Year 1, Quarter 1 Performance Review

This quarter was a strong start for the Rising Tide Growth Fund

Price of Rising Tide Growth: $11.925
Lifetime Performance to date (vs Aug 3, 2007): +19.25%

Comparable S&P 500: 1,509.7 (+3.03%)
Comparable Russell 1000: 823.1 (+3.37%)

Fund return vs S&P 500: +16.22%
Fund return vs Russell 1000: +15.88%

My informal goal is beating the indexes I track by 15% a year (for hopefully 3 years in a row), which would pro-rate to beating by 0.3% a week; obviously it would not be a straight line number (some weeks more than that, some weeks less). As the quarter began the markets were in the middle of the (first wave) of credit crunch worries. Now we appear to be entering the second wave.

I had the misfortune of starting the fund on a very down day in a very volatile market, which means Marketocracy.com measures me against a very low starting point (i.e. if I had started the fund 3-4 days later, when the market had rallied about 4% all my Marketocracy.com measures would look significantly better; but neither "point in time" is very accurate so I've measured myself against the weighted average of the first 5 trading days of the fund to smooth out the extreme volatility in the market at the time). Since I was obviously 100% cash on "day 1" and still heavy in cash the first few days the markets rallied while I was light on equities. Hence I was behind the 8 ball. In a rush to catch up I went very near 100% equity within the first 2 weeks, and of course had nearly zero cash at the depths of the market dip in mid August. Not so good.

Once the Fed cut the discount rate, the market began an absolute breathless rally - through the surprise 50/50 Fed funds/discount funds rate cut, in relentless fashion. Since the market had been so choppy in late July/mid August I had positioned with some short ETFs which proved fruitless in such a strong rally and held back performance. Also the unrelenting rally was not the style approach that works when I was cutting back winning positions in the face of expected pullbacks (which never came). Last, I was adjusting to buying such scale - i.e. I am used to buying in increments of $4-$7K, whereas to have any impact on a $1 million portfolio you need to buy in much larger pieces to have any effect. So that took some adjusting as well. Hey it's all part of the learning experience of a fake mutual fund manager; better to learn now than on the real job. ;)

So after some 'on the job' training, and a market that just would not quit and rewarded 'holding and ignoring all bad economics news' in the face of 'the Fed will make it all go away', it turned more into a choppy market the past month, and individual stock selection actually mattered as opposed to the first 2-3 weeks of the fund where "everything was sold" and the next 6 weeks where "everything went up". That's when the fund truly excelled with a string of weeks beating the market by 2-3% a week, each and every week. The fund is outperforming its indexes by about 11.5% in the past month (pro-rates to an annual 138% out performance). So this is where the fund out performance really happened; especially with some short ETF exposure in the right areas (financials, real estate, and Russell 2000), and cash on hand to take advantage of dips along the way where very short term fire sale prices were offered.

With that said, it's 1 quarter and I treat the scoreboard 0:0 entering the next; taking it 1 quarter at a time. While I don't expect this quarter's degree of out performance to continue (it would be nearly impossible with a 50 name portfolio), I do hope to continue to put a licking (of some degree) to the major averages moving forward.

I like to go back and review the major hits and misses to better learn and evolve as an investor, so here is a quick review of major themes.

The Good

1. Sector selection was excellent - every major sector I over weight in the fund had an above average rally, save for deep sea oil drillers.
2. Individual stock selection was excellent - in fact a simple buy and hold strategy in the face of a relentless mid quarter rally would of worked better than any trading as some stocks made moves beyond my imagine as 'the market' caught up with the reality on the ground, and pushed more and more money into those specifics names/sectors.
3. A great string starting at end September through early November of over weighting the top position in a 6-7% of fund in stocks that went on tremendous 20%+ short term runs - from Ciena (CIEN), to Blue Coat Systems (BCSI), to Mosaic (MOS), to CF Industries (CF).
4. An overweight in top 10 positions of sectors that really took off under the radar such as coal, networking stocks, fertilizer, select "less cyclical" oil services, et al.
5. Having cash on hand in back half of quarter to buy dips, and also holding short ETFs in the correct (weakest) areas of the market. While it would of been preferable to short individual names, I am prohibited so this was the best scenario considering what is available to me.
6. Culling laggards quickly and not letting them detract from performance - many either tanked near after being cut, or stalled most of the quarter.
7. While not heavily exposed to China directly, much of the portfolio benefited from an indirect global growth theme, and my single country ETFs (Singapore, Hong Kong, Malaysia) did well, although they weren't huge components most of the quarter (mostly around 1-1.5% of fund each). Further, exposure to India helped late in the quarter.
   
8. No huge earnings blowups in major positions - although Blue Coat Systems (BCSI), a major position, has been dragged down severely by weakness in sector brethren.
   

