Some thoughts at the end of the year

 I’ve disappointed myself by doing very little blogging I’ve done this year, which is a particular crime given there has been so much material!  Part of the reason I started this blog was to serve as some sort of historical record for myself and anyone else who might be interested.  In the year of the Coronavirus Pandemic, Brexit being finalised, and wildly fluctuating markets this is a crying shame, it must be one of few years from the 2020’s that will show up in history lessons.  I will try and summarise a few of more thoughts for the year now:

 

One thing that has interested me about the Coronavirus pandemic has been that it has been a good demonstration of how resilient humans and our systems are.  No one could have seriously predicted a world where millions are working from home and never socialising in public places and avoiding loved ones.  By and large, we have got on with it fairly well.  Imagine if this virus had occurred 20 years ago before we had all the connectivity options we have today.  I think I must have had 90 minutes or less of work connectivity problems all throughout the year, which is remarkable!  There has also been no rioting or really large scale disobedience, although I think part of the reason for that is that government economic support programmes have been so generous, and there has been little enforcement on those who choose to break the lockdowns. 

 

The virus has also shown up well recognised human behavioural weaknesses.  Many people would agree with the fact various health restrictions that have been imposed, such as limiting social contact with families.  For example, at various times in the UK, we have had the “rule of 6”  which limits humans in any one social gathering to that number.  But so many people I know have broken the rules in little ways and tried to justify it, not being able to recognise that if everyone behaves in that way then the virus will continue to spread (as it has).  When I light heartedly challenge them on the logic of the exception they have granted themselves, intelligent people often refuse to admit that their individual breaking of the rules is an issue.  The other behavioural error I have noticed is that people need rules to anchor themselves in some way.  People find it hard to just govern themselves and set limits for themselves.  For example, most people would say it is a bad idea to go on holiday when there is a virus in circulation, but millions did and many justified this by saying “it was within the rules”.  Why not just be more conservative than the rules and stay at home?  When invited to a gathering of six people, why not just politely decline? 

 

We are now in a situation where it appears the solution – a vaccine – is with us, although it will take several months to get rolled out sufficiently to make a difference.  While that is no time at all in the context of history, I predict that the next few months will feel very chaotic as the population relaxes.  It is also clear what the rules are if you have been vaccinated?  Are you still restricted from doing all the things that the unvaccinated cannot do? 

 

So what about me?

 

First, I did nothing to sell holdings or hedge my portfolio as the seriousness of the virus became evident.  Many large and small investors did and it was kind of obvious for a few weeks that that was sensible, if anyone had watched the events unfolding in Bergamo, Italy and though rationally for a bit.  So that was an error and especially so given that my largest holding is an airline engine manufacturer!  There is buy and hold and there is sheer bloody mindedness.

 

Like many people I was about 35% to 40% down as the nadir of the market falls and that is a serious hit, whoever you are.  I felt a bit unwell as I thought about all of the things I had earmarked for my portfolio, namely a house deposit and a comfortable retirement!  That’s the problem with equity investing.  Even if you do well over time, you will have moments when everything seems to have been pointless and it’s easy to panic.

 

I didn’t panic, but I didn’t really act either.  Surely I should have done something with my 12% Rolls Royce holdings as it lost c80% of value!

 

Anyway, markets came back and I’m perhaps 10% down, which feels like 50% up even though I’m aware I’m lagging lots of investors.  The important thing is that I have lived to fight another day and perhaps next year could be a good one for me.

 

One interesting thing is that I had three holdings, which I stated I held as a hedge against market volatility.  Berkshire Hathway has done very little year on year, although I too am disappointed that Warren wasn’t able to shoot his elephant guns as stocks sold off.  It has then lagged on the way back up but- hey – there’s no permanent loss.  IG Group did well as expected.  Given I had no clue that the cause of the volatility would be a virus induced lockdown leaving people with time on my hands, I could never have predicated IG’s boom in users but, whatever.

 

My third holding was Crystal Amber, which is a smallcap activist fund, with concentrated holdings.  This has been an absolute disaster and a classic case of someone trying to be too clever.  Because the fund uses index puts to hedge the portfolio I assumed that this was well would give me downside protection but how wrong I was!  What I totally ignored was that that in a sharp recession and market sell off, a portfolio of rubbish is going to be far harder hit than the market and this proved to the case.  It has become clear that the manager is unable to generate high alpha and the fund now trades at a large discount to NAV, given high fees.  

 

As my portfolio has come back, and things have returned to some semblance of financial normality, I’ve decided to put some roots down and have bought a house.  Consequently, there will be big changes in my portfolio as I’m selling approx. 20% of it to fund the deposit.  

 

As a world free of virus worries appears to be tantalisingly close, I have no doubt there is good money still to be made in the market in 2021.  I suspect there will also be a lot lost at some point because certain sectors look extremely bubbly.  I am going to continue to try and invest with an eye to not losing money, with a 6% targeted rate of return, although I hope for quite a bit more.  

Quarterly Portfolio Returns

 

	Bloomberg Ticker	Percentage
Value Fund		11%
Facebook	FB	8%
Berkshire Hathaway	BRK/B	7%
Unilever	ULVR	7%
Exor	EXO	7%
Jefferies	JEF	5%
BIFFA	BIFF	5%
Dignity	DTY	5%
Allied Minds	ALM	5%
Philip Morris	PM	5%
Bayer AG	BAYER	4%
Crystal Amber	CRS	4%
FIAT	FCAU	4%
Imperial Brands	IMB	3%
Dolphin Capital	DCI	3%
Rolls Royce	ROLLS	2%
Character Group	CCT	2%
Onthemarket	OTM	1%
Seritage	SRG	1%
Card Factory	CARD	1%
Spectrum Brands	SPB	0%
GBP Cash		11%
Quarterly Return	Quarterly Benchmark Return
7.99%	19.30%
Return Since Inception	Benchmark Return since Inception
18.24%	175.72%
Annualised Return since Inception	Annualised Benchmark Return since Inception
2.19%	13.98%

Quarterly Portfolio Returns

Portfolio as at end of June	Bloomberg Ticker	Percentage
Value Fund		10%
Facebook	FB	8%
Exor	EXO	7%
Berkshire Hathaway	BRK/B	7%
Unilever	ULVR	6%
Bayer AG	BAYER	6%
BIFFA	BIFF	5%
Jefferies	JEF	5%
Crystal Amber	CRS	5%
Philip Morris	PM	5%
Rolls Royce	ROLLS	5%
Allied Minds	ALM	4%
FIAT	FCAU	3%
Imperial Brands	IMB	3%
Dignity	DTY	3%
Dolphin Capital	DCI	3%
Character Group	CCT	2%
Card Factory	CARD	2%
Onthemarket	OTM	1%
Seritage	SRG	1%
Aryzta	ARYN	1%
Spectrum Brands	SPB	0%
GBP Cash		9%
Quarterly Return	Quarterly Benchmark Return
7.99%	19.30%
Return Since Inception	Benchmark Return since Inception
16.87%	168.00%
Annualised Return since Inception	Annualised Benchmark Return since Inception
2.10%	14.05%

Value Investing Talk: Li Lu

Loved this discussion of Value Investing, by Charlie Munger's chosen Fund Manger..

https://www.longriverinv.com/blog/the-practice-of-value-investing-by-li-lu

Financial Commentary on Quarter

It’s time to post Q1 portfolio results and they do not make pretty reading.  While I try and always remember the Charlie Munger quote along the lines of “unless you are able to react to a 50% drawdown with equanimity, you are not fit to be an investor in common stocks”, it is incredibly jarring to lose over a 1/3 of your net worth when you had mentally earmarked that for certain things such as a house deposit and a retirement done day.  Such a drawdown will cause anyone to reassess their life plans and, combined with the certainty of a massive global recession, which can affect job prospects, it’s extremely worrisome. 

In terms of the drawdown itself, I am of the belief that no one could have incorporated the possibility of this pandemic into their portfolio positioning and outcomes have been somewhat random.  If you owned a portfolio of tech stocks, for example, you’ve probably done relatively well, but you didn’t own that portfolio because of the possibility of a pandemic so I wouldn’t call that “skill”, per se.  I think the true skill will be in how people react from here and rebuild portfolios in a world of uncertainty and binary outcomes.  Will we have a prolonged depression?  Will there be the sudden announcement of a vaccine?

