Kick The Market's Ass with Naked Portfolio
I am happy to announce for the quarter ended October 31, 2005, the Naked Portfolio kicked the S & P 500's ass. Pardon my French. I am just too excited. Incidentally, peppering the words "naked", "ass" and "sex" throughout this article will attract quite a bunch sex maniacs to this article via Google, although it will end up a disappointment.
Performance
Anyway, below is the comparison of the Naked Portfolio performance to that of the S & P 500.
| Three Months Ended October 31, 2005 | |
| Naked Portfolio | 0.35% |
| S & P 500 | -2.99% |
Since inception on August 7, 2005, $10,000 invested in the Naked Portfolio has grown to a meager $10,035. Yes, I know, laugh it up. Only $35! But $10,000 invested in the S & P 500 has declined to $9,701. True, the Naked Portfolio has beaten the S & P 500 in the first quarter since inception. However, this is just a short timeframe for measuring investment performance. So in retrospect, there is really nothing to celebrate about or to be proud of. This does not indicate I know shit (wonder if this is a frequently searched word as well) about investing or otherwise (Please read my disclaimer at the end of this article). Remember, the first two months of the quarter saw the Naked Portfolio trailing the S & P 500.
Like all other value investors, I expect the Naked Portfolio to occassionally underperform the S & P 500 in the short term. So investing with the Naked Portfolio does require a healthy stomach. Stay away from McDonald's unless you own the stock. But the Naked Portfolio has not been too volatile mainly because the holdings are relatively stable companies whose stock prices trade north of $300/share. Some readers have emailed me cheering their no-split policy. I couldn't agree with them more. How many of you trade in and out of Berkshire Hathaway Class A? Exactly.
Holdings
Below is a current snapshot of holdings in the Naked Portfolio:
Berkshire Hathaway (NYSE: BRKb) remains the largest holding. Due to recent additions to the portfolio, Berkshire now makes up about 65% of the Portfolio. As you can see, since inception, Berkshire has only risen 0.07%. Like all other insurers, this year has been especially tough on Berkshire. With a record number of hurriances reported on the south eastern coast of the US, most investors would stay away from the insurance industry. Incidentally, all three holdings of the Naked Portfolio operate in the insurance industry. As I have previously explained in both my August and September reports, I favor the insurance industry now when everyone hates it because I believe after taking this kind of beating, the strong will return even bigger and stronger.
Despite the poor performance of the insurance industry in general, Berkshire's non-insurance holdings continue to churn out spectacular numbers. Grocery distributor, McLane, signed up major deals with Wilson Farms and Fleming Corporation. Wilson Farms owns Tops Markets and has operations throughout Upstate New York. Fleming owns a chain of convenience stores in Pittsburg and Kansas. NetJet partnered with Marquis Jet Card to offer prepaid private jet cards that work like prepaid phone cards. Berkshire continues to purchase stakes at great companies at great prices. Most recent purchase includes Ameriprise (NYSE: AMP. Another holding, M & T Bank (NYSE: MTB) continues to perform well. However, some Berkshire shareholders have questionned the performance and investment in holdings such as Pier 1 (NYSE: PIR), Gannett (NYSE: GCI and Coca-Cola (NYSE: KO. Personally, with no research to back me up, I think both Coca-Cola and Pier 1, despite their poor performance, could be trading at huge discounts just because they are out of favor. These are great companies with huge brand names. Some speculated that the Buffett-replacement, Lou Simpson, made most of the recent purchases. I don't have a problem with that at all considering Lou's outstanding performance as an investor. I'm not so sure about investing in newspaper publishing companies. I don't buy newspapers. But then, online newspaper subscriptions are increasingly popular.
Markel Corp (NYSE: MKL) has not made it easy for its shareholders to keep their trust with the company. After announcing an estimated loss of $150 million from hurricane Katrina, it is only reasonable to expect more investors to lose confidence in the company with the news of hurriances Rita and Wilma. The news about how the estimated losses exceeded that of Markel's modelling technique only adds salt to the wound. When valuing an insurance company, it is most helpful to look at the book value of the company. Markel's book value compounded annual growth of 24% is nothing less than impressive. I am so impressed by Markel I added two more shares of Markel to the Portfolio recently.
White Mountains (NYSE: WTM) was brought to my attention by a reader. I have long admired Jack Byrne since Buffett introduced him to the world through his letter to shareholders. White Mountains, like other insurers, suffered losses from the hurricanes as well. Recent changes in management made things worse. Jack Byrne has recently taken over the helm at Overstock (NasdaqNM: OSTK) from his son Patrick Byrne, presumably to help straighten things out. Investors who admire Jack Byrne may have tagged along and moved their money to Overstock. Of course, this is pure speculation on my part. I know, I worshipped Jack Byrne and preached in my previous article to follow the management. I'm going to go against my own advice here and stick with White Mountains. The reason is simply despite Jack's shift of focus, the company remains a compelling investment and the current management has been working with Jack since he left Berkshire. Since I purchased the stock, it has been the best performer in the Portfolio.
