Originally published March 6, 2021
Since the last newsletter, there has been a lot of volatility in the market with some evidence of sector rotation. In particular, there has been some selling out of the euphoric high-flying tech sector and this cash seems to be finding its way to other sectors like energy and industrials. This is good for my portfolio considering the recent changes that I have made. In fact, the portfolio has moved from lagging the SP500 to outperforming it a little. The timing of the rotation is simply luck. I would not want to consider the idea that I have some magical insight into market timing. As luck goes, things can change fast and next week we could again be bidding up tech stocks for another year, no one really knows for sure. I will accept luck as it is an integral part of investing.
The portfolio is getting close to what I think is a great risk-reward situation. The few high flyers that are left in the portfolio have been seriously trimmed so that if the meltdown continues, it will not be devastating to returns, while at the same time if prices move up, there is still some benefit to having them. It’s all about managing the risk-reward equation.
Why I Added Berkshire Hathaway
I have added Berkshire Hathaway to the portfolio after years of badmouthing them. For the most part, they have underperformed as a stock and this is primarily why I have avoided them. Some of you do hold Warren Buffett’s BRK.b and have strong convictions about it. I always say that I can be wrong, so I did revisit BRK.b from a purely analytical perspective. It’s very difficult to evaluate a conglomerate like BRK.b because there are so many companies within the Buffett umbrella. What ultimately pushed me over to the other side is that the market has gotten expensive while BRK.b has not. Its stock underperformance has made the price we pay for its earnings really low. This means the risk for its high-quality boring companies is quite low relative to the market.
Besides the value proposition, it has even more value as it relates to how it affects the portfolio. BRK.B is not a sector balanced conglomerate, meaning that if the market rises or falls, BRK.b may or may not follow suit, and it will return something else. This helps in the diversification of the portfolio overall and I would say that this is even more important than its relative bargain bin cost. By luck, BRK.b has been overperforming since I added it to the portfolio, I do not know if this will continue, but even if it does not, it will likely be a very positive addition to the portfolio.
More Royal Dutch Shell Please
I added more Royal Dutch Shell (RDS.b) for the same reasons as described in the last newsletter. I am now overweight in energy, mostly because it is the most unloved sector and provides one of the few bargains in the investment world. The potential for more rotation out of high-tech stocks into more bargain areas only makes sense as a strategy. Also, I would agree in principle that the death of big oil is eventual, but likely not in the near future. That being said, there is a viable bet that the death of oil has been exaggerated and that it’s likely going to be around for a while. I am double weighted in energy and that is playing out well for now. At least one of you has an even stronger conviction towards energy, but energy is notoriously difficult to get right considering all the geo-political moving parts, so I am comfortable with a 5-6% total weighting.
What Will Inflation Mean?
Looking forward, inflation seems to be the new concern of the month. As long as there are no unseen shocks I would say slow rising inflation is not the end of the world as it does represent strong economic activity. It can play a role in the demand for stocks as a whole, but most do not consider that the assets that companies hold also rise with inflation, washing out its effect. Nevertheless, high inflation does add an extra layer of complexity for the small investor.
I will have to pull out my old economic books to understand it well enough to formulate a viable strategy if it is at all necessary in the future. Should we be switching to high-paying bonds? Good god….maybe? If we have to. The one thing that most agree with is that holding cash (you know who you are) is the worst thing to have as inflation keeps devaluing the hoard of cash under your mattress. While everything becomes expensive including real goods, the value of your cash keeps whittling away month after month.
At this point, I will only make small tweaks to the portfolio as stocks generally are like soap, the more you handle them the more they seem to melt away. As long as the current strategy plays out no need to make any major changes.
How is my Gamestop Put option? Don’t ask. Was up, mostly down now, but lots of time left. Luckily it was a small bet as all speculative plays should be… because I could be wrong. Time will tell.
Happy investing.
Marc’s Monthly Moves
| Buy | Sell |
| Berkshire Hathaway B shares (BRK.B) Royal Dutch Shell (RDS.B) |
Marc’s Portfolio YTD Performance
- Portfolio return 2.3% (Including currency losses/gains)
- Portfolio return 2.9% (without currency losses/gains)
- SP 500 return 2.29%
Portfolio beat SP 500 by +0.6 points.
Money with Marc 