Robert C. Merton is perhaps one of the most brilliant financial theorists in the world.  He received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives, Merton’s research focuses on finance theory, including life-cycle finance, optimal intertemporal portfolio selection, capital asset pricing, pricing of options, risky corporate debt, loan guarantees, and other complex derivative securities. No doubt, he is an incredibly brilliant man, but at the same time, he was the principal of Long-Term Capital Management, a speculative hedge fund that collapsed in the late 1990s after losing $4.6 billion.  Not only was he extremely smart, but all 15 of his partners were super smart too.

Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM’s capital was composed of funds from the same financial professionals it traded with. After its collapse on September 23, 1998, Goldman Sachs, AIG, and Berkshire Hathaway offered to buy out the fund’s partners for $250 million, to inject $3.75 billion, and to operate LTCM within Goldman’s own trading division. The offer was stunningly low to LTCM’s partners, because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave Meriwether less than one hour to accept the deal; the time period lapsed before a deal could be worked out.

Unfortunately similar to the case of Robert C. Merton and LTCM, the stock market is full of smart people and companies doing stupid things… the list is long: Jeff Skilling of Enron, Bernard Madoff, AIG, Lehman Brothers, Fannie Mae, Freddie Mac, and so on.

As Warren Buffett mentioned in this great speech–what is important are the qualitative factors of a person, because everyone has the intelligence to do just the right thing.

When asked about Long-Term Capital Management just 4 weeks after the final call to agree on the bailout, Warren Buffett recounted one of the most valuable lessons I have ever heard in financial advice: [click to continue…]


Another great lesson of Warren Buffett

by admin on March 10, 2015

Warren Buffett

Warren Buffett is by far the greatest investor of all time. His way of thinking, perseverance, and tough negotiation skills are all qualities that set him apart from everybody else. As Warren Buffet’s prepares to retire (he is already 84 years old), he continues to give investors, (and frankly all of us) incredibly valuable lessons in investing, money allocation. and life in general.

When Warren Buffet turns 87, he will likely receive $1 Million from Protégé Partners, LLC. This time though the money won’t come as a result of one of his many brilliant investment decisions, instead it will come from a simple Vegas-like bet he made back in 2008, 7 years ago.

The bet was made with Protégé Partners, LLC who claimed that over a ten-year period the S&P 500 would underperform select portfolios from five hedge funds.  Buffett, who has long argued that the fees hedge funds command are onerous and should be avoided, bet that the returns from a low-cost S&P 500 index fund would beat the results delivered by the five funds that Protégé selected.

Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet’s conclusion in 2018.

The $1 million will then be donated to a charity. If Protégé wins, it has designated that the money be given to Absolute Return for Kids (ARK), an international philanthropy based in London. If Buffett wins, the intended recipient is Girls Inc. of Omaha, whose board members include his daughter, Susan Buffett.

Protégé partners are smart people, they managed around $3.5 billion at the time of the bet. Ted Seides, and two other men, CEO Jeffrey Tarrant, and Scott Bessent are partners. Each has a strong investment background, and two of the three have worked with well-known market practitioners. Seides learned the world of alternative investments under Yale’s David Swensen, and Bessent worked with both George Soros and short-seller Jim Chanos.

In a recent interview on NPR, the president of Protégé Partners, Ted Seides, said the selected funds were doing quite poorly. In fact, the S&P 500 fund run by Vanguard that Buffet is betting on rose more than 63%, while on the other side of the wager the hedge funds have only returned 20% after fees.

When the two sides made their respective cases for why they would win, Buffett noted that active investors incur much higher expenses than index funds in their quest to outperform the market. These costs only increase with hedge funds, or a fund of hedge funds, thus stacking the deck even more in his favor. “Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested,” Buffett argued at the time.

A number of smart people are involved in running hedge funds, but it turns out that you don’t need to be brilliant to do well in the stock market, in fact the smarter you are the greater your risk of making bad overly-confident calls.

Last December, the S&P Dow Jones Indices published “The Persistence Scorecard,” which measured whether outperforming fund managers in one year can continue to outperform the market going forward. “Out of 681 funds that were in the top quartile as of September 2012, only 9.8% managed to stay in the top quartile at the end of September 2014.”

