After an outstanding Q2, Q3 was a much more sedate affair for the VSG Premium portfolio where we posted a 4.49% return compared to 5.25% posted by the broader market as measured by the S&P 500 (total returns). This takes the VSG portfolio returns to 31.73% for the year which compares favorably with 19.79% with the S&P 500.
|As of Sep 30, 2013||VSG||S&P500|
Since the inception (Jul 23, 2009) the VSG portfolio is up 193.77% compared to S&P 500 at 83.17%
Why We Slowed in Q3?
We started Q3 with the cash component of the portfolio at around 29% and ended Q3 with cash still making up 23.57% of the portfolio. We had some great exits in Q2 and had a good chunk of cash to deploy but the valuation levels in the market were not attractive enough. All said and done, we mostly sat through Q3, with only 2 new purchases (a new recommendation was posted on Sep 30, which is not included here as it has not yet been purchased) and an exit from our position in ISH.
Generally when I find valuations unpalatable, as they still are, I expand my search to include thematic ideas. Valuations are still critical to ultimately selecting the stock, however the search is more top down. The blood, so to speak, was in the streets, as the Asian currencies were decimated against the US Dollar due to capital flight amidst the fears of tapering in the US. According to the MSCI Word Index data, to date, the emerging markets are down 1.7% YTD, led by Brazil and Russia on the down side. India and Indonesia are close to breakeven, while China is marginally up by 0.4%. The World stock index, as a reference, is up 16.9% this year so far. We invested in what I consider the perfect stock to take advantage of undervaluations in several Asian economies by investing in a company for whom long term means generations and centuries, not next quarter or next year. A conglomerate adept at repositioning their assets across the region based on new opportunities and trends. It has been doing this for many centuries now. The investment gives an instant diversified (across countries and industries) exposure to Asia with a value bias that is impossible to find in an ETF at a time when investors are actively fleeing these regions. It is a contrarian investment to some degree, but I consider the business excellent and the management in the highest regard and the stock with a minimal risk of capital loss at the current prices.
Such opportunities are though hard to find for investors who primarily buy on the North American stock exchanges.
Classic value investment opportunities in this market have become rarer still. In euphoric periods like this, when the market more or less takes a possible government shutdown in the US in stride, the risk of capital loss is greater the more you stay exposed to the market. The investments I choose to remain in or initiate are the ones where I have reasons to believe the odds of profits are as close to 100% as can be. Needless to say, cash is more attractive than vast majority of the stocks out there today.
The market has got ahead of the business fundamentals and I would not be surprised if we see a short period of continued volatility until profits catch up with the valuations. Patience and discipline is required. At some point soon, the Fed will start reversing its liquidity injection, which is a long term positive for the economy regardless of what the wall street might have you believe. When this happens, look for a knee jerk decline in the stock market precipitated by the short term traders, hedge funds and other investors with more bias towards action (and less towards thought) and that should surface some great buying opportunities. Until then, figure out a list of stocks you may want to buy if the price is right and wait.