Charles Schwab was our largest relative contributor to performance. The stock gained +82% in 2013 – after a gain of 30% in 2012. We trimmed the position throughout the year and fully exited the position at the end of October. Our sale rationale is quite succinct. Schwab remains a best-in-class business, but the stock, in our view, had become less than best in class (read: overvalued)....
For instance, we liquidated our stakes in Charles Schwab during the fourth quarter, as we believe several years of Schwab’s future earnings power were sufficiently recognized by Mr. Market in current prices. While the Company has continued to grow and take profitability share via its superb low-cost, internet-based platform, our analysis of the stock’s valuation suggests that the implied earnings power of the business is not only taking current business momentum into account, but also giving shareholders ample credit for higher short-Âterm interest rates, even though short-Âterm rates are currently anchored near zero. Admittedly, valuation is somewhat of a blunt tool, given the wide array of future assumptions, however, we believe that valuation becomes clarified and much sharper too as time passes.
