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Recently I liquidated my holding in SPY realizing a decent return. Why did I choose do this? Well, my investment philosophy, which is closely aligned with Buffett’s (hopefully), is rooted in investing for value. Purchasing companies that are trading at a substantial discount to intrinsic value, book value, or earnings is central to this philosophy.  In my opinion, SPY has become overvalued and other opportunities warrant the capital originally allocated to it.  For example, Mazda Motor corp is trading at a discount to book value by nearly 30% and has a stellar balance sheet.  Another great opportunity is Intel, which is trading at 12x earnings and 3.2x book value compared to 23x earnings and 3.35x book value to SPY.   

You might be asking how do I reconcile my decision to liquidate my position in SPY while I continue to own equity in Alibaba and Tencent.  These holding do not represent value in the traditional sense, but their competitive “moat” makes up for these shortcomings.  Alibaba and Tencent dominate the Chinese domestic market, the second largest in the world.  While, both companies trade at a premium to earnings their competitive advantages compensate for this premium.  However, their shares are hovering close to a value that represents too large a premium and may have to be liquidated soon. 

When buying a company as an investor you take a risk.  As a value investor, we try to mitigate these risks by understanding the underlying value of a company.  If a company were to liquidate, their value in liquidation would be determined by their net tangible assets or their net asset value. By understanding the net tangible asset value, we can determine what our margin of safety is.  If a company’s market capitalization is lower, then it’s net asset value it is trading at a discount.  If a company’s net tangible assets are double the market capitalization of the company that means for every dollar of equity you buy you get $1.5 in assets.  That represents a 50% return on capital.  Therefore, Mazda MZDAY: (%) represents an attractive investment at its current price. I will liquidate my position in this company after its market capitalization reaches its net asset value.  At a 50% discount on tangible assets, I would be hard pressed to find a more attractive use of my capital.