Based on data provided by Morningstar Direct, fewer than 20% of actively managed U.S. Stock funds beat their benchmarks last year, and those that did managed to do so by only 180 basis points on average. Greggory Warren, CFA Senior Stock Analyst from Morningstar’s Ultimate Stock-Pickers said in March of this year “Our top managers did not fare much better, with only one of the four fund managers that we track beating the market by more than 180 basis points last year. “

Billionaire Hedge fund managers also got it wrong in 2014. Only a few of the 20 billionaire investors tracked by iBillionaire performed above the +15.30% gain posted by the S&P 500 in 2014. In aggregate the iBillionaire index climbed +11.67%, underperforming the S&P 500.

So why does this matter? Why can’t hedge funds outperform the market or even deliver alpha? This is the same question The Teacher Retirement System of Texas and MetLife, Inc. are asking. Hedge fund managers, who are among the highest paid managers on Wall Street, have come under pressure from clients to adjust agreements since the 2008 financial crisis. Traditionally, the firms charged investors 2 percent of assets as a management fee along with 20 percent of profits as an incentive. Despite the pressure, many firms continue to stick to the “2 and 20” model, and some management fees are as high as 4 percent with a 27 percent cut of profits.

As hedge funds trail the Standard & Poor’s 500 Index for the sixth straight year, some clients have complained that managers still provide little information about their holdings and tie up their investors’ cash while lagging behind benchmarks. The California Public Employees’ Retirement System said in September it would divest its $4 billion from hedge funds after officials concluded the program couldn’t be expanded enough to justify the costs.

Warren Buffett knows all this, he knows how Wall Street operates and that’s why, for him, it was a no-brainer to think that a simple index fund could out-perform most hedge funds out there. One of the underlying problems is that hedge funds have so much power, ironically power given by anyone with a 401k. Mutual funds manage the money in a typical American’s 401K and other retirement plans. They don’t get paid based on performance, instead they are paid based on the amount of money they manage regardless of gains or loses. They are also willing to take on more risk because they don’t have anything at stake since what they are “managing” is not their money.

My advice to you, based on the deep wisdom of Mr. Buffet is, the next time you are considering an investment option, look for a couple of things: funds with low or no management fees, and funds that are managed by people whose personal capital is also invested in the fund. Here is a good place to start.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 40.5%, versus the S&P 500 54.9%. The return of the S&P 500 in February 2015 was 5.49%, as compared with 6.86% for my Dividend Paying Large Caps portfolio.  So far my portfolio is up Year to Date 4.61% vs 2.21% for the S&P 500.


In February, Lukoil (LUKOY), JC Penny (JCP) and Adidas (ADDYY) performed well. They were up 20%, 16.9% and 12.8%, respectively. Lukoil benefited from the ceasefire deal reached with Ukrania in January.

JC Penny as I mentioned last month it is not out of the woods yet, but revenues have stopped declining. Adidas benefited from the good news out of Europe, as well as the news that Adidas is actively searching for a new CEO. Longtime Chief Executive Herbert Hainer, who has led the company through years of success, has recently struggled to meet profit targets, sparking investor pressure for change at the top, once a replacement has been confirmed, I expect a spike of the stock price.


In February, my worst performing stock was Ralph Lauren. Ralph Lauren Corporation’s stock suffered the biggest one-day plunge in its history on February 4th.  After the apparel company blindsided investors with a disappointing fiscal third-quarter report and outlook, the stock plummeted -18.22% to the lowest closing level since July 12, 2012. The previous worst one-day performance occurred on November 5, 1998, when the stock tumbled 15.707% in the wake of disappointing quarterly results.

Acquisitions in February 2015

In February, I added two positions to my portfolio: Priceline (PCLN) and Expedia (EXPE). Both are companies that I believe will benefit extensively from industry consolidation, the good health of the travel industry in 2015, and the natural migration to new technologies. More on that here.

Liquidations in February 2015

In February, I liquidated Bed Bath & Beyond (BBBY), a great company, but the stock was flying high. Since I sold this position the stock dropped -4.71%. I found better opportunities in the market and they paid off well in February. Both Priceline and Expedia and are significantly higher since I purchased them. Priceline is up 14.19% while Expedia is up 4.53%.


