GOOG/BRK.B

End of year update

As mentioned previously, I have radically simplified my holdings into 8 long positions, the smallest being GILD. I also have a TSLA short (sized similar to FB). I have a bit of leverage through interactive brokers margin, but after accounting for assets I hold in cash-equivalents and TSLA short, I am roughly 100% invested in the market. 

The increase in GOOG reflects exercising employee stock options and the need to have more capital invested in GOOG to have the same economic exposure.

The relative reduction in Berkshire does not imply I'm less optimistic about it's future. It's just that the stock price got a bit higher lately (also as related to book value) and I'd happily add on any pullback.

While different companies merit different fundamental valuations, I was tracking the relationship between price of my two holdings: GOOG and BRK.B for some time, rebalancing somehow when any of those two stocks got out of favor. The chart below shows last 5 years of said relationships (2013-2017).

I'm still happily owning both, seeing bright future ahead of these two companies. I see the reduction as rebalancing, to maximize potential.

VRX is effectively a LBO play and GM is a self-driving bet, which should work out OK even if GM won't make a business out of self-driving cars, based on pure valuation. VRX's increase is a result of share price change (even though I trimmed # of shares) and I've covered GM previously.

Bitcoin

I'm watching bitcoin craze from the sidelines, as in my opinion there is no place in value investor's portfolio for an item with no intrinsic value. But I'm still interested in how it develops and I treat it as an indication of market being too greedy.

Whether this means that S&P 500 is also near peak is unclear though - I still think the prospects for economy are good and that there will be a continuation of efficiency gains that can help grow earnings at a good pace. But this might indicate that multiples like P/E will come under pressure.

I intend on staying fully invested as long as I find good opportunities. Recent rally of Valeant made me sell a good chunk of shares, but the dollar amount invested is roughly flat.
I liquidated a good portion of small & medium positions to simplify the tax reporting I will need to do for the next year. I intend to keep AAPL, BRK, FB, GM, GOOG, VER, VRX and TSLA(short). I find these reasonably or even attractively priced, having great competitive position and good or great long term prospects. Time will tell.

Bad car company, good car company

I've posted rants on Tesla before, but the latest developments merit at least a short note.

As expected the Q3 results were financially disastrous. The 'boldness' of skipping testing and going straight to 'production' (actually, more of a manual assembly) has also proved to be an astonishingly unwise move. I expect more drama coming out of Tesla, as once they sort out more automated assembly, the quality problems will likely follow. They will then have to choose between further delays as they redesign components/processes or ramping up volume and accruing heavy costs of future warranty repairs (even if they won't be properly accounted for at first).

But it go even more entertaining with the fundraising event (aka Tesla Semi and Roadster unveiling). The bold ask for 5-250k deposits shows that it's all about cash management now.

But I think it's too little, too late.

With serious competition arriving shortly from major, experienced automakers and with still tough economics for BEV, I think the prospects for Tesla being profitable are slim at best. After accounting for debt and other liabilities, I simply cannot see it as a going concern.


On the flip side, I am increasingly positive about GM. The core business is strong and disciplined. It seems to be second only to Waymo in autonomous driving. Because of being vertically integrated, I think it's best positioned to deploy commercial self-driving taxis at scale. Sadly, I did not act (enough) on these insights while it was in the (low) thirties. But I also try to learn from past mistakes and I've added to this position even at increased prices. Better late then never.

I'm awaiting the Nov 30th event from GM. Even if it's not ground-breaking, I can hardly see a winner of self-driving different than Waymo, GM, Uber, Lyft or Ford. Baidu will likely follow them up shortly and perhaps will eventually win thanks to being having the cheapest source of batteries and vehicles in the longer run - People's Republic of China. I see Mobileye/Intel as being contained to a the market of privately owned cars. In the long run, this market will be smaller than the (autonomous) taxi market.

Short TSLA, Long GM.

End of quarter update

With some delay, I'm posting my holdings for end of Q3'17.

There were not many changes, namely:

• Doubling the position in Apple to ~6% of portfolio
• Reducing Michael Kors by about 80% to 1%
• Increasing IBM, LUK and FB
• Decreasing GILD, SRC and FFH

For Apple, I simply realized that I underestimated the strength of the business and realized profits too quickly. I used a modest correction to almost reestablish the share count I have had at the recent ~$90 bottom. I wish I just did buy and hold.

The investment thesis for KORS was always based on it being undervalued and shareholder friendly (read: buybacks). I became less enthusiastic about the latter as they tamed buybacks and announced Jimmy Choo acquisition. I locked a very modest gain on KORS and I wouldn't mind selling it off completely as it appreciates just a bit more to hit my sell orders. The value story is much less clear for me these days.

Other trades were small and rather opportunistic:

- catching a bit more FB when it slid under $150 at the beginning of Q3 (I wish I placed bigger orders)

- bought some IBM <$150 and LUK @~$23

- taking profits in GILD, SRC and FFH as they rose (but on FFH I missed the jump)

In general, I did not see much of a change in the underlying value of the businesses I own, except for the general, steady rise. Alphabet and Berkshire are still great businesses with bright future.

I see VRX even slightly more optimistically then a quarter ago, with their turnaround plan clearly working. The market does not really agree, pushing it from $17+ to $13+ these days. I noticeably increased the share count and total investment. I'm a little bit in the green overall, but I still see this company's equity as being worth a few times more within 3-5 years. Time will tell how they will do.

I'm more optimistic on GM's prospects for commercial deployment of self-driving cars - I see it happening sooner than I thought before - perhaps as soon as 2018 or 2019. Unfortunately I did not act on that, and I'm sitting on less shares then before, as my layered orders executed.

As before, my EOQ allocation follows: