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Stock Strategist

Ultimate Stock-Picker's Portfolio: Performance Update

Despite a pullback, our performance continues to best the market.

The market volatility over the past month, and the precipitous drop in the share prices of most financial companies, certainly gives us all pause when examining our investment choices. To be sure, it's not easy to watch paper profits earned over a full year evaporate in a matter of a few days, but if we truly believe in the favorable economics of the underlying businesses in our portfolio, just because the market has suddenly quoted its value at a lower price than the prior day's close should not make us anxious. Instead, we should be filled with a sense of opportunity at the potential bargains to be had. One of my favorite quotes from  Berkshire Hathaway (BRK.B) chairman Warren Buffett illustrates this viewpoint perfectly:

"Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases. (It's the seller of food who doesn't like declining prices.)"

Even though the Ultimate Stock-Picker's Portfolio performance has pulled back amid the general sell-off in the market, it is still outpacing its S&P 500 benchmark by more than 300 basis points, and I still remain very confident that this portfolio will do very well over the next three to five years both on an absolute and a relative basis. In addition, despite this recent pullback, I am even more enthused by the number of bargains I see in the market today, and I hope to take advantage of some of these opportunities for the portfolio over time.

Performance Update

 Ultimate Stock-Picker's Portfolio Performance Update
  Shares Net
Cost ($)
Dividends
($)
Market
Val ($)*
Total
Ret (%)
Star
Rating**
Tyco Elec (TEL) 95 2,918.37 -- 3,131.20 7.29
Covidien  95 3,169.97 -- 3,610.95 13.91
Wal-Mart (WMT) 219 9,986.21 181.33 9,478.32 -3.27
Dell  459 9,987.02 -- 12,071.70 20.87
Berkshire (BRK.B) 3 9,615.95 -- 10,965.00 14.03
Time Warner  595 9,985.15 98.18 10,900.40 10.15
Expedia (EXPE) 599 9,992.29 -- 17,005.61 70.19
American Exp (AXP) 174 9,965.75 52.20 9,872.76 -0.41
Anheuser (BUD) 211 9,999.58 256.37 10,098.46 3.55
J&J (JNJ) 157 9,976.17 182.91 9,624.10 -1.70
Sprint Nextel  602 9,994.11 45.15 11,215.26 12.67
Pulte (PHM) 346 9,981.21 55.36 5,847.40 -40.86
Capital One (COF) 65 4965.95 1.76 4096.95 -17.46
Cash Balance       5,113.63    
Portfolio Returns   110,000.00   123,031.74 11.85  
S&P 500 Return         8.71  
Outperformance         3.14  
* Market value as of 08-15-07
** Star ratings as of 08-30-07

You'll notice in the table above that almost all of the positions in the portfolio have pulled back from the last time I reported performance to you in mid-July. That said,  Expedia (EXPE) continues to be the lead horse with  Dell  a distant second. The problems in the mortgage market have pummeled the shares of my latest addition,  Capital One Financial (COF), as well as  Pulte Homes (PHM), which is down more than 40% from my initial position price. While having a position down as much as Pulte is never a good feeling, it also speaks to the strength of my portfolio construction, as some of the hefty gains earned elsewhere helped to offset weaknesses in these areas. Even though Pulte Homes continues to be mired in the general fallout in the residential housing and mortgage markets, my colleague Eric Landry continues to believe it deserves a 5-star rating. Given Eric's viewpoint, I'm considering averaging down further into this name. To stay tuned for more on this front, please be sure to sign up for my free e-mail alerts.

As for the Capital One position, I remain a big fan of this business, and I continue to believe that the present valuation is very attractive. In fact, I hope you recently checked out my video interview with our Capital One analyst, Michael Kon, where we discussed the business as well as the scenarios surrounding its current valuation.

This and That
I hope you enjoyed my recent interview with  Markel's (MKL) chief investment officer, Tom Gayner. I cannot thank Tom enough for sharing his thoughts on investing with me, and I hope his thoughts were as beneficial to your investments as they have been to mine. In the next few weeks, please be on the lookout for another manager interview, as I recently had the pleasure to sit down with David Winters of the  Wintergreen Fund . As a reminder, only those of you that have signed up for my free e-mail alerts will have access to the full unabridged versions of my video interviews, where we discuss even more stocks presently on my watch list. I continue to believe that by being patient, focusing on good businesses, and learning from some of the best investment minds around, we can continue to generate market-beating performance over time.

Justin Fuller has a position in the following securities mentioned above: AXP, DELL, PHM, COF. Find out about Morningstar’s editorial policies.