Expedia-PricelineThe global economy is a complex machine, the result of many small transactions that take place in different markets and sectors. When a particular sector is down, another may be up, and vice versa. Money moves around as things change, and in our world, change is a constant. When changes are taking place, opportunities abound. The key is in understanding the present without losing perspective on the past.

Some of the most recent dynamic changes in our economy have opened the door of opportunities in a variety of sectors that were not attractive just few months ago. As I mentioned here, the energy sector is currently a very interesting sector for value investors with a long-term view. Another sector that I believe is becoming interesting is the tourism/travel industry. There are few reasons for this:

Low Fuel Prices

Thanks to low gas prices, airlines are profiting from traveling like never before. When oil prices shot up a few years ago, many transportation businesses started adding fuel surcharges. Now, fuel prices are plunging, but many of those surcharges remain. As the year progresses and airlines start reporting big increases in revenues year over year, stock prices should move up quickly. The drop in the cost of oil is always a huge factor in the airline industry where 30 percent of all expenses are fuel related. Airlines that are still down now are down because they locked in the price for a portion of their total fuel spending in 2015 through hedging. Delta reported $180 million in fuel-hedge losses in the last three months of 2014 as price declines accelerated, while United lost $237 million and Southwest lost $13 million. American Airlines decided not to hedge last year is profiting at a record levels. That decision has allowed American Airlines to take full advantage of the steep plunge in fuel prices. This year’s net income for American may be above $5 billion.

Thanks to the consolidation of the airline industry there is no pressure to lower prices anytime soon. In 10/24/2014 I acquired shares of Copa Airlines (CPA) and since then the stock is up 13.55%, the company is paying 3.3% dividend and the return of equity is at 22.61%.

Low fuel prices have also had a positive impact on travelers. People are suddenly enjoying more disposable income, and may are spending this on travel. Any increase in travel will benefit both hotels and online travel agencies (OTAs). I expect that sector to outperform the S&P 500 in 2015.


The other factor that makes the tourism/travel industry interesting right now is the industry consolidation. Hotel chains are buying other hotel chains, and online travel agencies are buying other online travel agencies at an increasing rate. In 2010 Marriott acquired AC Hotels, then in 2012 Gaylord Hotels for $210 million, and most recently in 2015 they acquired Delta Hotels in Canada for $135 million. On the online travel agencies side similar takeovers are occurring. In 2013 Expedia acquired Trivago, and this year they also acquired Travelocity for $280 million. Expedia currently owns, Hotwire, Venere, and a few other major brands. Priceline, which is the other major competitor in the market, owns and Agoda. In 2013, Priceline acquired Kayak for $1.8 billion, and they may now be targeting Orbitz that recently hired bankers to find a buyer. New entrants will have a hard time getting any share of the market if this trend continues. These companies will also benefit from economies of scale.  Online travel agencies (OTAs) are the fastest growing distribution channel globally, and the two largest, Priceline and Expedia, outpace the market by no small margin. Combined gross bookings of the two jumped from 38% of global OTA sales in 2011 to 47% in 2013. The continued, super-charged organic growth of Priceline’s, as well as Expedia’s assumption of the Travelocity volume largely in 2014, mean that global share of the two leaders will only accelerate in 2015.

Channel shifting

Hotels in general use four different channels to acquire guests. The first is property direct or when future guests book directly through the hotel, either booking on-site or through the commercial department of the property. The second channel is the reservation center, which is the segment of future guests that call the hotel to make a reservations. The other two channels are online: web direct, when the customers book through the hotel’s direct website, and online travel agencies (OTAs), which is when reservations come to the hotel from third party sites.

According the U.S. Travel Advertising Marketplace: Industry Sizing and Trends 2015, in 2013, 42% of gross bookings came through online channels. This represents a tectonic shift for the industry, as of 2013, online channels captured more travel ad dollars than offline for the first time. Bookings coming from online travel agencies are growing at double-digit rates per year, while direct bookings from properties and reservation centers are having an increasingly hard time keeping up. I expect this shift to continue for the next few years, which will benefit any company participating in or facilitating an online booking channel.

