Write an introduction to the financial report

Portfolio for Risk Tolerant Investors

An Intriguing Trading Experience

Abstract

The six-week trading began with a thorough investigation of the companies that showed a steady growth over a long period. Factors that determined the growth were analyzed and informed investment decisions were executed to reflect the market conditions. Investment strategies were devised for optimum capital growth and knowledge was gained throughout the trading period as to how investors can manage risk through various trading strategies. Power to analyze companies with consistent substantial margins and ability to invest in them enabled understanding of timely decision enhancement techniques for future investments.

Portfolio for Risk Tolerance Investors

An Intriguing Trading Experience

Introduction:

Briefly describe the following. What have accomplished in the project? What are your investment goals, your investment benchmark, and trading strategy? How did your fund perform relative to the market? Specify some main performance metrics, such as the Sharpe ratio. At the end of your Introduction, briefly lay out the organization of the remaining part of your report.

The Fund

The idea is to replicate Warren Buffet’s half a century famous Berkshire Hathaway’s investing strategy. Berkshire Hathaway Inc. is the fifth largest company in the world. It is a well-diversified company, an American multinational conglomerate, that owns (in full or significant percentage) insurance companies, pharmaceuticals, food, jewelry, international, jets, newspaper, electric, gas, and more and acts like an index itself. The four largest investments are Wells Fargo & Co., Coca-Cola Co., International Business Machines Corp. and American Express Co., which Berkshire Hathaway owns 9%, 9%, 6% and 14% of, respectively, making Berkshire Hathaway the largest investor in each.

Recently, Berkshire Hathaway has invested in undervalued companies such as General Motors Co., Verizon Communications Inc., Suncor Energy Inc., and more and joined Prudential Bridgeport Realtors. Based on the company’s net income increase year after year, and by consistent substantial margins, we continued to believe that investing in Berkshire Hathaway class A stocks would be a good investment strategy. The start-up fund was initially invested in Warren Buffet’s Berkshire Hathaway stock, which is considered as the foremost business strategy as a mutual fund in investing.

However, the goal was not to construct a 100% risky portfolio, hence the fund was invested in a managed mix of 60% stocks and 40% fixed income securities under normal circumstances. The main holdings of our fund include companies such as Health Net Inc.- a health care service company (HNT), White Petroleum Corp. and Oasis Petroleum Inc. (OAS & WLL), PIFCO ETF- fixed securities (BOND), Berkshire Hathaway (BRK A), and Church & Dwight Co.- a manufacturing company (CHD). Efforts were taken to include securities from both large and small market cap to understand the impact of new information.

Consideration for these stocks is primarily because Berkshire has outperformed the S&P 500 for the past five years with a low beta than the S&P index. In addition to large market cap of approximately 353B, Berkshire class A shares sell for more than 218K because they have not had a stock split since Warren Buffet took over the company. All the earning have been retained and no dividends are paid out, but this has caused to reduce the liquidity of the stocks in the market.

In addition, beta measure is a good risk assessment tool for short-term trading periods. The beta of BRK (.51), PIFCO ETF9 (-.07), CHD (.46), and HNT (.86) are below 1 and hence less volatile in price than the market. However, the other two investments in oil and petroleum companies, OAS and WLL have a beta of 1.91 and 2 each and are exposed to high price volatility. A diversified portfolio with more investments with low beta values, that project less risk and two risky investments for higher returns was thus created. (include beta, sharpe ratio of PF) However, one disadvantage to relying on beta is that it does not include any new information.

On March 26th Kraft foods crafted a deal with H.J. Heinz Co. that had Warren Buffet’s Berkshire Hathaway as their largest shareholder holding a 25% stake. This caused the price valuation to increase immediately, but within days the stock prices were effected due to information such as predatory loan practices at Clayton Homes, the nation’s largest producer and financier of manufactured homes, which is owned by Berkshire Hathaway. In addition, Berkshire’s liquidation of all its stake in POSCO, a Korean steel maker company, had a negative impact on BRK stock prices. More than halfway into our trading period, Berkshire Hathaway Inc. (BRK-A) performed above average with a weekly performance of 0.48% moving forward with a quarterly performance of -3.00% and a 52 week low of 19.65%. Market timing was one of our strategies to buy and sell stocks and decisions were made based on future price predictions and fundamental analysis.

Unfortunately, Berkshire Hathaway was the major loser that degraded the overall returns of the portfolio. The daily negative returns had a significant impact. The S&P 500 index and BRK stocks were closely positively correlated in the beginning of the trading period. Although we made a profit of .003% by short selling the securities in the beginning, we later encountered that the number of short seller against Berkshire increased predicting a fall in prices. We short sold the shares to prevent further loss by placing stop loss order at 217K. Due to simulator rules, a time delay of 15 minutes also contributed to lower returns on 25% of the fund. However, after the major events in the Berkshire’s Inc., the amount of correlation decreased between the market and BRK, thus becoming our portfolios major loser. (Before and During the Trading Period- Table 1)

On the other hand, major winners (Table 2) include two small cap firms Oasis Petroleum Inc. (OAS) with the market cap less than 2B and PIMCO ETF (BOND) with a market cap less than 11B. The total returns on each of these winner investment securities were 30% and .27% respectively. Market timing strategy had been implemented to decide if the stocks should be sold or held longer based on new information and predictions for positive returns. For example: OAS had been held throughout the trading period for total returns of more than 30%. On March 25th, two days after our market order buy of 15000 shares, increase in oil prices due to euro strengthening against the dollar resulted with OAS stock price to increase by 1.21%. In addition OAS has priced an upsized underwritten public offering of 32,000,000 shares of common stock for total gross proceeds of approximately $409.6 million. With a 30 day option to buy these stocks, the price increase by .68%. The decision to hold the security was firm when about 16 analysts agreed that the stock price would reach $ 18.13 in the short term with a deviation of $3.52.

Though not significant profits were made, about .003% return on Berkshire Hathaway, a large cap firm, was achieved by short selling them when the market started falling due to firm risk. Time delay of 15 minutes had a significant impact when short selling and market buy orders for BRK with a high P/E ratio 17.82. Holding BOND and OAS had resulted with an average return of 22%. However, OAS with lower P/E of 3.28 (BOND has no P/E value) did not help for higher returns even with 30% increase in its total returns.

you can use this part in the intro as answering trading strategy Q.

Trading strategy-

Our core investment strategy is to replicate Warren Buffet’s Berkshire Hathaway class A securities, which are diverse, has higher revenue, and makes attractive investments with an aggressive potential to expand. Similar to Buffet’s dogma, our benchmark is S&P 500 and repeatedly BRK has outperformed S&P 500 with an astonishing return of 693,518% from 1964 to 2013. We implement other strategies as market timing and technical analysis to maximize expected returns and to minimize risks.

Appended Tables

Table 1: Major Looser: Before and During the Trading Period; S&P 500 vs BRK

Table 2: Major Winner: OAS vs S&P 500

OAS: More than 30% increase in returns

PIMCO ETF Trust (BOND): .27% increase in returns

Portfolio Management Project

An Intriguing Trading Experience

Four investment analysts manage a mock portfolio worth $1,000,000 with a margin of $1,000,000. Interesting strategies are implemented within a short time frame of six weeks for capital appreciation with prudent approach to protect capital from undue risks.