Conclusion
My aim with the Naked Portfolio is to make it a learning experience for myself and hopefully others. Of course, every investor's objective is to beat the market. I am no different. But it is still too early to tell whether I have succeeded or failed. Regardless of its outcome, I am sure I will learn a lot in the process of trying.
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The Naked Portfolio is down about 0.50% compared to the previous month: Five Months Ended January 8, 2006 Naked Portfolio4.21% S & P 5004.06% The S & P 500 edged closer to the Naked Portfolio return. Hmm... Perhaps this is due to the legendary January ... Read
I'm six days late with my Naked Portfolio November Report. Apparently, nobody cares. It's good in the sense that I can completely forget about writing my monthly reports and no one will notice. But then I will disappoint the one loyal reader that I may ... Read
I've decided to increase my position in Markel in the Naked Portfolio with two more shares at $315.55/share. As of now, the Naked Portfolio has three holdings Berkshire Hathaway (NYSE: BRKb), Markel Corp (NYSE: MKL) and White Mountains (NYSE: WTM). Current cash available is $171.29 ... Read
This is going to be a very short post. As mentioned in my recent opinion about White Mountains (NYSE: WTM), I thought White Mountains is a buy at $566/share. Today the stock traded at $566.01/share. So I added one share to the Naked Portfolio. I ... Read
Well, you can make 10% fairly easily right about now. Here are two options (pun intended).
Take $10,000 and buy 200 shares of XLE (energy ETF) currently trading near $49
After buying 200 shares of XLE, sell the January 07 $49 call options for $6.10/share. This will give you $1220 in profit (today)!
Your return = $1220/$9800 = 12.44% in 14 months (does not include commissions).
If you are concerned about holding XLE that long, sell the Mar 06 options $49 for $2.90. This will give you 5.9% profit in 5 months.
If you don't like the energy industry, buy 200 QQQQ around $39/share. Sell the January 07 options for $4.20/share. Profit = 10.7% in 14 months. If you don't want to hold that long then sell the Mar 06 $39 options for 1.75/share. Profit = 4.5% in 5 months.
Rinse & Repeat ;)
I'm at a loss to understand this enthusiasm. So the "naked portfolio" outperformed Large Growth over the last 12 weeks... What's the point? So did BONDS!
A well diversified portfolio has also outperformed (thanks to Emerging Markets, Bonds, and Commodities). I think emphasis on this type of short-term performance is what makes many investors sorely underperform in the long run.
Also, a sure way to lose your shirt is to dabble in derivatives like the previous post suggests. Sure covered calls are more conservative than holding straight stock, but you get killed at the margins. The only thing that matters is the total after-tax return on your entire portfolio. The rest is just noise...
Cheers!
JC
Margins? Who said anything about trading in margin? I said BUY the stock and SELL the calls. The only theoretical negative is if QQQQ or XLE tanks - which really shouldn't matter to you buy and hold fanatics.
Guest, you entirely misunderstand. I said nothing about trading on margin. I said covered calls kill you at the "margins". Another definition of the word is "extremes". Broaden the vocabulary my friend...
Covered calls work fine until stocks make a sharp move then you lose bigtime. If they move up you lose potential profits. If they move down, you lose real dollars. That's why CC's are not as great a deal as many make them out to be.
JC
"Covered calls work fine until stocks make a sharp move then you lose bigtime. If they move up you lose potential profits. If they move down, you lose real dollars."
If there is a sharp move up, you don't "lose" bigtime, you get called and sell your stock at the agreed to price (you've already made profit).
If there is a move down then, yes, potentially you "lose" some money at a reduced cost (you've already taken in some profit).
But to a bigger point, can't sharp moves up or down happen with ANY stock or ANY mutual fund? How do you not "lose" big time in those scenarios?
For my money, 12% is 12% whether it comes from a covered call, sales of stock, dividend or mutual fund return....
I sieze opportunity where I see it.
OK. Knock yourself out my trader friend. Please realize:
I've traded CC's before (and just about every other instrument besides currencies). In my experience they're not what they're cracked up to be. Yes you "protect" yourself by rolling down, etc etc. We know all about that. But we're missing the forest for the trees. The only thing that matters is the total after-tax return on your whole portfolio. CC's are a poor vehicle for long-term returns. They're better than a stick in your eye, but that's beside the matter.
You said, "can't sharp moves up or down happen with ANY stock or ANY mutual fund?" Agreed! That's why you allocate carefully between poorly-correlated assets. It's called MPT, check into it.
Sieze opportunity? Go for it my friend. We need an army of guys like you in the market to provide needed liquidity which makes the market that much more efficient and that much more futile to try to beat.
Cheers,
JC
Well I'm willing to put my money where my mouth is and I'm tossing the gauntlet. I say we start a little competition (for fun of course).
I'll be starting my own blog and it'll primarily focus on trading various instruments (currencies, equities, options, etc).
We could begin on Jan 1, 2006 - we each start with a certain amount...say 35k and we measure our performance for 1 year.... All transactions of course would need to be posted.
Anyone up to the challenge?
