BlastInvest
Blast Investor Real-time Plus
by Henry Lu
2007 BIRTP Portfolio Annual Report
12/31/2007
2007 Performance Update
Blast Investor Real-time Plus (BIRTP)
model portfolio delivered double digit index-beating performance in
2007. For the whole year of 2007, BIRTP model portfolio was up
15.57% while S&P 500 index was up only 3.53% in 2007. This is
significant improvement over relatively weak performance for BIRTP in
2006.
The index-beating performance of BIRTP in 2007 was largely due to
success of our arbitrage stock pick Tribune (former ticker: TRB) and
commodity stocks Chesapeake Energy (CHK) and ConocoPhillips
(COP). The upside in arbitrage and commodity stocks overcome the
negative performance drag in Pep Boys (ticker PBY) and USG (ticker
USG). Overall, the yearly performance in 2007 was satisfactory and our
portfolio strategy shift to focus on arbitrage in later half of 2007
paid off.
Peer Performance Comparison
Oakmark Select Fund
(OAKLX) is $4.6 billion size mutual fund that is also based on
focused style of value investing strategy. Oakmark fund manager
Bill Nygren is a famous fund manager so that we picked his fund for
comparison.
Table 1 Peer Performance
Comparison (updated on 01/15/2008)
* Vanguard 500 Index is S&P 500 index fund. The return below
is total return after dividend addition and fund cost deduction.
performance
|
04
|
05
|
06
|
07
|
4
year average
|
Vanguard 500 Index *
|
10.74%
|
4.77%
|
15.64%
|
5.39%
|
9.05%
|
Oakmark Select Fund I
**
|
9.73%
|
4.84%
|
13.60%
|
-14.04%
|
2.95%
|
BIRTP Model Portfolio
|
59.53%
|
30.42%
|
-2.65%
|
15.57%
|
23.69%
|
Table 1 showed performance comparison between BIRTP model portfolio
with Oakmark Select Fund in 2007 and in past 4 years. In
2007, Oakmark Select Fund suffered big loss of 14% and
trailed
S&P500 index by double digit while BIRTP portfolio beat S&P500
index by significant margin. Under average return over past 4 years,
Oakmark Select Fund performance trailed Vanguard S&P 500 index by
6.1% while
BIRTP Model Portfolio performance beat Vanguard S&P 500 index by
14.64%.
Although Oakmark Select Fund and BIRTP portfolio both employs focused
value investing strategy, BIRTP model portfolio operation differs
from that of Oakmark Select Fund (and other value funds) significantly
in 2007. We believe Oakmark Select Fund (and other value
funds such as Weitz Value Fund) suffered big losses in 2007 mainly due
to their concentrated positions in financial stocks, which were
directly affected by sub-prime mortgage losses. The top
position for Oakmark Select Fund in 2007 was Washington Mutual, a large
bank that underwrote tons of sub-prime mortgages. Washington Mutual
stock suffered more than 50% loss in 2007 (graph 1), which contributed
significantly to the poor performance of Oakmark Select Fund in 2007.
At BlastInvest, we have never been fan of financial stocks as shown in
my 2005 article titled Derivative
Risk of Financial Stocks. Warren Buffett once said that
value investors should only stay within their circle of competence.
BIRTP portfolio avoided financial stocks in recent years because we
simply did not believe that we could understand complicated books and
their hidden risks.
Lesson from Financial Stock Debacle of 2007
Graph 1 Popular Financial
Stocks in Value Investing World
WFC: Wells Fargo stock, owned by Warren
Buffett in 07
WM: Washington Mutual stock, owned by Oakmark Select Fund in 07
CFC: Countrywide Financial stock, owned by Weitz Value Fund in 07
One of the arguments that favor financial stocks in the past is based
on the fact that Warren Buffett invested heavily into financial stocks.
Buffett's financial sector ownership spans from insurance sector, to
banking sector. Wells Fargo is a bank stock that Buffett has
owned for years.
Graph 1 showed performance comparison between Buffett's banking stock
Wells Fargo (WFC), and banking stocks that other value investors owned:
Countrywide Financial (CFC) and Washington Mutual (WM). We can
clearly see the dramatic performance difference between them in graph
1. Wells Fargo stock loss (adding back dividend) in 2007 was
merely 12% while Countrywide Financial stock suffered 74% loss in 07
and Washington Mutual stock suffered 55% loss in 07 (adding back
dividend). Buffett's stock Wells Fargo did not have huge loss
because Wells Fargo historically did not underwrite sub-prime mortgages
so that Wells Fargo's mortgage portfolio was significant safer than
that of Washington Mutual or Countrywide Financial.
