The Tree Continues Its Growth

by admin on November 11, 2012

Last week something special happened in my life, my first child, Enzo, was born.  This is one of those once in a lifetime events that makes you stop and think about life and the future. Warren Buffett once said “someone’s sitting in the shade today because someone planted a tree a long time ago,” and nothing is more real than that. In the stock market as in life, everything is about time (not timing). I have always considered myself a value investor because I always make my investments by looking at the world at least 5 or 10 years ahead. I’m not sure if my son will have a brighter future than any of us, but what I do know is that the tree I have planted for him is already growing with forward looking investments.

I’m very surprised by how shortsighted people can be sometimes, and how frequently they buy and sell in a panic for no other reason than that a stock is going up or down. People rarely focus on the bigger picture, and they have very little understanding of the role of human cycles in economics.

Human cycles are long-term and they control the ups and downs of the stock market. Making money on the stock market overnight it is just not realistic, but it is also a very dangerous game.  The larger the risk you take, the better the opportunity for big returns, but also the greater the chance for extreme losses.

It seems that everything in life is balanced by risks and returns – not just in finance and economics. I’m not a risk taker, and when you have a newborn, risk is the last thing you want. That’s why my investments take a very conservative approach. Investors in my portfolio shouldn’t expect to become rich overnight, but they can expect consistent positive returns in the long run.

This balanced approach in my portfolio is informed by a few simple rules:

  1. No one investment accounts for more that 25% of my total portfolio
  2. My top 10 positions account for 66% of my total portfolio
  3. I have fewer than 40 positions in total
  4. 70% of my portfolio is allocated among companies with $10B or more in market capitalization
  5. I never sell a position before I’ve had it for at least a full year
  6. Most of my investment are long-term (a minimum of a 3 year investment)
  7. I focus on undervalued and cheap stocks from good companies

So far this strategy has worked fairly well.  Since its inception on January 18th, my portfolio is up 11.8%.  That’s 3.7% more than the S&P 500.

After Tuesday’s election, U.S. stocks tumbled to their lowest levels in three months amid concerns about the U.S. political landscape.  It is time to prepare for turbulence ahead. From this point forward, the stock market will be under pressure as the U.S. deficit will once again be at the center of the conversation. My plan for 4Q is to strengthen my position in a few key sectors that are getting ready for rebound as well as in consumer goods companies, which are better suited to the turbulent winds ahead.  In particular, I’ll be strengthening my positions in Pepsi (PEP), Coca Cola (KO), and Dupont (DD) – all three of these companies are trading at a reasonable PE and yielding around 3% in dividends. I believe this conservative approach in Q4 will allow me to finish 2012 above the S&P 500, a great achievement for my first year at Covestor. In my next letter to investors, I will share a review of these investments.


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