Natural Growth

The travel industry, and the hotel industry both continue to grow every year. In 2014 U.S. hotel industry’s occupancy was up 3.6 percent to 64.4 percent.  The average daily rate rose 4.6 percent to US$115.32; and revenue per available room increased 8.3 percent to US$74.28. Stocks of these industries are still being traded at reasonable prices, but may grow naturally as a result. Of course there may be hiccups along the way because the travel industry is very sensitive to forex exchange variances and also because some of these industries may over spend on expansions or acquisitions. For example, Expedia is making key investments in Trivago’s top-line growth, sacrificing near-term profits to fund global expansion. Trivago benefited from an estimated $108.5 million TV advertising campaign in the U.S. alone — the largest of any online travel brand — and generated just $4 million in adjusted EBITDA in 2014. In the long term, it is an attractive industry where interesting changes currently taking place. As long as these companies continue to grow at a double-digit rates, it may be an attractive sector to examine more closely.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 42.4%, versus the S&P 500 68.3%. The return of the S&P 500 in January 2015 was -3.11%, as compared with -2.10% for my Dividend Paying Large Caps portfolio. My portfolio had a good start in 2015, beating the S&P 500 by 1.01%.


In January, JC Penney (JCP), and Lukoil (LUKOY) performed well. They were up 12.2%, and 5.4%, respectively. While JCP it is not out of the woods yet, at least revenues have stopped declining. Revenues dropped -8.23 billion from 20.19 billion to 11.96 billion between July 2007 and October 2013. However, since then, revenues have been up, and have not fallen below that level again. The full recovery of JC Penny may take few years more, but those who have the patience to wait it out may reap the rewards. Lukoil (LUKOY) in one of the biggest global oil companies and have been suffering through the crisis the same as the entire sector. However, it appears that Lukoil may be recovering faster than other oil companies. When compared with other oil companies such as BP, Exxon Mobil or Chevron, Lukoil was the one with the biggest gains in January. So far this trend continues in February as well.


In January, my worst performing stocks were Adidas (ADDYY) down -13.3%, and Ralph Lauren (-9.9%). Adidas was down as a consequence of the bad economic news coming from Europe. Also the re-valuation of the US dollar against the Euro was not good news for Adidas, receiving less in dollar amounts for its products will certainly have a negative impact on Adidas’ financial performance. Ralph Lauren (RL) was down ahead of its earnings report that took place on February 4th when the company reported disappointing earnings and lowered its sales forecast for the remainder of the fiscal year. That day the stock dropped an additional 18.22%, the lowest closing level since July 12, 2012. I believe Ralph Lauren is one of a kind in the apparel sector, and I’m sure the company will recover in no time. Here are some of the reasons why I’ll continue to hold my investment in Ralph Lauren.

Acquisitions in January 2015

No positions were added in January.

Liquidations in January 2015

No positions were liquidated in January.


2014 is over and the stock market did well for the third year in a row. The market was up 16% in 2012, 32.39% in 2013, and 13.69% in 2014 (including dividends). In other words the S&P 500 is up 62% since 2012. This is an impressive comeback after the -37% drop of 2008. Unfortunately, not every sector has enjoyed this upswing. The utilities sector did fairly well in general, up 19.09%, but other sectors such as Energy, Industrials, Materials and Consumer Cyclical underperformed the market in 2014. The energy sector was down -5.82%, materials -3.98%. Both industrials (+7.95%) and consumer cyclical (+3.38%) were up, but both underperformed the S&P 500 in 2014.

So the big question now is what to expect in 2015? Well, I believe the biggest opportunities remain in the sectors that underperformed in 2014. Some of the stocks in these sectors are very attractive at current valuations, and many of them were dumped in 2014 by individual and institutional investors for the wrong reasons.

I see some interesting opportunities especially in the energy sector, where many companies are being traded under book value. My position in Ecopetrol (EC) has a price to book value is 0.8, my position in Lukoil (LUKOY) is being traded at an even lower price to book value – 0.3. These stocks are down over the past three months (as are most other energy stocks) mainly because of the sudden drop in oil prices, which is putting enormous pressure on the entire sector as well as global economies.   