The Bad

1. Taking profits much too soon on some early winners in the face of a very choppy August - for example early in the quarter I had a heavy over weight in infrastructure stocks, such as McDermott (MDR) and Foster Wheeler (FWLT) and cut them as they began to rise - since they had fallen so steeply in the August dips - only to see them to continue to rise in magnificent fashion, meaning I left a lot on the table. The same could be said for some oil service stocks such as Core Laboratories (CLB), National Oilwell Varco (NOV), and FMC Technologies (FTI) - all were cut back down too soon, and profit was left, in large sums, on the table as these were major positions early in the fund life.
   
2. Having ANY short ETF exposure (it would not be disciplined to not have any) in the mid quarter unrelenting rise - but it did work against performance
3. Not enough exposure to Chinese equities which went on a barn storming rise this quarter - the small cap stocks that rose 150-300% on nothing but momentum (and subsequently have fallen by nearly as much) are not the ones I am discussing, but a lot of mid and large caps rose to levels I was shocked at (i.e. PetroChina now is the 2nd largest company in the world). I underestimated the power of momentum lemmings and the fact valuation means nothing to these people. I was also blown away large cap stocks could make such huge moves, tacking on literally $100+ Billion of market cap in weeks.
4. No exposure to the very hot dry bulk shipping sector despite debating it; and little exposure to mining/metals which again shocked me at the ability of large cap stocks in the size of $100-$200 Billion to make such tremendous moves.
5. Underweight "big cap" technology - some exposure to Apple (AAPL), some minor exposure to Google (GOOG), and no exposure to Research in Motion (RIMM) - all left me lagging on an area I like but valuations have been quite rich.
   

The Ugly

1. An absolute disaster in the solar sector as I outlined in the middle of this post. While nailing the sector, my stock selection could not of been worse during the quarter - choosing "value" stocks over "momentum stocks". The icing on the cake was selling a large stake in Yingli Green Energy (YGE) in mid teens in late August - the stock is now in the mid $30s - while I stand behind the reasoning for my reluctance to keep the position, the market is not interested in any points of logic in this sector right now - chasing up stocks at any valuation is the game. Again, I underestimated the power of herd mentality of a 'hot concept'. And left easily 4-5% on the table if I had thrown out rational thinking, and gone with the herd. :)

So overall, my concept for this fund is to keep major core positions in stocks I believe in the long run, and then cull when things get too hot and heavy, and cut back when prices get more reasonable. Since I was not buying in enough scale early in the quarter as I adjusted to "running" a million dollars, my positions were too small, and when I cut back on winners early there was little left of the position as the stocks continued on their runs. Once I adjusted in the back half of the quarter this strategy began working much better.

Below is the fund weighting by sector as we exit quarter 1. I last looked a few weeks ago, and you can compare the weighting at that time by clicking here.

At the time I was bit overwhelmed at how heavy my "crude oil" exposure was - I had heavily invested in oil services and deep sea oil drillers at the time. I've decided to cut that back some as oil heads to $100 and some of the majors this week are showing some weaker than expected results off their very weak refining margins. So I've cut that portion of the portfolio back 17.9% to 12.1% of portfolio. While I am a long term 'crude goes up on supply/demand' issues, I am a bit concerned at how crowded of a trade this is now as so much speculation and liquidity has flown into crude of late - that said with a weaker dollar inherently pushing up the price, it's tough to make a case for a huge decline but I'd assume some might be in order when we hit the psychological $100 level.

Other major changes have been to increase infrastructure exposure (+3.5%), much of which I did Friday of this past week which is a theme I see continuing into 2008. Agriculture is another long term bullish play and one I feel better protected from any global slowdown talk that would hit sectors like dry bulk shipping and metals/mining. However the stocks in general did not pullback at all during this past hectic week (which bodes well for their future performance) - but did not allow me to increase my exposure much. Last, technology is up as some of my favored names have pulled back (Blue Coat Systems, Ciena) and I added a near term stake in Yahoo.

Other reductions were in the solar space - inability to find any value at these prices and a near term drop in crude could adversely effect the psychology of this group. Also this group reports earnings so some 'reality' might hit this group - not sure though - momentum begets momentum and until momentum stops, it's hard to call a stop in a sector. I just cannot find value except for in 2 names, so I am going to step aside from now and reign in exposure. I cut back on India due to a huge short term run in individual names in the past week, and also cut back on financials as my 2 main names, Mastercard (MA) and Blackrock (BLK) have had great post earnings stock performance.



As for the blog itself, its grown from just me and maybe reader 'msb' reading it in the early days to getting about 500 unique readers a day in the past week (during weekdays) which is pretty sterling growth for 3 months. (p.s. if you happen to read often please download this add on to your browser, otherwise Alexa.com does not count you as a reader either on this site or any other blogger's!) Thanks to the support of the 3rd party publishing sites which publish my articles and hopefully it can continue growing in the future. And thanks to continued readership from viewers; I realize there are a lot of financial sites to choose from (I know, I read half of 'em!), so being selected as one of your choices is appreciated. While this has been more than anticipated work in terms of 'typing' and conveying a lot of thoughts in a "concise" matter, it has been a fun ride.