I have taken a hit of approximately 33%, and there’s really only fall that really bothers me – that of Crystal Amber, the UK activist fund that I bought as a market hedge of all things.  It’s true that they held FTSE put options that came good in February.  They weren’t rolled into March.  And so I was left owning a portfolio of poor quality UK companies which all fell precipitously at the same time as the fund itself went from trading at a 10% to 30% discount to NAV.  Result – a disaster.

Another disaster is Dignity.  Now I think some its terrible performance is due to the coronavirus epidemic and the fact that it will be overloaded with deaths, and it won’t be able to service those at a price point that enables it to benefit from increased demand.  But I also missed the fact that it would need to bring property leases onto its balance sheet, as well as the possibility which that it would consolidate its trusts as it has done.  Along with its securitised debt and the pension liabilities, the debt load will look terrifying to investors, and events have represented an almost perfect storm.

Two of my market hedges that have performed reasonably well are Berkshire and IG Group, and I think both can emerge well from the current crisis.

Rolls Royce, Allied Minds, Fiat and Card Factory are collateral victims of the virus, nothing more and nothing else.  Maybe I should have sold Rolls Royce sooner but I’m not going to beat myself up about these.

So now… the rebuilding has to begin.  I think we are in an incredibly bifurcated market where part of the market has been virtually untouched by events and the half that has seen its revenues affected by the shutdown has been absolutely slammed.  Given that many, including me, feel that the “quality” basket is due some punishment, where does this leave me?  Rooting around in the bargain bin I guess, trying to find a few gems and trying not to continue my mistakes of the last half decade.

In the meantime, this lifted my spirits and resolve: https://www.longriverinv.com/blog/the-practice-of-value-investing-by-li-lu

Quarterly Portfolio Return

Portfolio as at end of March	Bloomberg Ticker	Percentage
Value Fund		10%
Howden	HWDN	9%
Exor	EXO	8%
Berkshire Hathaway	BRK/B	8%
Facebook	FB	7%
IG Group	IGG	6%
Rolls Royce	ROLLS	6%
Jefferies	JEF	5%
Bayer AG	BAYER	5%
Allied Minds	ALM	4%
Dignity	DTY	4%
Crystal Amber	CRS	4%
Imperial Brands	IMB	4%
FIAT	FCAU	3%
Card Factory	CARD	2%
Character Group	CCT	1%
Aryzta	ARYN	1%
Seritage	SRG	1%
Dolphin Capital	DCI	2%
Onthemarket	OTM	1%
Spectrum Brands	SPB	0%
GBP Cash		9%
Quarterly Return	Quarterly Benchmark Return
-33.10%	-15.56%
Return Since Inception	Benchmark Return since Inception
8.22%%	124.71%
Annualised Return since Inception	Annualised Benchmark Return since Inception
1.10%	11.81%

Coronavirus: Non Financial Post

When I started to write this blog, I think part of the reason was to create a record that I could look back upon in the future.  This could help me learn and become a better investor and it would also be nice on a human level to remember how I felt at moments that were historically and economically important.  

I must say, now very definitely feels like one of those moments.  Unemployment claims are soaring, and economists are issuing dire predictions of the blindingly obvious – that GDP is plunging the real question being how long the recession lasts for.  My fiancé and I live I a flat in pleasant central Cambridge and we do not have kids, so life for us is pretty easy at the moment.  We are working from home, and although there are possibly dark clouds over the horizon, in terms of our jobs, right now things are fairly nice.  I don’t have my long daily commute and we are eating well, given all the extra time we have for home cooked meals.  Once a day, generally, we will go for a walk or a bike ride.  Spring is coming in the UK, and Cambridge is a very pleasant place normally.  With the lockdown in place, there are very few cars on the road.  I imagine it is currently a little like my mother knew it, when she was growing up in the 1950s, with lots of cyclists on the road, 2 abreast and moving at a leisurely pace.

Our parents seem to be coping pretty well with the situation.  They are all taking the required precautions and all have access to food and a TV!  The internet is a godsend as well.  It allows families to keep in touch in a way that they would never have done before.