As the economy improves in the US, I expect the energy sector to recover as well. A growing economy demands more energy, and that can quickly turn things around. The other reason I believe that the energy sector has the potential to do well in 2015 is because the sector continues to deliver healthy dividends (as a consequence of the drop in stock prices). If the FED increases interest rates this year, the stock market will shake. Investors will likely reallocate some of their capital to fix income instruments and will look for protection by investing in utilities, healthcare, or energy companies that are currently paying generous dividends.

I strongly believe that very bad news will come from Venezuela this year, the economy is on the verge of collapse due to drop in oil prices. Venezuela owe China $50bn that the Chinese loaned them since 2006, and if oil prices remain low, the likelihood of repayment decreases exponentially. While this would likely have a major impact on the global economy, a cut in production in Venezuela due to social tension can immediately send oil prices back up.

Some consolidation may also occur in the energy sector in 2015 as smaller companies won’t be able to survive if oil prices continue to fall. An example of this consolidation occurred in the financial sector during the financial crisis of 2008 when Wells Fargo (WFC) acquired Wachovia, Bank of America (BAC) acquired Merrill Lynch, and JPMorgan Chase (JPM) acquired Bear Stearns. These acquisitions helped increase productivity, and reduce operational costs and marketing. A similar process can happen with this oil crisis, consolidation takes place when things are bad, and in the long term it can be very beneficial for the companies making the acquisition(s). It is just a matter of time until the energy sector stabilizes – making this sector a good opportunity for value investors looking for long term investments.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 35%, versus the S&P 500 64.6%. The return of the S&P 500 in December 2014 was -0.42%, as compared with -4.68% for my Dividend Paying Large Caps portfolio. In 2014 my portfolio was up 0.94% as compared with 11.39% of the S&P 500. For the most part of 2014 my portfolio outperformed the S&P 500, but after September when oil prices dropped dramatically, my portfolio lost most of the gains accumulated throughout the year. The loss of gains in my portfolio was due in large part to the fall of Ecopetrol (EC) and Lukoil (LUKOY), two positions in the energy sector that I acquired too early just as prices started to go down. I never anticipated oil prices would go as low as they have.  However, as the old adage says, stocks can’t continue go up forever, and I believe the same is true of when they are going down. Oil prices may drop even lower but I don’t expect getting it for free anytime soon. China won’t probably leave Venezuela lead to default and certainly Russia still have a lot of power to pressure Europe and force higher oil prices again. If those things take place at the same time, the beginning of the recovery may be around the corner.

Below is a graphic showing my Performance in 2014 vs the S&P 500. As you can see, from October through December I lost some ground due to my exposure to the energy sector.

portfolio performance 2014


In December Oracle (ORCL), and Bed Bath & Beyond (BBBY) performed well. They were up 6%, and 3.8%, respectively. Oracle is a company that will continue to benefit as the economy recovers. In general technology, and energy sectors move up when market conditions improve. I like Oracle for many reasons, one of them being the excellent record of acquisitions they have had in the past. I expect Oracle will continue to do well, and it is a stock that I plan to hold for the entirety of 2015. Bed Bath & Beyond (BBBY) is probably one of the most efficiently run companies around, and I expect them to recover as the housing market continues improves – making it another position I’ll hold onto in 2015.


In December, my worst performing stocks were JC Penny (JCP) down -19.1%, Ecopetrol (EC), down –15.6% and Lukoil (LUKOY) down 16.2%. As I mentioned above, the last two positions are in the energy sectors, the worst performing sector of the stock market in Q4 2014. I opened these positions when the sector was down about 20%, but surprisingly the sector continued to slip further in 2014, bringing down my entire portfolio. Despite this drop my portfolio ended up 2014 in positive territory. I plan to keep my investments in the energy sector in 2015 as I expect things to start turning around mid-year.

Acquisitions in December 2014

No positions were added in December

Liquidations in December 2014

No positions were liquidated in December


Oil Pump2014 is coming to an end, and if anything is becoming crystal clear at the end of this year it is that economies around the world are deeply and intrinsically linked.