Graph 1 demonstrated a big lesson in value investing. Successful
value investing is individual stock pick based, not sector based or
macro-feeling based. Just because the best value investor Warren
Buffett invested into a financial stock, it does not mean that other
financial stocks within same sector have similar risk profile or
risk/reward potential. Just because Warren Buffett has
circle of competence in financial stocks, it does not mean that other
investors may have similar degree of competency in the same
sector.
Arbitrage Payoff in 2007
Stock market is either with fear or with greed from time to time.
While there was not enough of fear on financial stocks before the
credit crunch in August of 2007, 2007 was a year that offered
great investment opportunity in buyout arbitrage.
Tribune stock (ticker TRB) buyout deal was closed on 12/20/2007 at $34
per share as we expected. BIRTP model portfolio invested into Tribune
stock in August of 2007 at $25 per share and obtained 35.5% performance
within 4 months, at 138% annualized return.
Tribune stock was example of over-blown fear in Wall Street. Lehman
Brothers analyst Craig Huber in August of 2007 said that odds
of Tribune buyout deal closing is no better than 50-50.
Lehman Brothers analyst further said in a research report that Tribune
stock would not be worth more than $5 a share if the buyout deal fails
to close. One day before closing date on 12/19/2007,
Deutsche Bank downgraded Tribune stock from Buy to Hold in the
middle of market rumor that banks may pull the plug on the deal.
The stock market panicked one day before closing and Tribune lost 7% in
the morning of 12/19/2007. Yet, never the less, the next day
Tribune buyout deal was closed at $34 per share without any delay.
Lehman Brothers' research and Deutsche Bank last-minute downgrade on
Tribune stock demonstrated Wall Street analysts' disservice toward
individual investors. Quality of many Wall Street analysts'
research is sham. To really make money in the stock market,
individual investors have to do their own research and ignore the
non-sense from Wall Street. Although Internet traffic and
anxiety in our newsletter's private club discussion group on the last 2
days of Tribune deal closing hit new high, we stood with our
original research on the odds of Tribune buyout closing and paid off
handsomely eventually for BIRTP model portfolio and for BIRTP
newsletter members.
Outlook in 2008
We are no bull on general stock market. We think
US economy is still likely to see slow down or even recession in 2008
while financial sector will see stabilization of their balance sheet
from the help of sovereign funds and US governments. We continue
to be no fan of financial stocks in US market. However, we are not
end-of-world bear on the stock market in that we believe Fed and US
governments are on track to salvage the messy US financial system from
disaster. We believe US economy will do fine in 08 and 09 even with
assumption of recession. The key for the health of US economy is
employment rate in this country and we believe unemployment rate will
continue to be at historical low end in 08 and 09.
Crisis is coupled with opportunity in Chinese word. Currently, we
still see great investment opportunity in merger and acquisition buyout
deals and the spreads are extremely wide. At least for first half of
2008, we expect to continue to invest heavily into arbitrage picks
taking advantage of wide spread provided by the credit crisis.
Although we expect US economy to slow
down or go
into recession in 08, we continue to be bullish on commodity market.
Growth
in Asia and the rest of world is expected to compensate any loss of US
economy on commodity demand side and we expect supply and demand on
crude oil is extremely bullish. Since late 2006 BIRTP have decreased
investment percentage on energy stocks due to diversification
concerns. Never the less, we continue to be bullish on the valuation
and fundamental of energy business and we expect to continue to hold
large percentage of portfolio investment dollar in energy or commodity
stocks.
Blast Investor Model Portfolio Update
(as of 12/31/2007)
Model
Portfolio - Performance
|
BIRTP
|
S&P 500
|
Portfolio inception date
|
12/31/2003
|
12/31/2003
|
Portfolio inception value
|
$89,000
|
1114.10
|
| Portfolio
12/31/06 value |
$180,253.55
|
1418.30
|
Portfolio
12/31/07 value
|
$208,321.41
|
1468.36
|
| 2004
Performance |
59.53% |
8.78% |
2005
Performance
|
30.42%
|
3.00% |
2006
Performance
|
-2.65%
|
13.62%
|
2007
Performance
|
15.57%
|
3.53%
|
4
Year Average Return
|
23.69%
|
7.15%
|
4
Year Total
Return (Since Inception)
|
134.1%
|
31.80%
|