Wednesday, February 17, 2021

Resolute in Selling

As the market has run, I've been selling securities where I think margins of safety have gotten small. When Mr. Market throws caution to the wind is when I like to fortify my balance sheet to take advantage of any hurricanes that may eventually turn up. One of my recent sales is of Resolute Forest Products (RFP), which I discussed as an investment a couple of years ago.

I can't really predict what's going to happen in a commodity industry like this, but nor do I believe Mr. Market can either. For this reason, I like to buy at huge discounts to book, as such discounts industry-wide tend to prevent further investment, encourage closures, and generally bring pricing and thus profits back to an industry.

Though I made a small profit, it was for less than what I would consider a reasonable return. I probably didn't wait to get enough of a discount. However, this was a 10-bagger for anyone astute (i.e. not me) enough to pick it up during the market panic that took place almost a year ago. At that time, the risk of bankruptcy seemed like a real possibility, before housing sales took off and buoyed anything remotely connected to that sector.

I continue to think buying basket positions of cyclicals (as I did here) can pay off in the long-term; even though this particular investment doesn't constitute the best evidence of that, this strategy has worked well with home builders, financials and shippers, both in my portfolio and in the market's historical precedence. Of course, the bankruptcy risk is real, however, which is why the "basket" part is so important; Hornbeck is an example where my shareholdings paid the ultimate price.

Disclosure: No position

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