Since June a roller coaster of events has pushed up the price of the Dollar in Russia by 38%. This is the biggest increase since 1998 when the Russian Ruble plummeted to historic records. The main reason for Ruble’s current fall is the drastic and quick decrease in oil prices. At least 35% of the Russian economy is funded by oil, without that income, Russia would have a deficit close to 10%. This emerging problem is even more dramatic for smaller economies such as Venezuela and Colombia. In Venezuela oil accounts for 95 percent of export earnings, when you combine this with gas earnings, it’s 25% of Venezuela’s gross domestic product. In Colombia the situation is also becoming very critical. Oil makes up between 20% and 30% of Colombian exports and accounts for 4% of its GDP. To put this emerging crisis in perspective, the Colombian 2015 national budget was calculated with an oil price of $98 per barrel, the price per barrel is now at $70 and trending lower, which means Colombia is now facing a budget deficit of $3.6 billion in 2015.

If oil prices continue to decline, these governments will get hit badly setting off an unfortunate chain of events. First currency and government bonds will decline, as investors lose confidence in these governments and start pulling out money and hold off on any new investments. As their currencies lose value, exporters across industries will begin to receive less money for the same goods they are producing, and as a consequence they will spend less in their own countries. When they spend less, the whole economy is impacted and social unrest can emerge (which we have already seen in Venezuela). Eventually these economies will enter into recession and an austerity programs will be necessary. All this will happen while at the same time the US consumer economy benefits from cheap oil prices, and Americans start to spend more on a broader range of non-essential goods or services. These economies that benefited from the economic crisis in US that started in 2008, now see how things can go south quickly. As the US economy recovers and the Dollar strengths, these economies will start to feel the pain.    

Considering that oil prices will stay low for a while, I see a difficult 2015 for these international economies, and related energy stocks. Oil companies’ prices will continue to go down (although not as quickly as in Q3 2014). But eventually they will stabilize. Sooner or later investors will realize how cheap these stocks have gotten and they will start accumulating again. The price of these stocks will recover when the US economy improves further and the Central Bank starts increasing interest rates. That is expected to begin by June 2015 if everything goes as planned. As the US economy gets healthier, productivity will increase along with demand for more energy. Ultimately, this will drive oil prices and energy stock prices up and that will be the perfect moment to cash out.

We won’t see this happening in the next few months, it may even take a couple of years to get there, but ultimately the gains can be rewarding. With that in mind I will continue to hold to my positions in the sector for quite some time. Specially because dividends are high, and I’m positive they won’t go much lower than where they currently are. If the Venezuelan economy collapses, that alone would be sufficient to send stock prices up again. Every time there is a major economic crisis in a top oil producing country, oil prices tend to increase quickly.  By the simple logic of the economics of supply and demand when a top producer is out, this means less available supply and higher prices.

In 2015 the energy sector will play a key role worldwide, which will definitely benefit the US, but there is one important principle that we still need to keep in mind… Too much of a good thing, is almost always a bad thing.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 43.8%, versus the S&P 500 68.1%. The return of the S&P 500 in November 2014 was 2.45%, as compared with 1.65% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 5.89% as compared with 11.86% of the S&P 500.


In November Ralph Lauren (RL), Apple (AAPL) and Adidas (ADDYY) performed well. They were up 12.2%, 10.12%, and 10.10% respectively. As I mentioned here Ralph Lauren is a strong brand with little debt and a clear international strategy for expansion. Apple continues to be having a good moment after releasing the new and very well received iPhone 6 in September. They also announced the new Apple watch for next year, and it seems that they are building a new momentum. Finally Adidas is recovering after the stock decline among European stocks in September and October. Adidas is -40.8% YTD due to continuing weakness of emerging-market currencies as compared with the Euro (in particular the Russian Ruble as Russia is one of the most profitable regions for Adidas), and restructuring at TaylorMade-Adidas Golf. It may take some time to recover, especially as the Russian economy contracts in 2015, but I believe it will be worth the wait. Adidas is a strong brand with a wide international presence.


In November, my worst performing stock was Ecopetrol (EC), down -24.3%. Because of this, my portfolio underperformed the S&P 500 for the month. Ecopetrol is one of the largest oil conglomerates in the world that has been affected because of the drop in oil prices and devaluation of the Colombian currency.  Patience will be required before we see this stock climbing back to the $60’s of 2012. I outlined above why I plan to hold on to it for a while longer. It also doesn’t hurt that the company is paying a healthy dividend of 11.6%.   

