FEBRUARY MONTH END PERFORMANCE SUMMARY AND LOOKING AHEAD TO MARCH
*This is a copy of my letter to investors summarizing the month of February.
January monthly report can be found here.
2012 Return: +58.61%
2013 Return: +2.57%
Portfolio February Performance: -3.79% S&P 500 February Performance: +1.11%
Portfolio YTD Performance: +2.57% S&P 500 YTD Performance: +6.20%
Total Return Since Inception (1/1/12): +63.64%
Portfolio Highlights For February
- During the second half of the month, the portfolios took on a much more defensive stance versus the allocation over the past couple of months. The defensive measures were taken via reducing net long exposure and initiating a hedge in an inverse ETF (TZA). These defensive measures led to an extremely tight range of movements for the portfolios into the second half of month. Essentially fluctuating in a 100 basis point range while the markets took on a much more volatile disposition. Why is this a highlight? First, there weren't many highlights this month so the bar has been lowered a bit for classification as a highlight. Secondly and more importantly, it is early proof that the structure of the portfolio is well crafted for what I see as unpredictable and generally bearish conditions in the months ahead.
- MITL was the only position that experienced gains in the portfolios during the month of February. Being that it is a small position, it wasn't able to negate the negative effects of generally listless performance throughout the portfolios in February. The position in MITL was taken in mid-January. MITL was up 10% in February and is now up 11% since being initiated. I do believe that the company is a bit more correlated to the general market than most of the other holdings in the portfolios. For that reason, it is not something I am comfortable adding to at current market levels.
- IWSY is a new position in the portfolios taken just this past week. The research report for IWSY is available to view here. After looking into the company extensively during February, this has become one of my more favored new positions taken over the past 12 months. What creates favoritism in my book is an extremely well-defined risk profile paired with substantial upside. The risk profile in IWSY is one that has been cushioned greatly as a result of the transitions the company has made in their revenue model from a lumpy stream based on governmental and municipal contracts to one that will be more consistent dealing with the consumer and enterprise markets. Validation of their strategy has come early as a result of a partnership with Fujitsu, along with management stating that several other high profile partnerships are in the works. Should the company even be moderately successful in the roll-out of their cloud and mobile security platform, there will a consistent profit structure that will demand a multiple that is nowhere near factored in at these levels. The risk cushion is furthered by the fact that the company still has their lumpy stream of governmental contracts providing some consistency while they move more towards cloud and mobile security. The balance sheet has been restructured as well, with the company having zero debt and a decent cash cushion.
- The portfolios end February 75% invested in WMIH, SPNS, IWSY, FIGI and MITL. 25% short via TZA. Essentially net neutral when looked at on a notional basis considering TZA's 3X levered exposure.
Portfolio Lowlights For February
- During the middle of the month, as I mentioned in the highlights, there was some trimming and hedging that took place in the portfolios. While this served to tame overall volatility in the portfolios, the price points for the selling weren't exactly advantageous compared to where the positions closed for the month. These poor selling prices cost the portfolios roughly 75 to 100 basis points in performance during the month. Not exactly a huge deal, but something I am disappointed in nonetheless. I did perhaps become overly-cautious too quickly this month resulting in jumping the gun just slightly to initiate a more defensive strategy. I don't necessarily enjoy giving up any performance in what I like to term emotional gaps. I believe this qualifies as a gap in emotional performance as my attachment to gains and fear of loss cost the portfolios slightly.
- WMIH fluctuated between a mid to large sized position during the month, ending February with the same allocation as where it started. The share price was basically unchanged for the month in what I would classify as a classic consolidation pattern after an explosion in appreciation the past couple of months. Volume has dried up substantially. The daily and weekly ranges are contracting. It is simply passing time until a fundamental event or indication of such an event moves the stock up further.
- SPNS was down more than 3% during the month of February. Again, this is a stock that is consolidating after a large move during January. The share price was extremely tight in terms of overall movement while volume dried up during the month. SPNS will be more correlated on the downside to the overall market than a company like WMIH or IWSY. I did cut the exposure in half during the month, taking it down to a mid-sized position from a large sized position.
- PRXI and UPIP were both sold during the final week of the month. UPIP was essentially break-even from inception. PRXI was a roughly .30 cent loss. UPIP is a company that I continue to see potential in, as I have discussed over the past couple of months. However, my attitude as the month progressed was defensive in nature, as discussed. That being the case, I had to take action against positions that were non-performers over the past couple months. Additionally, positions like UPIP tend to be more market driven, succumbing to weak trends.
Looking Ahead To March
There are various reasons cited for why investors, whether of the professional or retail variety, lose money in the markets. The blame game is endless, without any real thought as to the core of the issues within a person that renders them unable to make proper decisions over extended periods of time.
The markets are inherently filled with an endless array of counter-intuitive obstacles that each investor faces on a daily basis. One of these obstacles is the contradictory nature of market analysis (macro or micro) and portfolio management. The contradiction that is evident in these two key foundations of wealth creation, I believe, can be blamed for a majority of insurmountable losses that seem to creep up on investors a few times each decade.
Let's look at what market analysis entails. The average market participant will investigate a potential wealth building opportunity, which then begins the process of creating belief in that opportunity. As the opportunity begins that wealth building process, the investor's perception of the validity of the opportunity then begins a virtuous cycle that only strengthens with each dollar that is made. Emotions become intertwined with analysis that only builds off the emotional fuel being supplied on a continuous basis.
Portfolio management is a completely contradictory process to market analysis. Operated properly, managing a portfolio involves looking at positions on a completely unemotional basis with the preservation of capital being the sole concern. That preservation capital is often times in conflict with market analysis that dictates holding onto a position or increasing it in the face of declining value. There is no distinction made for the investor between when portfolio management should take precedent over market analysis or vice versa. The investor is left on his own to determine which belongs where in the hierarchy of investing. Often times, portfolio management only takes precedence once fear begins dictating actions. By then, of course, it is too late.
That brings us to March. We are in a period here and now where market analysis has swung to favored status over portfolio management. Investors are more exposed to the markets currently than they have been in many months. They are more prone to allow the markets to have their way with portfolios as they have been in sometime. Th There is an expectation that analysis will prevail over management as a result of the perceived underlying factors that are keeping this bull market intact.
Portfolio management is in the back seat smiling shrewdly as it plots its path back to the forefront of the investor psyche. The same cycle repeats itself time and again. Investors become lackadaisical in their attitude towards risk. The markets re-calibrate their attitudes until portfolio management becomes the perceived route towards success. Market analysis then takes precedent again, as it is currently. The only thing that is consistent about the markets is their propensity towards adjustment.
Knowing that this propensity towards adjustment exists, little doubt should be left in the advantages of steering clear of areas where a lack of portfolio management becomes the accepted norm. Should you choose to lump yourself, as an investor, in with this crowd then the end result is predictable. You will eventually be washed out of the market at the most inopportune time. The market forces those who take faith in market analysis to become portfolio managers. That is what makes market bottoms.
I have made the decision here to forego any analysis or opinions I have of the individual names in the portfolios or voracity of the general market, in favor of portfolio management by taking on a net neutral stance in the face of a tremendous confluence of technical factors that will make further upside from here difficult to sustain.
The downside to this current stance is under-performance should the market continue to rise without much participation from a portfolio of long positions that generally trades independent of the market. The upside is being in a position to outperform greatly into the 2nd quarter of 2013 should the market go into an intermediate term bearish trend. I'm willing to make that trade off here as being offensive in nature has become the style of the day.
Bring on March.
Regards,
Ali Meshkati
