Generally speaking, there are three categories that comprise my portfolio:
Moats
First, I have what Warren Buffett has famously dubbed, the Generals. These are companies that have few competitors; strong, durable competitive advantages; high profit margins, ROE, and ROIC; minimal capital requirements; and steady cash flows. In other words, these companies have wide moats and should be around for a rather long time. To be clear, when companies like this trade at a discount, I like to pick up as many shares as I possibly can. An example of such a company is MasterCard. I first purchased shares of MasterCard shortly after they went public. Cost basis is just under fifty bucks a share. Mastercard met all of the above criteria. Due to some pending lawsuits, the shares were completely mispriced, which gave me the opportunity to load up on Mastercard's shares. Since then, I've sold some shares here and there to pursue other opportunities. But MasterCard still makes up a significant part of my portfolio.
Events
When I'm having trouble finding generals, which is quite often given their business superiority, I search for special situations. These include, but are not limited to, spinoffs, bankruptcy plays, mergers and acquisitions, and liquidations. For example, I currently hold a position in Carrefour. Partially because I believe they will spinoff their company owned stores into a publicly traded company. Such a move would certainly highlight the value of all the real estate that they own. General Growth Properties, an investment I made as soon as they entered bankruptcy, falls into this category as well as my next category. General Growth spunoff shares of the Howard Hughes Co. late last year. I continue to hold shares of HHC as I believe they have tremendous assets. I also believe Chairman Bill Ackman will create substantial value for shareholders.
Options
I'll often take very small positions in options. These could be traditional options with strike prices and expiry dates or these could be "options" in equity or preferred stock that have been left for dead. Back to General Growth, when I purchased General Growth it was trading at sixty one cents a share. I took a small position in the company knowing that shareholders could get wiped out. But I also knew that if the shares remained intact, shareholders would make multiple times their money. A similar situation can now be found in the Freddie and Fannie preferreds. The preference shares currently trade in an approximate range of three to five percent of par. Depending on what the government decides to do, these shares could become worthless. However, if Freddie and Fannie can work things out with the government and begin paying the divided to the preference shares or if any other positive outcome of that nature occurs, investors will likely reap multiple times their money. So while such investments are not options in the traditional sense, they have option like tendencies. Small positions such as the ones mentioned above can have a significant impact on the portfolio when things workout. Small being the key word, should things not work out, it will be of minimal impact.