Acquisitions in November 2014

No positions were added in November

Liquidations in November2014

No positions were liquidated in November


Why I increased my investment in Energy?

by admin on November 7, 2014

Stock Ecopetrol ECWhile there has been a lot of talk these days about the energy prices, specifically about oil and gas prices, two of my largest holdings are in this sector (Ecopetrol EC and Lukoil LUKOY). In October, I increased my position in Ecopetrol, so the question is why?
In order to explain why, first we need to answer a few questions:

  1. Why are oil prices going down?
  2. How low they can go?
  3. When can we expect to see a rebound?

Why are oil prices going down?
The media has covered this point rather frequently lately so I’ll keep this brief. There are basically two major factors that are currently impacting the price of crude oil worldwide. The first is the spread of Ebola in Western Africa and other parts of the world, and the second is that the US has overtaken Saudi Arabia as the biggest oil producer in the world. Oil extraction from shale formations across the US in places like Texas, Pennsylvania, and North Dakota has caused a surge in supply, which combined with restrictions on exporting crude is curbing the price of West Texas Intermediate, America’s oil benchmark.

How low they can go?
I don’t think prices can go much lower for few reasons. First of all, if prices go too low, a couple of things will happen:

  1. Hydraulic fracking drillers will be under considerable pressure and financial stress. The reason for this is simple, these companies spent more money than they brought in during the boom, and they made up the gap by borrowing. This was fine as long as the oil sells at a high price. When suddenly crude oil becomes inexpensive, their margins decline and they won’t be able to get as much money for their product as they originally though. This industry is massive in the US and Canada, and putting them under pressure is not in the best interest of the US government. If crude oil prices continue to go down ($75 or less), companies that rely on fracking will have a very hard time repaying their debt.
  2. If prices of oil go down much further, this has the potential to very negatively impact not only the US economy, but also the economies of major worldwide power houses like Russia. For many countries, the low price of oil directly translates into economic woes – including, most dramatically, the possibility of a contracting economy. According to a recent article in Bloomberg Businessweek, if pricing remains under $104 a barrel, Russia will face a drop in its gross domestic product by up to 1.5 percent. Prices are currently below $90. If an Economy as big as Russia’s suffers, then other countries around the world will also feel the pain.
  3. There is also a very strong linkage between oil production growth, economic growth, and wage growth across a range of US states. Annual investment in oil and gas across the country is at a record $200 billion, reaching 20 percent of the country’s total private fixed-structure spending for the first time. If this industry gets hit too hard for too long, that will impact other market segments, and the US economy in general. Low prices are good, but prices too low for too long will not be good news for anybody.

If we look at historical prices of oil vs gas, we see that they move in tandem. Oil prices vs gas prices behave very similarly to stock prices vs earnings. They can deviate from the mean once in a while, but at the end of the day, they will eventually always need to correct course. By looking at the graph below comparing % price change between oil and gas, you can easily see a strong correlation. If oil prices increase too quickly when compared with gas prices, there will always be a correction. That’s what happened in 2008, and that’s what is happening now. Based on the graph below, oil prices may go lower, but we are certainly near the bottom of this trend. I don’t think the current low prices will be sustainable for much longer.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

When can we expect to see a rebound?
Now that the US is the biggest producer in the world, I don’t expect huge increases in oil or gas prices anytime soon. Gas prices will rise as soon as the economy improves. When that happens, energy stocks will outperform any other market segment, but we may still be a couple of years away from that moment. In the meantime, you can collect strong dividends from most of these companies.
So to answer the question, why did I increase my exposure in the energy sector? I would say:

  • Prices won’t go much lower than current levels because it is not good for the economy or for the fracking companies that the US government is trying to protect. It is a big sector that if it hits a recession has the potential to drag the entire economy down. Certainly nobody is interested in that.
  • These companies pay healthy dividends, in the order of 3% and above. So even if stock prices don’t go up for a while, I’ll be happy to wait a couple of years while collecting the dividends.
  • PE ratios are very low when compared with other segments of the market making this an excellent opportunity to take advantage of before the economy improves and prices start to rise.

Summary Portfolio Performance
Since inception (01/19/12), the model is up 42.9%, versus the S&P 500 63.2%. The return of the S&P 500 in October 2014 was 2.32%, as compared with -2.84% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 0.47% as compared with 0.91% of the S&P 500.

