My Investment Philosophy; 2009 Outlook & Trading Strategy

My overriding investment strategy is based on a few pillars:

• For the long term, you simply can't beat low-cost index funds to give you a market-tracking diversified base.


• Invest only in companies you understand well. Very well.


• Active trading is just gambling. Maybe not craps, but definitely poker. Skill can help, but it's still mostly luck.


• Use funds only for long-term exposure to sectors with long-term growth potential where I cannot develop good information on individual stocks, and where no good indexes are available.

At the end of 2008 I took a hard look at my portfolio. I realized that over time I have ended up with a good portion of my portfolio in actively managed funds, something that I don't like for the long term.

Current Market Perspective

My current view of the market: short-term pessimism, long-term optimism combined with high volatility.

I think the economy is not near bottom. I am of the opinion that there are a lot more skeletons in the closet, with far more downside risk than upside potential, especially in the next 3-6 months. I am tangentially involved in the real estate industry, and watch it closely. It is a mess. I think listings and deal volume will start to increase again in the next 3 months [I sure hope so], but sales prices will be way down. Deal volume may recover by 2009-2010, but it will probably take 3+ years before the overall dollar volume returns to 2007 levels.

2009 Strategies and Tactics

With the end-of-year rally to nearly 9000, I decided it was the perfect opportunity to cash out of all of my actively managed funds and even some of my index exposure. I was also nearly totally invested in the market, so I wanted to improve the cash portion of my portfolio, especially as a reserve for buying when the market goes down.

This environment is a near-perfect fit for my trading strategy. Over the next few months I will be increasing positions of my favorite companies (Berkshire Hathaway [BRKB] and Apple Computer [AAPL]) and then selling covered calls.

I will probably also increase my exposure in the WilderHill Clean Energy ETF [PBW], a green-energy ETF. It has gotten hammered (down from 22 to 9) in the last year or so, but I am invested in it as a 20-year play for energy sector exposure. The current low in energy prices makes for a perfect time to load up on this sector. It will probably lag for 2-3 years as energy demand recovers, but in the long run I think it will outperform in a major way.

I am not sure where I sit on "peak oil", but I do know that energy demand growth will eventually outstrip supply growth, and when that happens, just like this summer, energy prices will spiral uncontrollably upward. As far as energy prices go, this recession came just in time. Hopefully the next time energy spikes the green energy industry will be in a position where it can add to supply fast enough to keep up with demand growth, and if it can, PBW will pay off handsomely.

Notes on Apple

Apple has about $25B in cash and a market cap of $80B, yielding an implicit value on their business of $55B. They have been putting out impressive net income numbers; 2B, 3.5B, 4.8B in 2006, 2007, and 2008 respectively. With a discount rate of 5% and assuming they can pull out even 3B a year for a while, that's a $60B valuation on their current business assuming no growth. Thus there is essentially no growth priced into their current share price. I have been impressed by their ability to transition to iPhone from iPod without significantly affecting sales volumes or margins. Coupled with aggressive international expansion of iPhone, I think that they will continue to perform. I see RIMM as a dead-end in the long term, just like PALM. Google's Android is the only significant competitor, and Apple will take large market shares given the current competitive environment.