Investment Journal Review, 2014

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At times in the past, I’ve discussed my thoughts on using an investment journal; I’m convinced that this is an indispensable tool. Why do I believe this? Simply put, I think it’s too damn easy to trick yourself otherwise. Keeping an investment journal keeps you honest: you can’t change your previous beliefs (or what you’re brain has now convinced you was your original thinking as you soak up new evidence / biases over time) when you periodically track your thoughts in a journal.

A little over a year ago, I shared some of my earlier journal entries with Gurufocus readers; I thought this would be an interesting exercise for another article – to reconsider some old posts, and some I had previously not discussed (along with one new one). Let’s jump right in:

June 2011

Highest Conviction Ideas:

BRK.B($75) – P/E on non-insurance businesses (after backing out other components of value) is extremely low. Concerns about Sokol incident and Buffett’s eventual death are irrational. My estimate of intrinsic value is approximately $100 per share.

MSFT($24) – After backing out cash, trades at 7-8X earnings. Concerns about the decline of Windows (due to tablets & mobile) are overblown; MSFT is priced as if they will never be successful with search, mobile, Kinect, cloud, etc. Estimate of intrinsic value is $32-35 per share.

In both cases, the investments have worked out well: the results at Berkshire have been solid, but really not that difficult to see a few years back (the resounding success with BNSF is the one possible exception – the fundamentals have improved materially since then); at Microsoft, the overarching thesis from day one has held to date – and buying a cheap stock has paid off as management has executed well in other areas to start building franchises for the coming decades.

However, both stocks are now ~50% higher than where I pegged intrinsic value a few years ago – which has to make you wonder why they are still my two largest holdings (I’ve trimmed MSFT slightly this year, but haven’t sold a single share of BRK.B). Even after accounting for the increase in intrinsic value over the ensuing three years (TVM), I would be hard pressed to argue that either stock is very cheap (at least based on my prior analysis); my current thinking is aligned with that conclusion. I’ll need to update my thoughts on these positions in my journal.

August 2011

The S&P & Dow Jones Industrial Average were down 5%+ in two days, and ~15% in the past month. I see plenty of cheap stocks; despite widespread negativity, I’m as optimistic as ever [with the stocks I’ve selected]. Summary: keep buying cheap stocks, and don’t listen to anyone who thinks they can call bottoms or predict macro events.

I think this is interesting because it captures something that I think has been lost as of late: there were a lot of people who were negative on stocks, the economy, etc, three years ago; they were worried about many things, including a double dip recession - as well as the usual fear of “volatility” in and of itself, with stocks down more than 5% in two trading sessions. With hindsight, it seems that everybody “knew” stocks were cheap and that they were a sure winner – but the reality was much different at the time; since then (mid-August of 2011), the S&P 500 is up ~75%.

March 2012

Buffalo Wild Wings - BWLD - (~$85) looks like a good short: poor business at a big multiple (30x). Unfortunately, still relatively small with a big growth opportunity in the United States (plans for 2x current store count); probably won’t short, but think it will underperform.

Good thing I resisted on that one! Since then, the stock has nearly doubled, with additional units and mid-single digit comps fueling top line growth. Just to be clear, I’ve never actually read the annual reports / 10-K’s for BWLD; this would’ve been speculation, plain and simple. I’ve actually looked at the name recently (when it was around $150 per share) and had similar thoughts - though I had conveniently forgotten that I thought the same thing two and a half years ago. Clearly, I would’ve had been slaughtered to date if I had shorted BWLD back in 2012.

While I conveniently managed to forget about BWLD, I can vividly remember some of the winners I passed on (like Intel - INTC - in the low 20s at the end of 2012 / start of 2013). Attempting to recall past predictions from memory is a dangerous game…

Conclusion

In closing, here’s my most recent addition to my investment journal:

November 2014

I’ve initiated a small position in IBM at $161 per share; roughly 10x multiple, and ~20% below Warren Buffett (Trades, Portfolio)’s purchase price three years earlier (adjusted for share count; actual basis on original purchases in 2011 was ~$170 per share). Rationale for investment: (1) emerging market growth pains are temporary – hardware and currency headwinds will abate with time; (2) hybrid cloud model supports software & services businesses; (3) must admit that Warren’s presence is part of this one - I’m not sure I’d be as comfortable making the purchase otherwise (do not share his knowledge / access to IT department thought process – though I understand the rationale).

I’ll probably put together a longer article discussing my thoughts on IBM (IBM, Financial); as always, I’m interested in hearing what other Gurufocus readers think as well.

We’ll see in few years now how this newest journal entry looks with hindsight!