In October Apple (AAPL), American Express (AXP) and Bed, Bath & Beyond (BBBY) performed well. They were up 7.2%, 2.8% and 2.3% respectively. Apple continues to have a good moment after releasing the new and very well received iPhone 6 in September. American Express is doing an excellent job targeting more diverse audiences, and is currently paying better dividends than MasterCard (MC) and Visa (V). PE ratio, and Price to Sales is also way lower than its competitors.

AXP PS Ratio (TTM) Chart

AXP PS Ratio (TTM) data by YCharts

Bed, Bath & Beyond (BBBY) continues its recovery after the big drop that it faced this year from January to May. Although the company still down for the year -15.1%, since August the stock has increased 10.4%. Price to sales ratio is only 1.1 and the company has no debt.

In October, my worst performing stock was JC Penny (JCP), down -24%. Because of this single position, my portfolio underperformed the S&P 500 for the month. After reaching $11 in August, the stock took a hit and is currently trading at $7.20. This stock is extremely undervalued at the moment. Price to Sales ratio is 0.1. Very low compared with the 7.2 of Macys (M). I’ll keep this holding in my portfolio, but I know that the recovery will take at least 1 year more. Yearly revenues from the company are finally increasing, after deep declines in 2012-2013. I expect this stock to have a very good 2015.

JCP Revenue (TTM) Chart

JCP Revenue (TTM) data by YCharts

The other company that took a big hit in October was Ecopetrol. For the reasons mentioned above in this article, the whole energy sector is suffering lately. I think this sector crisis is at the bottom and I also expect Ecopetrol to do very well in 2015, especially if the economy sees an improvement.

Acquisitions in October 2014
I added Adidas (ADDYY) to my portfolio, the stock has been down -45% this year, but this is a great company, with a global presence and very well diversified. The stock has been dragged down by the European Stock market, which is not having a great year. I expect this stock to recover very quickly. Price to sales is 0.7, nothing when compared with the 2.9 of Nike (NKE). Adidas has not been this cheap in many years.

I also added Copa (CPA), a very interesting airline company operating in Latin America that was “unfairly” hit because of worldwide Ebola concerns. Many airlines have been down because of this, offering great entry point opportunities. This is a stock that I won’t hold for long. As soon as the stock is up 20% I plan to get rid of it.

Liquidations in October 2014
The only position I liquidated in October was Wells Fargo (WF). Great company that I had to sacrifice in order to take advantage of better opportunities on the stock market.


The legacy of Larry Ellison at Oracle

October 9, 2014

Larry Ellison will be remembered for founding one of the most successful companies of our times. Only time will tell if he will also be remembered as king of the acquisition. Ellison, of course, was a specialist in product engineering, but he was also an excellent salesperson to corporate clients and extremely good in analyzing […]

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The future of Intel is not computers, it is wearables, servers and the Internet of things.

September 4, 2014

In 2013, Intel underperformed the Nasdaq index by 12.7%, and investors became concerned about the end of the era of Wintel domination. The Wintel alliance was virtually unstoppable from the 1980s to 2000. In April 2013, the research firm IDC issued an alarming report saying that world-wide shipments of laptops and desktops fell 14% in […]

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The apparel sector is suffering, but not everybody is skinny dipping

August 7, 2014

As Warren Buffett used to say, “Only when the tide goes out do you discover who’s been swimming naked.” That adage applies perfectly to the apparel sector right now. Although the industry has had a terrible year, one of its major players is still financially strong with incredible competitive advantages, and a solid global presence. […]

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Picking up a bargain in June

July 3, 2014

In June, shares of Bed Bath & Beyond (BBBY), one of the most efficiently run companies around, dropped by 5.7%. Year to Date, its shares have dropped 28.53%. This is one of those very rare opportunities to invest in a great company selling at a very good price. Price to sales is just 1.049 and […]

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Apple is back but questions remain

June 4, 2014

On September 21, 2012 Apple reached $700 per share for the first time, only to go back down to $390 six months later. The company has had a fantastic run since 2010, but its current price of $628 is still under the $700 of those glory days in 2012. Apple invests huge amounts of money […]

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