I guess what I’m trying to say is that – apart from having a glimpse of a slower, older world – I am extremely insulated from what must be a near hell a short distance up the road at Addenbrooke’s hospital.  If news stories are to be believed, and why wouldn’t I, medical staff are short of equipment and are trying to do a job which requires close contact, diligence and compassion in an environment which must feel chaotic and uncontrolled at times.  Elsewhere in Cambridge, good people are trying to make the best of life when their businesses have been forced shut by the virus, not knowing when to open.  Japas Sushi, where we go for our weekly date night, is now takeaway only and it seems to just be the proprietor and chef working there.  They seem stressed and rushed off their feet.  The beauty of sushi is that it doesn’t have to be ready at a set time.  It comes when it comes and people sitting at the restaurant table don’t expect it all to be at the same time.  It’s different with takeaway and I’m sure that’s why they seem so stressed.  The proprietor told me on Friday that he wasn’t sure he could stay open because he couldn’t get supplies.  So it looks like he will join all the other business that are shut down.  Very often, these are individuals that had a dream – of opening a neighbourhood café or arts & crafts shop - and those dreams are shattered.  And there’s still a load of pain to come.  We are in the eye of the economic hurricane here in the UK.  The chancellor has announced all sort of economic support measures, many of them delivered via the retail banks, who “owe the nation” after being bailed out by the taxpayer in the 2008 financial crisis.  Those measures include the furlough, whereby lots of employees that would have been made redundant are effectively having their salaries paid by the government for three months.  But the question is – what happens after that?  It seems clear that the current lockdown of the population is not something that will end, just like that.  Rather, we are set for a long grinding year of phased lockdowns and there will undoubtedly be economic scarring.  Who knows, maybe myself or my other half will be victims but for now, we should be grateful for what he have – our health, our comfort, and that of our loved ones.

Portfolio and Life Thoughts at the Start of a New Decade

It’s been a very mixed year for me in several ways with lots – good and bad – going on in my personal life.  It’s made me feel rather philosophical and I’ve been doing lot of thinking about what I want my life to be and how my investing might fit into that.  I’ll riff on that more on that later in this piece.

Given this is an investing blog, Iet’s start, however, with the 28% total return for the year.  This is obviously highly satisfactory, but in a year when lots of indices were up big, and where lots of twitter small cap investors are reporting returns of 40 or 50%, it feels a little mundane.  I think part of that feeling is also due to the fact that a large part of that good return is attributed to Leaf Clean Energy, which was up c400% on the back of its court victory and subsequent liquidation.  Did I get lucky?  Maybe.  But you have to put yourself in the right spots to get lucky and I made the investment because it seemed the risk/reward was favourable.  Maybe I was also owed some good karma after my total loss on Flybe the previous year. 

Some of my other positions really underperformed:

Rolls Royce: Continued issues with their installed engines led to more expenses, with the market fearing that there are fundamental design/quality issues and beginning to lose faith in the idea that there is a ramp up in FCF on the way as engines continue to mature.  I will keep faith for now with Warren East, the CEO, but the fact that the board representative from ValueAct has resigned is worrying.  There may be a benign explanation but I really don’t know what it might be.  I will continue to hold on the hope that the market starts to think about this one differently.

Crystal Amber:  I bought this stock because I feel that Richard Bernstein is a value investor who creates long term value, and provides exposure to an asset class – UK mid cap activism – that is idiosyncratic.  In addition, unless you’ve really been through the accounts, you won’t know that he maintains index puts to provide protection in the event of an equity market collapse.  2019 was a horrific year for this fund.  Pretty much the whole concentrated portfolio of UK stocks (except Leaf Clean) encountered their own difficulties and price pressure which led to a big discount to NAV developing to compound the fall in fund value.  I have added as I don’t believe Bernstein has become a bad investor over the course of a six month period, that the stock should indeed ballast if the S&P were to sharply correct, and because I think Bernstein will pursue value creating buybacks as long as the fund trades at a discount.

Tripadvisor: I sold this as they reported continuing deterioration of their hotel booking business and they paid out a special dividend, which seemed a little to me like an act of desperation to bolster the share price.  I think this is probably another example of me buying a “story stock” but to be honest, given not much value has been created over more than a decade by the CEO, it was clearly a mistake.  Why did I buy pretty much the only travel review/booking platform that doesn’t make money!

Imperial Brands:  This fell precipitously on the back of health and regulatory concerns re next generation products and specifically vaping.  I am somewhat hopeful on this stock given the high dividend yield, low multiples, and the fact that they have just appointed a new chairperson with M&A expertise to presumably oversee a sale of the company.

