Performance in 1st Quarter 2012

Ignoring currency changes but accounting for trading expenses, the fund returned 10.83% in the 3 months to 31 March 2012.  Over this same time period, the S&P500 returned 12.55%. 

It’s not surprising that in a bull market (9^th best 1^st Quarter in S&P500 history) the fund underperformed, but it does mean that simply buying an index fund and forgetting about it outperformed all the carefully selected stocks in the portfolio.

The best performers in the portfolio were:

• Aperam (APEMY) (+29.56%),
• Teekay Corporation (TK) (+24.87%),
• NAPCO Security Technologies (NSSC) (+22.05%),
• Microsoft (MSFT) (+21.29%),
• Dolby Laboratories (DLB) (+21.04%).

The worst performers were:

• Multiband Corporation (MBND) (-8.48%),
• Clearwater Paper (CLW) (-2.96%),
• Gyrodyne (GYRO) (-1.90%)

Warren Buffet sent me a secret message

Back in May Warren Buffet did a video interview

Reuters: You’re always looking for value. What about Microsoft? I know you say you don’t do tech. But given that it has a forward P/E right now that’s below 10, it seems like a value play.

Buffett: Yeah. I agree with you. I regard myself as precluded from either personally or having Berkshire buy Microsoft because if something good happened the following week people would think Bill had told me. So I just see no way that we can ever buy Microsoft and be sure that we won’t look like we had some kind of inside information or something. So it’s off limits. It did look pretty cheap.

I was going to write up all the fundamental quantitative stuff that makes me like MSFT.  But then TurnkeyAnalyst did an amazing job so I'll just send you there.

The conclusion is:

So overall what are the quantitative data telling us about an investment in MSFT?  Perhaps its most distinguishing feature is that MSFT is a cash cow, earning high current and normalized returns on capital and assets based on the wide defensive business moat that its Windows operating system provides.  While in the longer run, MSFT may face significant competitive pressures, it is unlikely to be dislodged from its strong defensible position in a dramatic way any time soon.  There are no obvious red flags from any of our short screens, and the company is hugely profitable and stable, so there is a low risk of financial distress.  The stock looks cheap here, and its strong magic score suggests that you are not overpaying for this very high quality business.  If you are looking for a safe bet in a high quality company in the technology space, MSFT would appear to fit the bill.

We bought MSFT for the fund in early November 2011.  It has appreciated 9% since then and paid a dividend of 0.8% of our cost.  We bought after reading Warren Buffet's comment and taking a look at the return on invested capital and earnings yield.