Mid-Year Letter 2019

2019/07/14

To my partners,

For the first half of the year, the S&P 500 index, with dividends reinvested returned 17.2% to a passive investor. Lembirik Group returned 9.24%.

This outstanding performance of the S&P 500 was caused in major part by the tech sector and macroeconomic events rather than fundamentals. According to an article by MarketWatch, value stocks are trading at the biggest discount in history, even cheaper than during the dot-com era! What helped us achieve a positive return YTD is our holding of Micron Technologies.

MU was a Phil Fisher stock selling at a Ben Graham valuation. With a PE of 3, P/B of 1 and a very healthy balance sheet, this was a no brainer. We built our position at an average price of $32.88, at this writing the stock is trading at close to $40 for a quick 21% return.

 Knowing when a common stock is cheap is an easy process, we study a company’s financials, analyze its quality of earnings, balance sheet and cashflows and calculate the intrinsic value. On the other hand, knowing when to sell is the most difficult part in the investment process.

Our approach was to sell when the stock reaches its intrinsic value, this philosophy affected our performance (hence our capital) in a very negative way. An example is our largest holding: Capri Holdings (Formerly Michael Kors). We bought the common stock at an average price of $32.73 during the second quarter of 2017. It went all the way up to $75 before giving all that up and settling back at around $34! Two reasons we never sold, one is that it has not achieved intrinsic value and two because we wait at least 366 days to pull the trigger in order to avoid a larger tax bill. This was a big mistake! Now we will sell as soon as we reach 75% of intrinsic value, wether this happens in 3 years or 3 months. However, we will never engage in short term trading just to lock in a profit, we are in the business of investing and not speculating.

The worst performance of the S&P500 was the retail sector and our portfolio is 40% invested in it. We are not bothered by this temporary “valuation”, we believe that our reasoning is sound in selecting stocks in this sector and this short-term glitch will correct itself, we are very optimistic.

These days, what’s driving markets are the trade wars, presidential tweets, and analysts upgrades/downgrades among other things. Although these events might be important to some, especially to short term investors, to us they are meaningless, we have a long-time horizon and “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

We cannot opine on the market’s direction for the second half of the year, we don’t possess any psychic skills, but we believe that if markets perform the same way they did YTD, we should expect great returns.

Finally, for new investors interested in becoming partners, the new minimal capital requirement is $50,000. This restriction does not apply to current partners, who may add capital throughout the year at no minimum increment.

If you have any questions, or if something was not clear to you, I am always at your disposition.

 

Regards,

S. Mehdi Lembirik

Managing Partner

Lembirik Group Investments