Walter Energy - 13%

Walter Energy (WLT), formally Walter Industries, is a coal company that specializes in coking coal used for making steel which it sells to China. Originally, a home building company from Florida, Walter got involved in the coal business when it bought 4 mines in Alabama n 1972.  After going private in 1988, it went public again in 1997.  Over a year ago, Walter spun off its home building and finance business and changed their name from Walter Industries to Walter Energy in an effort to re-brand themselves.

Much like Red Hat, this is a stock that takes up a large percentage of the portfolio because it was bought cheap and increased in value, in this case rapidly.  Unlike Red Hat, I don't plan on de-investing any time soon.  First, this company appears to be run extremely well and efficiently making smart decision after smart decision; second, its market does not appear to be going anywhere as China needs its coal; and third John Paulson, the shrewd investor who correctly predicted the collapse of the housing market and, more importantly, figured out how to profit from it by selling mortgage backed securities short, recently added this diddy to his portfolio.

Also, unlike Red Hat, I cannot really pinpoint when and where I first heard about Walter.  It was around 2005 and I believe I started tracking about ten stocks involved with China.  I purchased my first bloc at $30 and watched it jump to over $90, then plummet down to $37.  In some cases, wild swings are a major turnoff, and perhaps if you are protecting wealth instead of trying to accumulate it, they should be.  However, I viewed the $90 price as a realistic target and bought my next bloc at the aforementioned $37.  When it started climbing back up, past $90, I figured it would do what it did before, and I put my STOP order in when it hit $94 for $89.  When it went up to $109, I changed my STOP to $101.  When it topped $120, I canceled the Stop order altogether and now expect the 4 or 5 dollar swings a day. With a current price target of $150, its recent purchase of Western Coal (overwhelmingly improved by their investors), no analyst giving it a worse rating than "neutral",and  nuclear power now suddenly on the wane, I see no reason to do anything but hang on for the ride.

Red Hat update: 2 days after my post, Red Hat announced a 25% quarter-over-quarter increase in sales, beating the analysts predictions.  The stock increased 18% in one day fulfilling my predictions in much less than the 6 months to 2 years I had originally thought.  This is par for the course. No one understands how they could possibly make money so they get trashed and everyone claims they are overpriced.  The price goes down until the quarter results come out which they invariably beat and the price goes back up.  However, as I promised, I need to put my stop order in and de-invest in 15%-20% of my holdings.  I think 20% is a decent target for ones maximum percentage of one holding in their portfolio. This was historically about the percentage that coke was of Warren Buffet's portfolio, although that's up to 25% more recently.

Red Hat - 28%

Back as a graduate student in the mid to late '90s, I noticed large empty boxes with the word "Dell" stamped across them.  Everywhere I looked, stacked up in all the corners of each and every professor's lab.  What was this Dell?  Well, I soon learned they were basically a mail order, build your own desktop (or laptop) computer company, and they were being purchased in bulk by most every research advisor at my university.  I talked to my uncle who was a bit ahead of the computer curve (he had had a Prodigy email account when they first came out) and told him "Dell" is the computer company of the future. He scoffed at me and informed me that, no everyone was buying Gateways.

Six months later, I saw my first Dell TV ad.  A hip young lady was showing off how she had custom built this computer and ordered it online.  Because she was young and hip, the computer was of course designed with sate-of-the-art music software and we, the television viewing public, were privy to all her hip young tunes.  Gateway fell off the map and I learned an amusing and interesting lesson: look at what the professors were buying with their grant money.  Whatever they were buying, basing their career on, using what massive funding they had procured for the sole purpose of building their ideal labs, was bound to be of the highest quality and endorsed by those in that field.  So, soon after the Dell mania spread, I looked at what the next wave might be.

Now at this time, we were using HP and SPARC workstations with unix, but like most of the younger professors, my advisor was upgrading and switching semi-regularly.  Like everyone else she was buying Dells, stripping them on the pre-installed Microsoft OS, and loading them up with Linux - Red Hat Linux.  Thinking back to how great it would have been to buy Dell when the boxes were first showing up, I immediately investigated the prospect of buying Red Hat. 

Alas, Red Hat was not at that time public, but its IPO was on the horizon, indeed within a few months of my brilliant brainstorm.  I looked into it, decided the $40 offering was above my pay grade, and that I couldn't get in at the IPO anyway.  Riding the wave of the dot-com tech boom, Red Hat proceeded to rise to $120, and then when the bottom fell out, Red Hat went with it.  Now was my time to pounce.

As a poor graduate student, I had little spare cash to buy anything, but whenever I could, I stockpiled Red Hat, buying between $3.60 and $8 over the next couple of years.  Incidentally, this went against the advice of every person I spoke with, many of whom were told by their stock advisers that "Red Hat can't make money".  By 2003, Red Hat had posted its first profit and now, many many years later, Red Hat has proven to be resilient, recession proof, and is still being loaded on all the scientist's Dell workstations.  They give their product away and charge for premium services or premium versions of their free product.  Many companys and governments pay for this service or for their premium products because it's about and order of magnitude cheaper than other IT solutions and because it's open source, it may be customized for each individual business.

Now, at 28% of the total portfolio, I am well aware that I am way over-invested in Red Hat, primarily because I bought it early and often when it was cheaper.  I know I would be advised by any risk management expert to de-invest and spread some of that percentage around and that I will in the medium term future.  The only reason I don't right now is that I don't particularly want to suffer the tax consequences all at once, especially as I have two major sell-offs planned this year.  Furthermore, although it has dropped recently to around $39, I fully expect it to bounce back at least to $45 in the next 6 months to 2 years and would probably wait to sell some when it reaches that target.

A Prequel

The Random Walker takes its name from "A Random Walk on Wall Street" and features a semi-stream of conscious on investing and my investments.  This is a way to keep on top of my investments as well as a way for my wife to see what we own and why we own it.  "Diffusion Monte Carlo" is a numerical methodology for solving complicated physics problems using statistical methods.  Many of these methods include what is known as "Random Walkers".  Unfortunately and somewhat amusingly, all variations of "arandomwalk", "therandomwalk","randomwalker", etc., were all taken, mostly by people who haven't posted since 2003.

Highly influenced by "A Random Walk on Wall Street" , I'd like to think of myself as a value investor, although I have a small portion devoted to "Castles in the Sky" (very small).  As a value investor student, I find the Motley Fool to be one of my favorite resources, and I also read Forbes, The Street, Seeking Alpha, etc.  Although I don't buy into the Motley Fool official recommendations (Hidden Gems, Game Changers, etc.), I do find their subjective articles comparing company with company and giving information like cash to debt ratio, and other things that may appeal to me personally, highly helpful.

The first so many posts will be each individual stock that I own and why it was purchased starting with the largest percentage of the portfolio to the smallest.  From there, we'll play it by ear.