The good news about 2020 is that I feel my portfolio is well set.  As well as the three above that I continue to hold:

Dignity: While this has come off its lows, the stock continues to trade at a depressed level as the Competition and Markets Authority plods on with their competition enquiry.  Given the lack of material being posted on their website, and content of their various industry fact findings, I am becoming increasingly confident that the final report will be benign.  This will give Dignity the freedom to continue with their strategy of rationalising their estate, digitalising the company and building some competitive advantages based on their scale.  This should lead to a rerating and materially higher earnings if they can execute.  The company should also reap the benefit of demographics, as more and more people are forecast to die in the UK, on an annual basis.

Jefferies: The CEOs appear determined to reverse the Leucadia merger and become a pure financial services organisation again.  This should be good for shareholders as they continue to sell assets near book value and buy back shares at a large discount to tangible equity.  Broker Dealers have had a good quarter, and at the Investor Day last year, leadership were very clear that they believe the Investment Bank is underearning.  I will continue to hold as long as the asset sales and buybacks continue.

Bayer:  After their terrible 2019 and the shock of the Roundup lawsuits, it seems that the pessimism is fading as the market starts to believe in a settlement scenario that will be painful but not disastrous.  Consequently, the stock price is back to near where I bought it but still looks reasonably cheap compared to its peers.  Granted, management is useless but there’s a gem of a business in there in what used to be called Monsanto, and we have to assume it won’t be totally ruined.  This is a hold until the Roundup scandal has passed.

Further to the stocks above, the stocks I bought in an attempt to increase the quality of the portfolio – Howden, Exor, Facebook, Berkshire – have performed well but still don’t have very challenging valuations.  I can imagine owning these for many years.  They are hopefully “forever” stocks and I hold them outside my ISA.

Moving onto wider things about the direction of my life, the 28% return resets me and my savings somewhat, and I feel a little like I’ve got out of jail.  I can still see a runway to achieving my ambition of early retirement – let’s call it FIRE deluxe – and if I think back to when I was a student, and I envisaged myself as a rich person, it was always because I wanted freedom, not status.  Freedom from having to do a job which I found dull and freedom from having to worry about money if a relative got ill or I wanted to travel.  I also wanted to pass onto my kids enough money that they could have freedom from the hum drum of the commute and office politics.  Now, I still think I’m on track for that to happen when I’m 50ish, although perhaps in a much less grand way than I thought when I was 20.  Then, I saw myself retiring on my own terms on the back of a successful city career.  Now I think I’ll be escaping from a job I don’t enjoy to do what comes naturally to me – pottering around and thinking about the world.  I won’t have the money to create some sort of dynasty, my children will have to work, but I’ll definitely be able to start them off in a much better place than I.  So that’s the plan – in ten years I’ll be living outside the UK probably, in Poland, France, Italy or Spain.  

To get there, I’ll need to make 10% -12% a year, I think I need to try and do two things.  First, I need to not have losses of permanent capital.  What does that mean?  I know it sounds obvious but it means not betting on story stocks, not trying to shoot the lights out, and fully understanding the business models of companies I invest in.  I shall continue to try and use my edge of a genuinely long term, unconstrained, time horizon, and it also means being ultra conservative.

Second, I need to survive through the next downturn and stock market collapse.  We all know one will come, and we suspect it might be quite soon.  I am going to start building cash in preparation for that day.

I will also acknowledge what is clear to me now, which is that I don’t have the time or discipline to research all the stocks in my portfolio myself and I should outsource some of my portfolio management to others.  So for example, I have invested 10% of my money in a portfolio manager based in Switzerland, who has had great results over the last ten years, and who’s style I like – cheap global stocks that often have some sort of catalyst.  I have money also with Warren Buffett and John Elkann, quite simply because they are cleverer and harder working than me.

End of Year Portfolio Update - Commentary to follow in next days

Quarterly Return	Quarterly Benchmark Return
5.84%	1.95%
Return Since Inception	Benchmark Return since Inception
18.11%	166.11%
Annualised Return since Inception	Annualised Benchmark Return since Inception
2.41%	15.01%
Quarterly Leveraged Return	Annualised Leveraged Return
4.15%	7.75%
Leverage	0%