Gaffer's Portfolio 

April 30, 2010

Gaffer's portfolio is demonstrating the true value of diversification and rebalancing. Three of its 21 stocks have been in the headlines with negative stories in the past month or more. 

Goldman Sachs has been charged with fraud by the SEC and today a criminal investigation was announced by the Department of Justice. The stock closed at $145.20, down from $170.63 at the end of last month. 

Rebalancing at the end of last December reduced the holding by 29% after above average gains that year. The stock was originally purchased for $84.39 16 months ago. 

Toyota has now recalled more than 9 million vehicles in recent months, the latest being the recall of 50,000 Sequoias built in the early part of the 2003 model year for upgrading of the stability control system. The company agreed earlier this month to pay a fine of $16.4 million imposed by the Transportation Department. The department claimed the company deliberately hid information about one of its pedal-related recalls. Toyota has not admitted fault in the complaint. 

Shares closed at $77.09, down from $84.16 at the start of the year and from $80.42 a month ago. The stock was bought for $65.44 16 months ago, two months before the bull market began. 

Wal-Mart was also in the news this month. A lawsuit against the firm has been simmering quietly since June 2001. In 2004 a trial judge classified the case as a class action. Wal-Mart's appeal against that ruling was disallowed April 26 and now Wal-Mart will appeal to the Supreme Court. 

It all started when Betty Dukes and six others sued on the basis of gender discrimination. The suit claimed women are paid less than men and it is more difficult for them to win promotions. The case now involves some one million female employees and if Wal-Mart loses could cost the giant retailer billions. 

Without a fully diversified portfolio any one of these scenarios might be enough for several sleepless nights by those who hold these stocks. Given diversification, the loss has been fractional and nothing to worry about. Other stocks in the portfolio have made up for those losses.

What we do need to look at is the longer term. Will Goldman Sachs fail? As we have seen in the past year, the government cannot allow it to fail given the horrendous damage it would do to the economy. It is still too big to fail. So the SEC slaps them with a fine of, what, $1 billion? The company had net earnings of $3.46 billion in the first three months!

Totally separate from Gaffer's conservative system, in the opinion of many Goldman is a buy at these reduced prices. As an investor with a diversified portfolio, I am not concerned.

What about Toyota? It has built good cars for a long time and has built a loyal following. Yes, the company has received a black eye…and ultimately that's probably good for it. It will keep an even sharper eye on testing, quality and performance in future, and the recent fine will probably keep them more honest. I am not concerned about Toyota either. We simply use dollar cost averaging to buy more shares than we otherwise may have done.

But what about Wal-Mart? That is a different kettle of fish. People might think it is too big to fail, too, but is it? The company, bought late in the recession as a defensive buy, has not performed well at all. Now it is looking to develop much smaller stores to fit into downtown areas in larger cities to boost profit. Maybe that will help.

The court case is the problem, though it will take years to resolve one way or the other. I have not seen an estimate of what it could cost the company if it loses. One million employees awarded wage increases going back almost 10 years? I don't care how large the company is, that would hurt.

I will keep a close eye on this one; there may come a time to run for the exits – but not just yet.