Poetic Portfolios

I started this blog as a way to keep a journal of my thoughts about investing and to keep a record of my thoughts on individual companies. The Two Roads Diverged Portfolio is truly my investing testing ground.

If you look back at the beginning of this portfolio, a good portion of funds were invested in treasuries. These investments represented a rainy day fund. As I began to grow more comfortable with my analysis and investing, I began to invest these funds in stocks. Now it looks like this transition was a bit early.

I invested through the dotcom collapse, but the lessons learned through that period are much different than the lessons learned since the Bear Stearns Collapse. During the dotcom collapse, valuations had been ridiculously high. I remember owning Ariba (NASD: ARBA) stock at the same time that I was reading The Warren Buffet Way. I sat down and built a discounted cash flow model based on Ariba’s projections and came up with a value of $3.00 per share. I thought that I must be doing something wrong, the stock is $150 per share. Other holdings at the time were equally over-valued. I began selling my shares a little at a time and got out of enough holdings to end up being close to break-even at the end of the meltdown. I learned that valuation matters.

Last year this time I was reading The Intelligent Investor. Ben Graham has comments in that book about buying companies below book value or for under a P/E of 10. I remember wondering how bad the market must have been to find value like that. Well, here we are. During the dotcom days, we all saw valuations primed by greed. Despite the crash, however, we never really saw valuations primed by fear. Today, there are certainly companies to avoid. All is not right with financial companies. The big three automakers could seriously fail. Still, there are other companies that are not likely to fail that have had their share prices decimated. These are the times that “intelligent investors” wait for.

I thought I was on track investing in companies below their intrinsic values. Those companies still seem like good investments today. I had never seen times like these. I didn’t know how truly cheap a company could be or how truly disconnected a stock could become from its business to the downside. I also didn’t realize that during a recession, a person is likely to need more cash on hand than during periods of increasing asset prices and salaries. I should have kept more funds in treasuries to wait for these moments.

During the year, I have been liquidating this portfolio. Some sales have been due to valuations that no longer seemed valid. Some sales have just been to raise cash. Soon this portfolio will consist of only shares that are too ridiculously undervalued to sell. I will take a close look at those companies. The other portfolios that I track will receive more attention.

This entry was posted on Sunday, November 23rd, 2008 at 6:35 pm and is filed under Thoughts on Investing, Two Roads Diverged. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.