Davy Bui's  Instablog

View the spreadsheet containing all disclosures for my complete equity portfolio, including initial entry points, YTD returns, total returns, etc. through August 31, 2009.

THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

• Enlightened-American Portfolio: +23.7% YTD (my actual IRR, which lags the equal-weighted returns)
• DJIA: +8.2%
• Nasdaq: +27.4%
• S&P 500: +13.0%
• DJ WIlshire 5000: +15.4%
• Russell 2000 (smallcap): +14.5%

The broader markets look pricey to me at this stage. The debate rages on about whether the indices can hold these levels without a sustained, organic economic recovery. Is the current rally 1930 all over again or 2002? Who knows?

I have been looking to deploy capital in areas non-dependent on a positive resolution to the aforementioned debate. After studying David Swensen's Pioneering Portfolio Management, I am more convinced than ever on the need to properly diversify my investment capital, even as some notable endowments back away from Swensen's strategy. Of course, retail investors lack access to many of Swensen's alternative asset classes. However, readers may want to consider Warren Buffett's strategies during his hedge fund days and in particular, his "workouts" category as a model for diversification.

Some portfolio comments:

• Even as natural gas prices plumb depths barely conceivable a year ago, natural gas stocks remain buoyant. Market analysts are well aware of the pending production cliff as drilling rigs number in the 600s, well short of the 1,000 or so needed to maintain steady nat gas production. I do not know where or when natural gas prices will move but remember, the commodity is extremely volatile, which, by definition, means it won't stay below $3 per mcf forever. The key is to find companies that can hang on through prolonged periods of pricing weakness. I continue to hold Chesapeake Energy preferred shares; the company's assets are top-notch while management has displayed an ability to monetize properties even during the worst of the credit crunch. I find some margin of safety in the probability that the company could sell itself or its assets in a worst-case scenario. Moving up the capital structure into the preferred with 9% cash yield provides some buffer against some questionable corporate governance practices with top management.
• Gold and gold-related stocks still comprise a large portion of my holdings. A sense of normality is returning to the markets, which could invite complacency. Yet gold remains near its nominal record high despite the easing of panic so I will probably look to reduce some of my gold holdings in the coming weeks. The sector's volatility lends itself to trading in and out of positions as prices move.
• Many analysts expect rough sledding in the commercial real estate market and some astute investors have funds ready to pick off distressed opportunities. While this suggests little room for us to get into the CRE market, with patience, investors should get a chance to put capital to work at good prices. I have some backdoor exposure to CRE via Brookfield Asset Management (BAM). Mohnish Pabrai's recent disclosure of buying Brookfield Properties (BPO) may necessitate a closer look at that BAM subsidiary. I am also looking at some REITs as possible investments.
• I have focused on cash-yielding securities to good effect -- nearly all of my holdings throw off dividends or coupons and writing options contracts provides cash upfront. At least one prominent study (by Rob Arnott) has shown that the most of the historical stock market returns derives from the dividend. While markets appear relatively calm for the moment, investors should demand some return for the risk of prolonged price stagnation.

September started off with a bang, with the Dow dropping 185 points on the first day of trading. Whether this is a prelude to another disastrous September or a mere speed-bump to more gains remains to be seen but investors should strive to position themselves for either situation.


Disclosure: Long BAM, CHK-D