I spent most of the Patriots Redskins game yesterday working on a 2012 outlook article for Seeking Alpha. I had answered one question for Saturday’s post and then the other 19 yesterday. This was interesting in terms of comparing how I answered the questions this year to how I answered similar questions last year.
There are two factors here. One is that not much has changed. We are slogging through, there has been some evolution in terms smaller issues but the bigger issues both here and in Europe are not yet resolved even if we know a couple of things now that we did not know before.
As a result, the fundamentals for the things I have been saying stink still stink, the housing market is not started any sort of significant recovery, jobs are still not where they need to be to belie health, treasury yields are still getting what I’d call a panic bid, our political situation has somehow become more dysfunctional and Europe is even worse.
The other factor is the extent to which I try to take a long term view with the portfolio and themes and exposures embedded within. Not everything in a portfolio will work as hoped for of course but assuming something doesn’t turn out to be immediately incorrect, then most long term exposures can be given time to do well. That does not mean that each exposure will work for all times but one year means a lot less than five years, at least for us it does.
A perfect example of this might be Vale (VALE). We’ve owned the stock for almost seven years with a tweak or two along the way. Since we bought in it is up a little less than 200% versus about a 15% lift for the Materials Sector SPDR (XLB). Over the longer term VALE has turned out to be the better hold (the comparison is to the sector exposure of our benchmark, XLB is comprised of the materials stocks in the S&P 500) but it has not been better for every single period. In the second half of 2008 it fell far more than XLB. In the future there will be occasional six or 12 month runs where XLB will be better to hold but I believe over a five year period VALE will have made much more sense.
Again there will be some of these exposures that don’t work out as I hope for. There will be a couple of holdings (maybe more) where after a great run the story will change necessitating a sale. The best example there is probably our hold forever position in Bank of America (BAC). The takeover of Merrill Lynch was immediately and obviously unforgivable and an immediate sale despite my previously having thought we would keep it forever. If VALE, another hold forever does something that stupid I would not hesitate to sell that out immediately as well.
There will also be holdings that, to paraphrase Dennis Green, won’t be what I think they are and will need to be sold. Fortunately I have not had many of these but this will come every so often (hopefully not too often, knock on wood) and part of managing a portfolio is being on the lookout for something that just proves out as just being flat out wrong.
Something that just meanders either up a little or down a little or moving with the market becomes a risk for losing patience as some themes or countries may take longer to work out than you think.
Obviously I prefer to think longer term as I think it is more consistent with clients objectives which I think of as being having enough when they need it not beating the market this quarter or this year.
A couple of unrelated snippets from the weekend; I got a kick out of the serious argument between Patriots’ QB Tom Brady and the Pat’s offensive coordinator. I may have this wrong but Brady wins any argument with a non-Belichick coach. University of Cincinnati basketball coach Mick Cronin was very impressive in the aftermath of that hideous fight with Xavier in saying he has to decide who is still on the team and that he made every player take off their game jersey, hopefully he backs up the tough talk. Lastly I watched the movie Step Brothers starring Will Ferrell and John C. Reilly on Saturday afternoon (Saturday was a day of some procrastination). Like all of these movies they are very stupid and very funny. There was a line in the movie that I thought was hysterical and brilliant for how subtle it was, “wait, Dale got Hulk Hands?” It’s funny for anyone who saw the movie.