Grain of Sand Portfolio: Investing Within Your Sphere of Competence

by: Investorpoet

To see a world in a grain of sand,
And a heaven in a wild flower,
Hold infinity in the palm of your hand,
And eternity in an hour.
-William Blake

Investors with many years to go before retirement should seek to maximize returns while limiting the risk of permanent loss of capital. The new Grain of Sand Portfolio simulates a 401k that has been converted to an IRA. The investor has gained control of enough capital to have some diversification. The goal is long-term returns with at least twenty years before retirement.

Circles of Competence

In my career, I have worked in commercial real estate finance for insurance companies and banking institutions, so the portfolio will be weighted towards this circle of competence. Investors should seek to gain at least some advantage, and this is a good place to start.

Losses or lackluster returns will often result from investing in companies that aren’t well understood. In the past I have held both Ctrip (NASDAQ:CTRP) and Baidu (NASDAQ:BIDU) , but sold way too soon. The truth is, I have little insight into the internet search habits of people in China, and it is difficult for me to make any determination regarding the Chinese travel industry. The Grain of Sand Portfolio has several holdings outside my circle of competence, but these are likely smaller positions or pure value-based holdings.

Focus Investing

While the Against the Sky Portfolio has a focus on diversification to limit losses as the investor nears retirement, the Grain of Sand Portfolio seeks a more focused approach for superior returns. Currently, Genesee & Wyoming (NYSE:GWR) comprises more than 17% of the portfolio. Late last year, my holdings in Lexington Realty Trust (NYSE:LXP) reached 25% of the portfolio.

Focus investing involves concentrating your largest positions in your best ideas. The Grain of Sand Portfolio will have some core holdings, but readers will see a rotation of money into holdings that have the best prospects for high returns.

Stock Options

The Grain of Sand Portfolio also uses options to a limited degree to gain leverage for long positions and also to produce some income on larger holdings. Options aren’t for everyone, but can be used by individual investors

Current Holdings and Returns

To date, the portfolio is up almost 9.0% as compared to less than 2% returns of the S&P 500. Current holdings are noted below:

Security Ticker Portfolio % Return
Genesee & Wyoming GWR 17.00% 10.28%
Berkshire Hathaway (B) BRK.B 13.10% -5.23%
Lexington Realty Trust LXP 12.62% 63.65%
Paragon Shipping PRGN 8.48% -14.13%
Markel MKL 6.96% -7.35%
Annaly Capital NLY 5.86% 0.34%
Otter Tail OTTR 5.02% -18.50%
Assurant AIZ 4.86% 19.48%
CapitalSource CSE 4.65% -28.03%
First Solar FSLR 4.46% 4.37%
RGA RGA 3.96% 2.64%
Formfactor FORM 3.70% -28.39%
Chipotle CMG 3.50% 110.68%
Suptertel SPPR 3.01% -6.70%
ATVI January 2011 $10 Call 1.00 -38.80%
Cash 1.87%

The portfolio holdings demonstrate a focus on my best ideas with concentrations within my circle of competence.