Positioning A Portfolio Properly For Any Outcome

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Includes: ADP, AMZN, COST, IBM, LMT, MA, V, WMT
by: Mycroft Friedrich

Summary

A high-percentage success rate in our model portfolio holdings creates market outperformance.

We own market leaders with quality management and consistent track records of out-performance.

Why our allocation is right for no matter what the future brings.

Earnings season is upon us and traders are making big bets looking for a quick buck by either going long or short a stock ahead of a company's report. We are long term investors, who are well diversified among elite companies with elite managers at the helm. So, we have a very high success rate in our model portfolios.

We still have a large position in cash because we simply cannot find anything new of value which we can safely add to the portfolios. The companies we have in the portfolios are conservative investments that we can hold for a long time, are leaders in their industries and are either duopolies or market share leaders. For example the number of debit/credit cards in circulation are as follows as of December 31, 2015.

So as you can see 81.8% of all cards in circulation are from our two powerhouses VISA (NYSE:V) and MasterCard (NYSE:MA). That number has probably grown as management of both companies are signing up new financial firms daily. I just recently had my Wal-Mart (NYSE:WMT) store card replaced by a Wal-Mart MasterCard which means that the turf war between Wal-Mart and MasterCard is now over and they are now partners. Imagine what landing an account like Wal-Mart will do for MasterCard going forward!

Lockheed Martin (NYSE:LMT) over the next 40 years will dominate the aviation needs of the Army, Air Force, Navy and Marines with its F-35 strike fighter and plans to produce over 3000 fighters and totally dominate the US strike forces for a generation. Thus we own a virtual monopoly.

Automatic Data Processing (NASDAQ:ADP), which reported this week, does the payroll for over 250,000 businesses around the world and is the dominant player in medium to larger firms, while our PayChex (NASDAQ:PAYX) is the dominant player in payroll for small firms. So we have both bases covered there in a very conservative business with huge retention rates.

It is very hard to find industries where retention rates are this high as most industries have huge competition. Retailers for example are a dime a dozen and they must compete with Amazon (NASDAQ:AMZN) which sells everything at cost or loses money just so it can increase revenues. It trades at insane overvaluation levels but Jeff Bezos as an ex-hedge fund player understands that all Wall Street cares about is revenue growth and since he sells everything at cost, he always beats the competition on price because they cannot compete due to higher overhead expenses. Costco (NASDAQ:COST) does the same thing on the warehouse level but has not had its free cash flow go up in 7 years from where it was in 2010. But because it also sells everything near cost its lines are always full and thus Wall Street applauds its revenue growth and does not care at all about profits.

International Business Machines (NYSE:IBM) on the other hand is a company that is insanely profitable and generates huge amounts of free cash flow but, unfortunately, has a lot of businesses that are experiencing negative revenue growth and thus Wall Street hates it. Warren Buffett, who is also a long-term investor, unfortunately ignored the negative revenue growth and just concentrated on the free cash flow and profits. Even $400 billion (market cap) Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) does not have enough juice to change the way Wall Street thinks and today he was forced to capitulate and sold off 1/3 of his IBM stake.

Once the Buffett cult followers hear the news they will do the same thing.

Warren Buffett tells CNBC he's dumped a third of stake in IBM

marketwatch.com

"IBM's woes are mounting, as Berkshire Hathaway Inc. Chairman Warren Buffett said Thursday his company has sold about a third of its stake in the computing giant after losing confidence in it."

When even Wall Street has become so powerful that one of the greatest investors in history is forced to capitulate and change the way he invests, it becomes an important lesson for all of us: that Wall Street is a pretty scary place these days, caring more about revenue growth than real profits.

But Main Street is different. On Main Street CEOs and insiders are dealing with inside information that no one on Wall Street has access to and as an investor it is the #1 priority to see what CEOs and insiders are doing with their own money and whether they are buying or selling their own stock for their own personal accounts. They are in the best position to know the potential future for their respective companies after all.

Well, we were going to write you another 2000 words on that subject but the partner of our friend John recently wrote all about it and saved us the trouble.

Why Are Corporate Insiders Selling Into The Trump Rally?

seekingalpha.com

"Corporate insiders aren't buying into the Trump rally. In fact, they are selling in droves. The message is clear: They do not see value in their own companies."

As you can see from reading the article, insiders are dumping shares like crazy as fast as they can. Since they have inside information on Main Street and dumping of shares is across the board among all industries, it's just a matter of time before the truth of the markets being priced at Mount Everest levels will be exposed.

Right now Wall Street has priced everything for perfection expecting that Trump will do everything he said he would do (and we hope he does) but hope is something we cannot afford to invest in with retirement savings. In preparation for the inevitable we have a large position in cash and have the rest invested in duopolies that are killer companies with elite management at the helm. So, we have enough skin in the game to keep up with our benchmark if the markets keep going up, but also have the cash ready to invest if stocks crash. Thus, we perfectly positioned no matter what happens.

If the president is successful on his tax plan (meaning: if it actually passes intact) we will simply take every 2% position we own, add another 1% to it and have 22 position at 3% each. We will then be finished with 66% invested and 34% in cash as we wait for more bargains to present themselves. The reason we will remain 34% in cash is that we will be investing in the most overvalued market in history, but that does not mean it will not become even more overvalued.

We are using common sense and logic in an environment where it is in short supply and will be in a position to benefit no matter what shows up. The two of us (Mark and Mycroft) have been doing this for a combined 75 years and only in the year 2000 did we see a market this crazy. As market historians we would need to go back to 1921-1929 to see an environment this out of touch with reality. The result of the 2000 market was the NASDAQ falling 75% and Amazon falling 90%. The result of the 1929 market was a fall of 90%. So, the odds are that eventually it's going to be ugly, but right now there is no way anyone on earth can tell you if the Dow is going to 30,000 or 10,000. All we can do is just diversify in elite companies with elite management at the helm and keep a ton of cash on hand just in case Trump fails. We are positioned as perfectly as we can be and will eventually win no matter what transpires.

To learn more about why we feel this is an overvalued market please consider our recent articles about the current environment:

"The Whale on the Horizon that Determines the Future of Stocks"

"Convincing Traits of a Stock Market Bubble"

To learn more about how our selection process works consider visiting AskFriedrich.com.

Have a good weekend and sleep well because it does not help to worry. What occurs is beyond anyone's control, but since we are focused on the long game and not dealing with the noise our eventual positive outcome is assured.

As always, we welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other's experience and knowledge. Don't forget to hit the "FOLLOW" button at the top of the article next to my name to keep up to date on my next moves.

For those who would like to learn more about Mark's investment philosophy please consider reading " How I Created My Own Portfolio Over a Lifetime."

Disclosure: I am/we are long V, MA, ADP, PAYX, LMT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

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