The portfolio lost 4.6% for the month of August, bringing the year-to-date return to 0.3%. Over that period, the S&P was down 5.7%. Most of our positions made losses in the month, particularly China-related equities and short treasuries. But one investment decision was a particular disaster.
As the VIX was hitting some relatively high levels, we decided to sell volatility to add a bit of yield. We sold a few puts at levels where we wouldn't mind buying the underlying equity. But as it wasn't possible to execute the size trade we preferred, we decided to try an ETF structure called XIV - an inverse short VIX futures structure. But though this reads like "inverse VIX", it doesn't track VIX at all, it tracks VIX futures, a different animal entirely. Worse still, volatility did not subside, and even worse, because the ETF must roll its short-term futures exposure in the face of an upward sloping volatility curve, it is short volatility AND SHORT CARRY! We lost our shirt, or 23% of our trade size, equivalent to 1% of the fund. We swore off this kind of ETF structure once before, and only wish we'd remembered our oath.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
6 Oct 2011
Small-C July 2011 Letter
The portfolio gained 1.2% for the month of July, bringing the year-to-date return to 4.9%.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
9 Aug 2011
Small-C June 2011 Letter
The portfolio lost 0.5% for the month of June, bringing the year-to-date return to 3.7%. This is about what we'd expect from a portfolio that is de-levered to equities in a month the S&P lost about 2%. Our call on US Treasuries continues to be wrong, however. Over the more than two years we have been short longer-dated treasuries, we have lost a total of 5%. Somehow, it doesn't feel a high price to pay for some measure of insurance against the inevitable inflation that will result from money printing.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
30 Jun 2011
Small-C May 2011 Letter
The portfolio lost 1.7% for the month of May, bringing the year-to-date return to 4.0%. That's a bit worse than the S&P's -1.35% return for the month.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
Small-C April 2011 Letter
The portfolio gained 1.9% for the month of April, bringing the year-to-date return to 5.7%.
Since we bought Berkshire Hathaway this month, we've been reading "The Essays of Warren Buffett" on our morning tube ride. For the most part, it's entertaining and occasionally thought-provoking, rarely earthshattering. However, one simple yet profound piece of wisdom made a serious mark on us, and we're not sure if we'll ever be able to fully assimilate its implications: an investor should be cheered when equity (or any asset) prices fall, because he or she expects to make more investments in the future and will be getting a better price. It left us feeling foolish and confused - we had all the information yet got the crucial conclusion wrong our entire lives, feeling glad about rising asset prices. We're (hopefully) not even halfway through our investing life, and hope that our current investments represent only a small proportion of our eventual wealth, yet somehow we've felt glad each time rising prices made that more difficult. Viewed even more simply, we hope to die in a larger, better house than the one we live in today, yet our gut reaction is to feel relief whenever London house prices rise.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
Since we bought Berkshire Hathaway this month, we've been reading "The Essays of Warren Buffett" on our morning tube ride. For the most part, it's entertaining and occasionally thought-provoking, rarely earthshattering. However, one simple yet profound piece of wisdom made a serious mark on us, and we're not sure if we'll ever be able to fully assimilate its implications: an investor should be cheered when equity (or any asset) prices fall, because he or she expects to make more investments in the future and will be getting a better price. It left us feeling foolish and confused - we had all the information yet got the crucial conclusion wrong our entire lives, feeling glad about rising asset prices. We're (hopefully) not even halfway through our investing life, and hope that our current investments represent only a small proportion of our eventual wealth, yet somehow we've felt glad each time rising prices made that more difficult. Viewed even more simply, we hope to die in a larger, better house than the one we live in today, yet our gut reaction is to feel relief whenever London house prices rise.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
16 May 2011
Small-C March 2011 Letter
The portfolio gained 0.7% for the month of March, bringing the year-to-date return to 3.8%.
