eBay, Google and greed

It has been a good couple of weeks for the eBay share price (SP.) After the quarterly earnings release on Oct 20th the SP plummeted to $38 but in the last two weeks it has climbed back up to $44. The annoying thing is that I am not sure why! This is the problem with observing the market from a distance (about 3000 miles to be precise!) I remember a scary week in April when the SP dropped like a stone for about a week for no obvious reason. Now it is doing to opposite. I did read a report that currently the number of listings is beating expectations. Sentiment is improving anyway and that has to be a good thing.

My aggressive portfolio is composed mainly of Google and eBay. Google has been a fantastic holding for me this year - I have managed to capture a rise of almost %100 over two periods of holding this one. The eBay SP has only just turned into a profit on my buy price back in January. However, given a choice between the two on a share to buy and hold for ten years I would choose eBay. Most of Google's revenue comes from advertising and I am slightly uncomfortable with that. Here are some reasons:

1. Advertising budgets are one of the first things to get hit in a recession.
2. Yahoo, Microsoft, IAC and others are all going for a slice of the same pie. There is only so much advertising money to go around.
3. Selling advertising means you are selling to businesses rather than consumers. eBay's revenue comes from businesses and consumers and that gives them more growth opportunities.

Of course Google is going to try to start getting revenue from consumers one day. But the idea of regularly getting an invoice from Google seems a long way off to me.

So Google has been the success story this year (in terms of SP) but eBay is my favourite holding by a long way. With a trailing P/E of 60 eBay does seem risky. But this is a company that is growing at 40%, would do fine in a recession and has no real competitors in most of its markets. How many companies like that do you find?

This brings my thought processes to a final conclusion: should a large portion of my mortgage portfolio go into eBay?

My mortgage portfolio is currently invested in British blue chips, with up to 25% in US blue chips. But the British blue chips are so slow! Vodafone's SP is about 5% above what it was almost 2 years ago when I first bought it. That is a major market underperformance. Maybe the SP will jump up if larger dividends are announced in the interim report next week but I am getting impatient with VOD (again!) Tesco is down 3% on my purchase price in the summer, BAA is up 3% and Royal Bank of Scotland is flat. The real gains have been in the US blue chips. I made a quick 15% on Motorola and have recently made a quick 8% on Microsoft.

So nearly all my success is coming from the other side of the Atlantic. There seem to be so many high growth companies over there. The few decent ones on this side (like ARM) are over-priced because of the lack of alternatives for UK investors. So maybe I should adjust the rules of the portfolio to allow a portion of it to be in high growth US companies. Is this falling into the greed trap? Or is it just common sense for a portfolio that has almost 20 years to run?

I am inclined to think it is the latter.

So here are the new rules for this portfolio:

Blue chip means: trailing P/E less than 30, market cap. over £2 billion, yield over 1% and non-cyclical.

1. At least 50% in British blue chips.
2. Up to 25% in foreign blue chips.
3. Up to 25% in high growth companies.

As I have said before, the great thing about having maximum allocation ratios is that if one of your holdings doubles you are forced to take some of the profits. This would have meant avoiding some of the market downside in a situation like the dot com bubble burst.

So I have convinced myself: the mortgage portfolio needs to be more aggressive. Yippee! It is nice when you are managed by yourself!