Negative K-Swiss sentiments

I just listened to the K-Swiss conference call and came off with very negative sentiments.

Not only does management seem to be ignoring the fact that its domestic business is continuing to free fall - spent more time talking about athletes it has marketing contracts with than about it negative growth and how to fix that - Royal Elastics, who's 2006 profitability was part of my original thesis, continues to lose double digits cents per share.

I'm heavily disappointed with this - as is the market who has sent its shares down $5 in the last week - and almost sold my shares this morning.

However management has proven itself able to continually produce good returns on capital, its returns remain above the rest of the shoe industry at 21%, and is now trading at only 12x cash flow.

Thought I may have been stupid enough to hold my shares above $40 I'm not stupid enough to sell them at $23 when its the cheapest stock, earnings wise, I own and has a history of good capital management - it still has the best returns and best balance sheet in the industry.

Adding Cash

I will be adding $3000 to my account in the next week and will be using this to increase current position sizes and start new positions in two stocks I've been analyzing over the past few weeks.

Concentration by Default

My apologies for the delay from the last post I've worked a few 60+ hour weeks and am just finishing up a vacation to Chicago to get a tour at the Chicago Mercantile Exchange.

While I've been in Chicago and on the plane over here I've been able to read most of the VII issues, three books and numerous fund shareholder letters. Basically I got a refresher course on superinvestor methodology.

Going through all of this is making me think of a new definition of portfolio concentration, a portfolio should not be concentrated for the sake of being concentrated.

If Joe does the same amount of research on the five stocks in his portfolio as Mark does on the fifty stocks in his Joe will not get better returns just because he owns less stocks, in fact it's very possible he could lose most of his money.

Just being concentrated is not enough one most do the adjusted research as well.

Portfolio concentration is not something that should be the focus, but the sum of finding great companies at discounts.

Mohnish Pabrai has repeatedly said that he can only find two or three great opportunities a year.

If one's standards are up to par with superinvestors portfolio concentration should come by default because only a few ideas a year can possibly be found.

Buffett has said in the past that holding more than twenty investments is the mark of someone who doesn't or doesn't think they know what they are doing. Someone who claims to be able to find great ideas at will and buys ten, twenty or thirty new companies a year is suffering from either supreme overconfidence or lack of investment standards.

One thing I've also found is that diversification is necessary, unlike what I have preached in the past I believe some kind of difference is needed in investing. If all investments are correlated to one factor it's conceivable that one big event could take down your whole portfolio.