This month, we made some important changes to the portfolio, partly in response to tax considerations and partly because of a shift in our view. Even though we remain short treasuries, we now favor some amount of inflation protection and exposure to economic growth. The outlook for corporate debt remains good, however less-so than it has been for some time, with spreads not offering the same amount of cushion as they have for the last couple of years. We're mindful of the fact that if we wait for the outlook to be poor it will be too late. Therefore, we have cut our exposure to corporate debt, and moved taxable equity exposure towards non-dividend paying equity and non-taxable debt to high-dividen equity. Unfortunately, that meant we bought Berkshire Hathaway just days before the Sokol scandal broke.We changed our crude oil exposure to a broader commodity exposure, though we still have an important exposure to oil prices via our Inpex shares.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
This month, we made some important changes to the portfolio, partly in response to tax considerations and partly because of a shift in our view. Even though we remain short treasuries, we now favor some amount of inflation protection and exposure to economic growth. The outlook for corporate debt remains good, however less-so than it has been for some time, with spreads not offering the same amount of cushion as they have for the last couple of years. We're mindful of the fact that if we wait for the outlook to be poor it will be too late. Therefore, we have cut our exposure to corporate debt, and moved taxable equity exposure towards non-dividend paying equity and non-taxable debt to high-dividen equity. Unfortunately, that meant we bought Berkshire Hathaway just days before the Sokol scandal broke.We changed our crude oil exposure to a broader commodity exposure, though we still have an important exposure to oil prices via our Inpex shares.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
24 Mar 2011
Small-C Feburary 2011 Letter
The portfolio gained 2.9% for the month of February, bringing the year-to-date return to 3.1%.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
22 Feb 2011
Small-C January 2011 Letter
The portfolio gained 0.2% for the month of January. Common to the last two months of the year, our favorite themes underperformed the S&P index. China-related equities were down and the small caps we loaded up on at the end of the year to take advantage of the Other January Effect went down. Treasuries started to move down a bit, while high yield was up. Possibly our best performer over the last several months, Inpex, continued on its tear.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
18 Feb 2011
Small-C November & December Letter
Because we've been so slow to report these months, we're combining November and December into a single note.
The portfolio gained 1.6% over the period, bringing the return for the year to 6.7%.* The total return on the S&P was about 15%, so we must apologize for missing our benchmark by a mile. We can point out that over the longer term, we have still outperformed the equity index, but that feels like small consolation when we really ought to have 10% more money in our pocket.
Some of our biggest calls failed us this year. The Other January Effect failed to materialize for the second year running, and the market finished up signficantly after falling first month of the year. Market timing trades, mostly playing to the January theme, therefore lost around 1% across the board. Our China- and Asia-related shares made a 15% return, but we note that we count the US-listed YUM! Brands in that category, which made a stunning 42% over the year (making it the best performer of any consequence). High-yield bonds returned 13%, but only just beat their interest rate hedge; we lost money on our short bonds trade, bringing the historical P&L for that trade close to flat.
Broadly, our main mistake was not to have enough equity exposure and too much fixed income and like instruments. We continue to favor yield; instruments that put money in our pocket today that we can choose to reinvest, versus speculative plays based on future growth. We feel having liquidity to judge entry points, and wealth preservation in the face of a difficult financial environment, will be increasingly important going forward.
Looking into 2011, we see some of the same themes we have been following for years. Inflation data is starting to show the effects of loose monetary policy, and the rate adjustments can't be far behind. In Europe, there a shell game going in which sovereign debt is being passed from one borrower to the next, evidently calming solvency concerns while the debt burden only grows. The US is doing nothing serious to deal with entitlement spending. Western investor are concerned that China is overheating and will suffer some sort of crash. I believe that view is heavily influenced by our experience of low growth Western economies, where every several years a bust follows a boom. Surely economic development in China will experience bumps the road, but the nation has fifty years of solid growth ahead. We look forward to what 2011 will bring.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
The portfolio gained 1.6% over the period, bringing the return for the year to 6.7%.* The total return on the S&P was about 15%, so we must apologize for missing our benchmark by a mile. We can point out that over the longer term, we have still outperformed the equity index, but that feels like small consolation when we really ought to have 10% more money in our pocket.
Some of our biggest calls failed us this year. The Other January Effect failed to materialize for the second year running, and the market finished up signficantly after falling first month of the year. Market timing trades, mostly playing to the January theme, therefore lost around 1% across the board. Our China- and Asia-related shares made a 15% return, but we note that we count the US-listed YUM! Brands in that category, which made a stunning 42% over the year (making it the best performer of any consequence). High-yield bonds returned 13%, but only just beat their interest rate hedge; we lost money on our short bonds trade, bringing the historical P&L for that trade close to flat.
Broadly, our main mistake was not to have enough equity exposure and too much fixed income and like instruments. We continue to favor yield; instruments that put money in our pocket today that we can choose to reinvest, versus speculative plays based on future growth. We feel having liquidity to judge entry points, and wealth preservation in the face of a difficult financial environment, will be increasingly important going forward.
