Interesting times and more mea culpa

“A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.”

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My wife bought me a copy of the 6th edition of "Security Analysis" by Dodd and Graham for my birthday--- with forewards by Warren Buffett, Seth Klarman, Bruce Berkowitz and the like. I'm going to digest every word... I can hardly wait.

On the more sobering matter concerning the markets and our hemorrhaging portfolios, I've been slowly and methodically changing my positions in the following securities, while reflecting what I've done wrong and reasonably well:

LYG Lloyd's TSB: SELL (for a 90% loss)-->Pro forma results of Lloyds pre-merger business were very decent ($1 B profit) considering the toxic atmosphere for banks, particularly of the UK sort. Not that this matters a whit, as the hasty and politically motivated deal went through without much discussion with shareholders. The share price was quite rationally sliced to ribbons (<$3/share from over $20) as it became clear to investors that HBOS' aggressive corporate bond and mortgage portfolio was going to bring on eye-popping losses for an extended period. The combined entity has become semi-nationalized with the UK gov't owning 65% of equity in the company as it required more and more funding to cover these losses.The dividend was terminated about 6 months ago, of course. Where I made the error was not in assuming that LYG was "too big to fail"; it was in not realizing that the government needs to protect the interests of the national economy, often to the detriment of shareholders. I was impressed by Lloyd's track record of conservative management and their very good balance sheet. In the past, they have always been very careful about costs (to the point of having a reputation for being stingy) and I figured that this good stewardship would pay off down the line when the competitors gave up market share to LYG during the meagre times we're in now. After the HBOS merger was announced, I was lulled into complacency by the CEO's message that the new company would emerge from the crisis as a largely unchallenged semi-monopoly of the mortgage market in the UK. In retrospect, when management makes uncharacteristically risky moves (particularly a merger or acquisition), I should sell-- even if it means taking a loss. Lesson #12322, engraved into my eyeballs for posterity. UNH United Health (an HMO)-- sold for 30% profit due to difficulty of assessing political risks. For much the same reasoning, (I read Obama's budget carefully) I'm not entering a position in SYK Stryker or IHI (med device ETF) although I find the investment profile very appealling of those stocks. You just can't ignore the political aspects. Thanks To Steven Friedman for his insight here.

DELL-- SELL -half of my position was sold after digesting the last quarter's results, for a loss of 35%. I'm not certain that this company still isn't very undervalued and the balance sheet is very strong indeed; however, the key profile that brought me in in the first place isn't as compelling-- the cash flow/share.




PCs, laptops and netbooks are becoming commodities, pure and simple. Dell made its name for being the lowest cost producer and a reliable, quality product. It will now face fierce and probably insurmountable competition from Chindian firms. Its franchise has been deeply eroded due to austere product lines (albeit, better lately) and damage to its reputation by providing poor support for its products (outsourcing and poorly executed quality control of that support network). Insider and guru buying is mixed. This company has confounded me. What I am most certain of is that there are better businesses with fatter margins and wider moats to deploy capital into. We'll see if I'm wrong.

SGP Schering-Plough- SELL- a great company with a great pipeline of products that I was lucky to get in at $12/share after the Vytorin media spin knocked the stock down irrationally. The impending acquisition of SGP by Merck was announced today and the share price appreciated 14% just today. I plan to take profits, hopefully in the mid 20's. I have no interest in owning Merck and even less interest in owning a mega-mega cap combined company with all the execution risk involved in such a large deal and the hostile political exposure to big Pharma evident in the Obama administration's budget. I am interested in the smaller non-US companies who have excellent balance sheets, strong pipelines and generic exposure like SNY, NVS and NVO.

CX Cemex- SELL- for a 65% loss- a potentially great company that was crushed by its debt load. I made the mistake of expecting historic nadir cashflows (the bottom of previous business cycles and other recessions Cemex has weathered through) to be sufficient to meet Cx's debt covenants. I then realized that I wasn't aware of the massive derivative holdings of the company (other than the hedges held for feedstock) and the largely unhedged forex risk. This was poor research on my part and I can blame no one other than myself.

more on the "buy side" in another post...