Blessed by the Potato

This is a monthly update from the Blueberry Portfolio. The events I mention below happened approx 8 months ago.

In the last month the index has returned roughly 1%. Our cumulative return is 18.9%, with just over 3% of that in the last month.

We’ve had several investments work in our favour over the last month. Canexus has been a stealthy out-performer: each day it only turns in modest gains, but it has been going so consistently up over the last month that it’s added up to about a 10% return in that short time. Chemtrade, a similar company, has also turned in solid results.

Indeed, at one point Chemtrade had grown enough to hit a completely arbitrary threshold, where it made up 20% of the portfolio. I am aiming to run a fairly concentrated portfolio, but I must balance that with the risk of having too much invested in any one area. It’s very tough to draw that line, especially when an investment is performing consistently well (an old trader’s adage: “don’t shoot a running horse”). But the line has to be drawn somewhere, and 20% is a nice, round number; so when Chemtrade crossed that line I pared it back, taking some profits.

Speaking of taking profits, I also sold our position in Poseidon Concepts. It had a great run, and indeed has kept going up (another 7% since I sold, though it did at least have the good graces to put in 3 down days immediately after I sold to spare my feelings). PSN has sparked many great discussions and reflections on portfolio concentration and when to take profits.

In hindsight, PSN should have been a bigger part of the portfolio than it was. And I don’t mean that in the obvious hindsight bias sense of “it went up phenomenally, we should have had everything in it!” It was a fairly simple company to understand, and I had done a tonne of research into it. It was not followed by any big-bank analysts, so was largely unknown in the investment community. These are things that create opportunity. And while there were of course risks, at those prices we were getting paid to take on those risks.

Wayfare and I had a conversation fairly early on about how much PSN to own given its prospects and how much work I had put into researching it (I believe her expression was “why are you putting so much work into something you’re going going to buy a tiny bit of?”). At the time, I had about 5% of the portfolio in PSN, and decided that yes, we could have more like 7.5-10% in there (I still wasn’t comfortable enough with it to make it any more than that).

That’s where I fell into my own personal psychological hang-up with investing: chasing stocks up. Many people — indeed most — engage in performance-chasing: shunning that which has recently dropped, and piling in to investments that have had good recent performance. For the most part that is a recipe for investing disaster. Recall the classic description of investing: buy low, sell high. Yet performance-chasing does the opposite. For whatever reason, I’m naturally wired the other way around: I see investments that have recently come upon some short term pain as an opportunity to be embraced. But I also am squeamish around stocks that have had strong recent performance. “I’ll wait for a pull-back” I might say, or “I guess I missed my chance.” And I’m inherently distrustful of large short-term moves. So after Wayfare helped me decide that owning more PSN was a good idea, I didn’t follow-through because PSN had run-up roughly 10% in just those first two weeks since we bought. Though it was still very reasonably priced (indeed, it has run another 40% from that point), I just have too much difficultly holding my nose and buying in the middle of that kind of run (even if it turns out that is only the beginning). I made the same mistake in my personal portfolio two or three times in the month of January of this year — it was just a time of running horses.

Anyway, that’s a psychological pitfall I’ll have to find a way to conquer.

Back to the topic of taking profits and sitting on cash: the portfolio is now nearly 20% in cash. I’ve said before that we have had a lot of luck in getting such returns so quickly, and that future expectations should be more muted. This is even more true now: the high-flyers have been sold and the profits reaped; the remaining investments are either the losers, or the ones that are being held for steady dividend payouts rather than any expected capital appreciation. And with a large part of the portfolio in unproductive cash, there should be no reason to have another five months like the first five.

I want to keep the portfolio fully invested, and not have so much cash on the sidelines. But I’ve been finding it difficult to find good companies at attractive valuations to invest in (and just 4 short months ago we had almost the inverse problem: so many good ideas that it was hard to narrow the field down to a manageable number for a portfolio!). In fact, the more I’ve been working to try to find a good investment, the more comfortable I get with having that cash. I’ll do my reading and wait for a fat pitch, but in the meantime things in the market have started to get me a little worried, so some cash — which exists purely to deal with transactional needs and fear — seems appropriate.

So far I have completely avoided the Canadian banks as investments. They have superficially attractive metrics: TD trades at about a 12X price-earnings multiple (P/E) with a decent dividend; CIBC is down around 10X while yielding almost 5%. Yet for years now I’ve been concerned about what a correction to high Canadian house prices could do to the Canadian banks. That has been a prediction with no good time-frame, so I haven’t exactly been chasing others away from the banks. That is starting to change. There is nothing in particular I can point to as evidence that the tide is starting to turn; no graph, report, or spreadsheet that makes the case. But little independent things are catching my attention: Scotia selling a fair bit of stock; TD raising LoC rates; the push for 5-year fixed mortgages, and the speedy reversal of the new year’s promotional rates; CIBC reigning in its subprime mortgage unit; a steady increase in banks borrowing from the BoC rather than each other. In isolation, all fairly normal, minor events, but my brain (granted, one programmed by the conspiracy theories of the X-files) is starting to taste a pattern, and smell the fear coming off the banks.