A New Look At The Portfolio

The main purpose of this letter is to introduce a new, and I believe much improved, way of disclosing my portfolio and investment transactions. I believe this to be an answer to prayer. For many months I have been uncomfortable with the present system, especially with the amount of time and energy required to update it. Not only can the new plan be updated in about 15 minutes per month, but it supplies considerably more information, and is much easier to analyze. I am really excited about it. Let me explain.

The new portfolio data will be displayed on two web pages. The first is titled JAY’S PORTFOLIO MARKET VALUES. This page will divide all investments into the three major allocations, and show the market value of each individual investment as of the close on the last trading day of each month during the year 2008. Below that are sections which give percentage allocations. The first shows the major allocations. The second shows a summary of allocations giving more detail. This page is very easy to analyze and by the end of 2008 will show the entire year on a single page.

The second page is titled JAY’S PORTFOLIO PERFORMANCE. This page gives information not given before. It tracks the performance of each individual investment over the entire year. If the investment was owned on 12-31-07, it is assigned a value of 100 on that date. If added later in the year, its cost is assigned 100 when added. The market value of every investment at the end of each month during the year is expressed as the ratio of its market value to the market value at the beginning of the year (or cost if purchased later). In other words, all the numbers give the exact year-to-date performance of each individual investment. Example, 90 would mean the investment was down 10% for the year-to-date. 110 would mean it is up 10% for the year-to-date. The bottom of this second page also has the same allocation percentages as the first page.

I believe you will find these pages much more useful than the old ones. Take a look at them and see if you don’t agree. NOTE: This analysis is not perfect because quantities of each investment are not given. Nor are partial sales accounted for. As long as I own any of a given investment, its market value and performance will be included. Therefore an auditor would not be able to verify my total portfolio performance from these reports. But I do accurately calculate the monthly performance directly from the actual portfolio taking into account income and both realized and unrealized gains. I guess you’ll just have to take my word for the accuracy. I’ll try to improve this as I work with it in coming months, but I do believe you have all the important information you would need to construct a portfolio similar to mine.

Almost all the investment newsletters I have seen are updated monthly, and I can see why. But what about important things which arise between month-ends? This could be handled in two ways, by brief interim letters, or by a web page titled perhaps COMMENTS AND DISCUSSION, posting and dating the latest information at the top. We’ll play it by ear as we proceed.

The following is a discussion of the actions I have taken since Letter 28 (June 8, 2008).

Stock Portfolio Insurance Puts
For some months it has been my conviction that stocks are in a bear market. See Letter 19 (March 13, 2008). At that time I reduced my stock allocation from 40% to below 20%. That has turned out to be a good move. My overall portfolio performance year-to date June 30 was +15.15%. This compares to the S&P 500 Index which was down 12.8% year-to-date June 30. Today my stock allocation is 20.3%. Even with this relatively small allocation, I want some protection against the bear market, so in early June I invested 1.4% of my portfolio in puts on the Nasdaq 100 index. That is reported in the new pages explained above, and, as you will notice from the PERFORMANCE page that investment had gone up 17.78% by the end of June. The market is way oversold and due for a rally, but I don’t see the usual signs of a bottom, so I want to hold my insurance, and possibly add some more if we get a strong rally. We’ll see how this “insurance” investment does over the next few months. If the bear market is over, I will gladly sacrifice my entire 1.4% investment in these puts to have the peace of mind that my stock portfolio is protected against a major fall, just as I am happy to sacrifice the annual premium on my homeowners policy for the assurance that I won’t lose the total value of my house if it burns down.

I don’t give the specifics of buying puts, and most of you will probably not want to use them, but if anyone does, if you’ll email me, I’ll be glad to share the mechanics involved in doing so, along with the symbols of the vehicles I am using, and suggested size and timing.

Valero Energy (VLO)
I have previously disclosed my investment in this company. As you can see from the PERFORMANCE web page, I was down 14.08% on this investment as of June 30. As this is written, I am now down 30.9%. At today’s price I have a 1.9% position in the stock. I believe VLO is becoming one of the best “hated asset” opportunities I have seen in a long time. In an article dated April 14, 2008, Barron’s points out that at today’s market price of VLO, its refineries are selling at a deep discount to replacement value, even as new refineries are close to impossible to build in the United States and the appetite for them remains robust. The company has liquidated some of its assets and plans to pay down high coupon debt and buy back shares. Over the past two years, it’s bought back 20% of its stock and doubled its dividend. Recently it authorized the repurchase of an additional $3 billion of shares. Guess who’s been buying VLO as the market has been selling the shares down?

