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 October 31, 2009.

THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

• Enlightened-American Portfolio: +33.5% YTD (my actual IRR, including cash balance)
• DJIA: +10.7%
• Nasdaq: +29.7%
• S&P 500: +14.7%
• DJ Wilshire 5000: +16.9%
• Russell 2000 (smallcap): +12.7%

All the major indices, except for the Dow Jones Industrial Average, booked losses ranging from 3% - 9% for the month of October. Our portfolio lost half a percentage point, despite the volatility in energy stocks. Much of the steady performance was attributable to the continued build of cash. In some instances, such as Intel (INTC), these cash-outs were forced as our call options expired in-the-money.

• No new positions taken.
• We were called out of our Intel position @ $16 per share. We missed roughly 20% upside due to writing this call option but sometimes that happens when writing options. At the time, we wrote the option, Intel was trading around $15 1/2 and we had successfully sold a string of INTC calls to good benefit. While it may be easy to rue this move in hindsight, investors must not forget the lessons of this bear market -- cash on hand may be a less desirable but never regrettable option.
• Our Yamana Gold (AUY) position was reduced by 25% due to being assigned on our $9 Oct calls. We have been writing $9 cals on AUY for a year, thus booking good gains before getting called this past month. Gold mining stocks in general are good candidates for options-writing due to their historical volatility, which means bigger upfront premiums and relative assurance that general drops in stock prices will be reversed at some point in the near future.
• I reduced one position in the current portfolio by 25%, the details of which are revealed only to premium subscribers. Find out more about Enlightened American Premium here.

Our cash position currently comprises 46% of the total portfolio. While I am not enamored with this situation, I continue to hold cash rather than compromise our standards for investing. During huge rallies, it is easy to get caught up in the euphoria and feel a subtle urge to join the party. However, Seth Klarman has proven in the past that it is possible to outperform the markets even while holding huge chunks of cash. In fact, that is precisely what we have done this year, as the Enlightened American portfolio is now beating all the major indices, including the red-hot NASDAQ, despite 30%+ cash holdings for most of this year.

So what next?

It is interesting to see some savvy market players positioned for negative market events. Marc Faber has predicted the US dollar to go to zero at some point. David Tice of the Prudent Bear Fund sees the S&P 500 dropping to 400 before this bear market is over.

As I have said all year, I expect the market to follow the economy down into the dumps. And I have been wrong during this time. But as I have also said all year, we do not base our investment decisions on market predictions, even if they are our own. Rather, we measure stocks based on fundamental valuations and risk/reward profiles.

There is always the possibility that folks like Faber and Tice are wrong and the market won't crash. If we buy good stocks at a proper discount, it won't matter which way the market turns in the long run. This is the course we continue to follow.

As always, YMMV.

Disclosure: view the spreadsheet containing all disclosures for my complete equity portfolio, including initial entry points, YTD returns, total returns, etc. through October 31, 2009.