Looking into 2011, we see some of the same themes we have been following for years. Inflation data is starting to show the effects of loose monetary policy, and the rate adjustments can't be far behind. In Europe, there a shell game going in which sovereign debt is being passed from one borrower to the next, evidently calming solvency concerns while the debt burden only grows. The US is doing nothing serious to deal with entitlement spending. Western investor are concerned that China is overheating and will suffer some sort of crash. I believe that view is heavily influenced by our experience of low growth Western economies, where every several years a bust follows a boom. Surely economic development in China will experience bumps the road, but the nation has fifty years of solid growth ahead. We look forward to what 2011 will bring.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
12 Nov 2010
Small-C October 2010 Letter
The portfolio gained 4.3% for the month of October, bringing our year to date return to 5.1%.* The S&P gained 3.7% over the month. A lot of things went well this month. Quite a few of our equities outperformed the market, especially our China-related portfolio. Treasuries finally started to lose some value - even with all the talk of quantitative easing, rates are edged upwards. We feel we will someday be vindicated in our negative view on rates, and when that adjustment comes it will be drastic and, obviously, unexpected by most.
This month, we passed our high water mark, set in late 2007. That means for the last three years our investments have generated zero returns and only now stand a chance of making you money. It has been a long road, and as depressing as a zero return sounds, we are feeling a bit self-congratulatory.
If you had invested in a money market fund over the same period, you would have made around 4%. If you had the foresight to buy a 10-year treasury, you would now have a 26% return in your pocket. On the other hand, if you had invested in the S&P, you would still be down over 14%.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
This month, we passed our high water mark, set in late 2007. That means for the last three years our investments have generated zero returns and only now stand a chance of making you money. It has been a long road, and as depressing as a zero return sounds, we are feeling a bit self-congratulatory.
If you had invested in a money market fund over the same period, you would have made around 4%. If you had the foresight to buy a 10-year treasury, you would now have a 26% return in your pocket. On the other hand, if you had invested in the S&P, you would still be down over 14%.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
12 Oct 2010
Small-C September 2010 Letter
The portfolio gained 3.2% for the month of September, bringing our year to date return to 0.8%.* The S&P gained 8.8% over the month. Of course it is disappointing to underperform our benchmark so drastically, however that will be the occasional result of holding a low volatility portfolio. We question the validity of this rally. While the economic data has improved slightly, the economy is still in grave difficulty. There have been rumors and intimations that the US will embark on a new stimulus spending and a program of quantitative easing. Previous rounds of such stimulus have done nothing to improve employment rates, and we fear that each time the government takes over a larger portion of the economy it dooms us to a longer period of sub-optimal growth. How that can be positive for equities is beyond us. Even more amazingly, 10-year Treasury rates ended the month nearly unchanged! We have been wrong about the direction of rates for a very long time now, but this just seems absurd.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
Small-C August 2010 Letter
The portfolio gained 1.7% for the month of August, bringing our year to date return to -2.4%.* The S&P lost 4.7% over the month. We are pleased to have outperformed our benchmark. Our shares positions outperformed the market slightly, while of course the low-volatility bond positions held their ground.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
20 Sept 2010
Small-C July 2010 Letter
The portfolio gained 2.9% for the month of July, bringing our year to date return to -4.1%.* The S&P gained 6.8% over the month.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
14 Jul 2010
Small-C June 2010 Letter
The portfolio lost 1.1% for the month of June, bringing our year to date return to -7.0%.* The S&P fell 5.4% over the month.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
1 Jul 2010
Small-C May 2010 Letter
The portfolio lost 5.8% for the month of May, bringing our year to date return to -5.9%.* The S&P fell 7.6% over the month.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
20 May 2010
Small-C April 2010 Letter
The portfolio gained 0.6% for the month of March, bringing our year to date return to -0.1%.* As the S&P rose 1.6% over the month, we are disappointed with our performance. Where did things go wrong? A big contributor was ongoing underperformance of China versus US stocks. China outperformance is one of our core positions, and it hasn't been going well lately. Outside that, performance was a mixed bag, with no notable great successes or losses.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
13 May 2010
Small-C March 2010 Letter
The portfolio gained 3.7% for the month of March, bringing our year to date return to -0.7%.* It was helped by some recovery in the equity markets, in which we maintained a long position. Our investments in China began to catch up to the US market somewhat. Our single stock picks showed mixed performance - one volatile trade we liked, Toyota Motors, was up 8%, while our high dividend shares lagged the market. US Treasury yields increased slightly, while high-yield bonds made gains, so our hedged high-yield position performed well.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
29 Mar 2010
Small-C February 2010 Letter
The portfolio gained 2% for the month of February, bringin our year to date return to -4.4%.* It was helped by some recovery in the equity markets, though we began cutting our levered long position.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
Small-C January 2010 Letter
The portfolio lost 6.4% for the month of January.* This was due to an levered long in S&P equity.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
Small-C December Letter and 2009 Review
The portfolio gained 2.1% for the month of December, bringing our year-to-date return to 15.6%.*
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
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