At today’s price I have a 1.9% position in VLO. I would love to work up to a 4%-5% position in this company, but I’m in no hurry to put more capital at risk in this bear market. As an alternative, I decided to buy some long term out-of-the money calls on the company. This is really the same strategy I’m using on my puts, only in reverse. By risking a small amount of money I can hold the right to add a significant number of shares in the event the stock returns to its old trading levels or higher. Adam Hamilton has written a brilliant research article on the refining stocks (see Gasoline, Diesel and Oil - May 19, 2008), and has himself bought calls on VLO. My investment in VLO calls will show up in the July 31 update to MY PORTFOLIO page. As with the stock puts, I’ll be glad to share the specifics on the VLO calls with anyone requesting it by email.

Airline Investment
I have made an initial investment in a package of airlines. As of June 30 it was 3.4% of my portfolio, and was down 7% from my cost. If it falls an additional 10% from here, I will likely add some more. My reason for making this investment is Jim Rogers disclosing his investment in airlines, otherwise I wouldn’t even be looking at them. It has to be one of the all-time great “hated asset” opportunities. I have purchased only those mentioned in his recent interview (see Good Time To Invest In Airlines - June 19, 2008), plus three mentioned in his latest book (CEA, ZNH and BJCHF).

Gold and Silver
Please take a look at the charts on the following web page: Gold & Silver Charts.  Notice how the price of both metals is holding relentlessly above their 200-day moving averages (green lines), and how a massive base has been built since the all-time gold high made in March. It is very typical for both metals to correct or go sideways in the summer, then begin a new leg up in the fall. Currently the 200-day moving averages are about 880 for gold and 16.50 for silver. Although nothing mandates it, it would be perfectly normal for the metals to sell at or below these levels before the summer is over, then begin a new powerful up-leg in the fall. I think that is especially likely this fall because the American people are beginning to wake up to the fact that we are experiencing massive increases in inflation which have not occurred since the late 1970s. Remember that gold went up 24 times during the decade of the 70s. So by all means, don’t get scared out of your gold and silver investments, and if you don’t have a full allocation to physical gold and silver, use any weakness in the price to add, and seek to reach your full allocation by the end of August no matter what happens. I also suggest you make sure you have at least a mid-sized position (3%-4%) in SSRI (Silver Std Res Inc.), my favorite stock.

Final Thoughts
Even with my recent investments in VLO, the airlines and some additional SSRI, I am holding my common stock allocation at about 20%, cash at 34%, and the rest in gold, silver and oil and gas properties. For those of you who have no oil and gas investments, you might want to consider San Juan Royalty Trust (SJT). I mentioned this several weeks ago, suggesting you not buy it until it sold below 40. At the time it was over 45. It closed last week at 38.70. I would consider this an excellent time to begin building a position, and I would treat it as a physical commodity investment rather than a common stock investment. The current distribution rate for the trust is over 9% annually, payable monthly, I believe.

Here’s a quote from Richard Russell’s remarks dated July 18, 2008.

Prayer Request
For several months I’ve been meditating on an idea which I think has merit. I would like to compile a list of investment principles or rules, perhaps post them on a web page, and use them as a check list to run through every time I make a transaction (buy or sell). Over a few weeks time, this list might get up to 10 or even as many as 20 principles. The goal would be to “keep all the balls in the air” simultaneously. i.e. follow all the principles every time I make a purchase or sale. This is rarely possible, and never easy, but it could become an invaluable tool. We already practice this on a limited basis. Every time we buy or sell, we have one or more reasons for doing so, but we may be unknowingly violating several other rules. By running through and thinking about all 20, or however many rules there are, there’s no telling how valuable it could be.

The idea would be to state the rule, then follow it with a minimum discussion required to understand its application. Here’s a hint of some of the first ones I might write up:

• Never invest with borrowed money or money you are not willing to leave alone for several years.
• Buy hated assets, and allow time for the market to recognize their value and bid the price up.
• Buy weakness and sell strength.
• Don’t try to time the market.
• Get in sync with the secular trend and stay there until the trend is over.
• Follow the masters, etc., etc.

I would appreciate the prayers of those of you willing to pray and ask the Lord to bless the project if it is His will.