Portfolio Performance: +18.4% YTD through June 2008

Heavy weighting in commodities and precious metals powered the portfolio to a winning June and a 18.4% gain for the 1st half of 2008, compared to losses of -12.8% for the S&P 500 and -14.4% for the DJIA. My non-commodity positions (foreign telcos, GE, ACAS) have suffered along with the broader market but those are meant to be long-term, high-yield positions (each yielding at least 5%) so patience will be required for those picks (or perhaps they can be harvested for tax-loss purposes later in the year).

I completely exited my Agnico-Eagle (AEM) position in June. While I’m almost certain that AEM will rise ever further in the near future, I just couldn’t justify holding on a valuation basis. Unlike Chesapeake Energy (CHK), Agnico-Eagle has not added substantially to its reserves since I opened the position and so the only driver for increasing NAV is higher gold prices. I follow a value-based philosophy and selling discipline is one of the hardest areas of investing. Value investors are often cursed with the problem of buying/selling too soon — I may as well get used to it. That position logged over 100% gains in little more than a year and qualifies for favorable tax treatment.

Going forward, navigating these markets will be tougher. While I believe in the long-term strength of the commodities story, there is little opportunity at these levels to find bargains in those sectors. I am still waiting for a good-sized pullback to add to positions in oil, gold, agriculture, etc. but it is highly possible that the train has left the station. In time, the oil story will be viewed as one of the easiest no-brainer investment opportunities of this decade but as a value investor, I cannot lose my head and chase the story.

As such, I am finding interesting prospects coming into my range in other out-of-favor sectors like big pharma, consumer durables and the like. These sectors don’t have the massive tailwind of peak oil to boost returns and cover any mistakes so I’m treading cautiously for now. As the saying goes, it will be a stock-picker’s market — margin of safety always. As of now, I have a 35% cash weighting.

In his old partnership letters, Warren Buffett continually emphasized that his main objective was to outperform during down-markets. Buffett much preferred years where he was down -5% compared to the market’s -10% rather than years where he was +10% to the market’s +5%. Bear markets are where investors really show their mettle. He also stated that you need 3 years minimum to begin judging someone’s track record and preferably closer to 10 or more years.

While I am obviously pleased that the portfolio has escaped the market carnage so far, at 1.5 years track record, I remain cognizant of the distinct possibility (likelihood even, if you believe EMT/MPT) that the results are more attributable to luck or a fortuitous call on commodities than any superior skill or analysis on my part (however, I will take credit for my rather prescient calls on the recently completed Euro 2008 tournament, picking all 8 quarterfinalists as well as picking the tourney winner). As such, I am endeavoring to double my vigilance and research for the back half of 2008 and the potentially treacherous markets ahead.

As always, take in everything with a healthy dose of skepticism (even in my blog), do your own due diligence and arrive to your own conclusions. These are my (foolish) opinions only and YMMV.

3 Responses to “Portfolio Performance: +18.4% YTD through June 2008”

  1. DavosDax Says:

    CHK has been my star performer this year too.

    I’ve been cutting it back (I usually invest through options), as it looks like the leaders are starting to succumb (Steel stocks last week, Ag the week before).

    Do you have a price target on CHK?

  2. Davy Bui Says:

    I don’t know about price target but I put my valuation on CHK at $75, minimum. My semi-educated hunch is that CHK is probably worth closer (maybe even north of) $100 but it’s still early days on the Haynesville Shale. But keep in mind, I don’t play the momentum or market-timing game so my moves may not be appropriate for your style of investing.

    I did like the deal with PXP and it relieves some of the financing pressures on them that have been my biggest concern.

    Also, while many pundits are now all over the Haynesville, CHK announced several other new plays in conjunction with Haynesville, including a potential billion barrels of oil which would be the highest return on investment prospect they have.

    I don’t think all of this potential has been priced into the stock so that combined with my view on energy scarcity leads me willing to hold CHK, even in the face of a bear market.

    At this point, I only wish I had bought the preferred shares as opposed to common so I could have collected higher yields but c’est la vie.

  3. The Enlightened American » Media Appearance: On Commodities Bubble & Chesapeake Energy Says:

    [...] Some readers question my stance on the oil “bubble” and whether I’m just in denial.  If something drops in price 70%, does that automatically make it a bubble?  I guess some people say yes but I view it differently.  The “speculative” (almost all investment can be defined as speculative) demand in the commodity space collapsed mainly as a result of the global economic implosion and not due to unjustified speculation.  Does that mean prices should be at $150/bbl in less than a year?  Of course not but note that I, for one, didn’t support moving into the energy space at those prices; in fact, I warned against chasing after the energy bull. [...]

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