Accounting Oversight Board’s Auditing Standard No. 5 defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.” (page 45, 10-K dated 3/30/12)

This confirms our belief that none of KITD’s 10-Qs (which were unaudited) can be relied upon. And if you can’t trust the 10-Q numbers, how would you believe whether the company actually generated positive cash flow during any quarterly periods?

This also explains why the company is insistent on using its own non-GAAP numbers, such as cash-based adjusted EPS, since it has no GAAP expert on staff. But then, if you can’t trust the GAAP numbers, how can you trust the non-GAAP numbers as true measures of the company’s performance?

If you were a potential acquirer of KITD, how could you believe any of the numbers?

We believe Czech-based KIT Digital remains a compelling short. The much-anticipated 10-K finally came out on Friday, March 30. KITD did not disappoint as we found several surprises buried in the filing. The crux of the bull thesis now rests on the board’s ability to sell the company at a higher valuation than it is today. Given the troubling 10-K surprises and recent board resignations, would you trust what is being sold?

NAV isn’t having a particularly good day… down 15%.

Nothing wrong with holding forever despite what some posters say…you will do yourself a favour by not selling/buying…I can speak on this more but i think you already know all about it…

We have one stock in common Google, which is now over 10% of my portfolio…love the company, the valuation, and the product…

I own about 12 stocks myself and like to take concentrated positions with a long term horizon. Will prolbably consolidate my portfolio shortly to no more than 5…

if you’re picking stocks no need to own 17 unless you have too much money…

Makes no sense to hold some positions only temporarily if you identified stocks good for the long term…all that matters is how certain you’re over time of potential returns…

Can I ask why you use stops to begin with? Since it looks like you’ve gone through the exercise of picking stocks, wouldn’t it be best to follow these stocks regularly and figure out which theses are intact and which are broken, and make your decisions accordingly? WIth a 2-5 year horizon, some of these stocks could go through prolonged stretches of “bad luck” and stop losses might cause you to incorrectly identify a bad secluar investment versus something that’s simply out of favor for the time being.

This is just my view, but I think that if you don’t have time to follow your stocks regularly, you shouldn’t be picking stocks or actively investing. If you believe in your investments, you should look at dips as an opportunity to increase your position rather than exiting.

I think the purpose of the stops is to prevent behavioral bias, i.e. refusing to sell a bad position and recognizing a loss.

I’ve never fully understood how to execute the “buy the dips” idea very well, except as a mechanism for scaling in to a position.

When a position dips, what capital are you using, exactly, to buy the dip with. And if you had that capital available earlier, why wasn’t it already deployed?

Buy the dips looks like sound advice when you look at a chart and see the dips and think “I should have bought then,” but the dips are never that clear when they are happening. Buying at the start of a dip that goes deep can be very painful.

If you have target allocations and rebalance, it can be easier to do, because you sell (some of the) winners and use the capital to buy more of recent losers. That works fine if you believe in mean reversion. It is a disaster if momentum is performing well.

Rebalancing effectively buys dips, but more as a by-product of resetting to target weights. I don’t really know how one consistently and consciously buys dps on an asset-by-asset basis.

That’s a good question, because a true “trough” doesn’t become apparent until you’re already too late to a trend. However, all I’m saying is that if you see a position trading down 20% or whatever number you want to pick, you should be asking yourself why it’s so, and whether there’s a chance this would reverse itself or if your thesis is actually broken.

Also, even if you’re fully invested, I think it’s important to have a view as to which of your positions are close to realizing what you think full valuation is, and which are not. I personally like to sit on a bit of dry powder because not all of my investments realize their catalysts at the same time, but if I have a strong opinion that one of my positions is underperforming and unlikely to realize its catalysts for a while and I see an opportunity to buy something else, I’m perfectly comfortable taking a loss on the underperforming position rather than further extending losses, and re-deploying that capital towards a more favorable investment.

You buy on dips if you have excess cash lying around that you got either as new inflows or the liquidation of a position…

Ppl have excess cash normally for this exact reason. Most ppl are not 100% invested (professionals included)…

“buy the dips” implies that when you initiate a position in a stock, you don’t deploy all your capital into it at once. Say I had 10k I wanted to invest in GOOG. I’d spread out the buys over a few months…you’re supposed to build a position over time.

Or maybe you are a trader and not an investor, so you buy and sell frequently.

what if you really like the asset and the damm thing doesn’t dip?..that would be horrible…

Been there…I wanted to buy SAM and damn thing went up 65%. *grumble grumble*

Buy the dips works depending on the situation. If something is SEVERELY undervalued and there is an imminent catalyst, it would be pretty dumb to try to buy the dips.

But it generally works well because asset prices move around a lot in the stock market due to noise (even “fair value” for most stocks is a range). If you are trying to buy something with a market cap of 200mm and an average daily volume of $250K and a stock price of $4.50 there is absolutely no reason it cannot trade down to $4.00 on no news. If you think it’s worth 8 or 12 over time based on your analysis, then you may start buying some at $4.50 realizing it could easily go to $4.00 or lower in the interim, at which point you would buy more up to some pre-specificed allocation rule or dollar amount of capital. It could also go the other way, in which case you would either need to wait or chase it (I hate chasing stocks), but that is the risk you take (overtime nibbling tends to do better in my experience).

It’s kind of noobish to shoot your wad all at once, that’s a good way to cry in your cheerios unless you play in the really liquid / efficient part of the market. It would be painful to deploy all of your capital at $4.50 and then watch the stock go to $3.50 – you may be tempted to think you were “wrong” (and you may be), but if your work is sound, it could simply be noise. The pain of being a value investor is eased by deploying in small waves, not one large wave.

I would also add that pricing trends tend to persist in the abscence of new news. If something is persistently selling off, chances are it will continue to sell off. Obviously things sell until they don’t and some inflection is reached, but the inflection may not correlate to any sensible valuation (based on my experience) but rather simply reflect an abscence of buyers. That doesn’t happen with the GOOGs of the world, but happens in plenty of other places in the market. Better to wait until the stock has ground out and is trading within a range with an expected catalyst than try to fight the tape. Bleeding stocks tend to bleed longer than you want them to, just like momentum stocks tend to go up longer and higher than is sensible.

Totally agree, and I don’t think this is limited to areas outside of the most liquid names. I follow this strategy with mid- and large-cap names with higher betas. In fact this is what I was describing in my comments on my AAPL thesis. Did you and others have a chance to see it?

To that extent, I also agree that being someone that trades isn’t mutually exclusive with being an investor. You still have to be opportunistic about entry and exit.

Regarding range-bound investing, there happens to be a really nice book by Vitaly Katsenelson called “Active Value Investing.” I found this book, combined with Steenbarger’s “Psychology of Trading,” to be very influential. I can think of several people on this thread including bromion and bchadwick who’d find the Katsenelson book to be an entertaining read, if they haven’t seen it already.