Liquidated my Roche position

I have become increasingly uncomfortable with the recent meteoric rise of Roche Holding (ROG.VX). Here is the stock performance over the last 5 years.

Roche vs SLI


Meanwhile, Roche has also boosted dividend and over my holding period the dividend went from Sfr 6 (2009) to Sfr 7.35 (2012). After withholding tax of 35%, the current dividend yield is 1.8% (current price Sfr 253.7).

I think Roche is a fantastic company with great management but at this point the stock is very dear. I don’t see any way to justify the price at this point. It definitely yield nearly twice as much as a savings account in Switzerland but I am not satisfied with such measly returns. Following are the details of my trade with Roche.

Roche trades

Unfortunately, I do not have an alternative investment as of yet. I am researching into a few stocks and will probably buy opportunistically, if the time comes.

The checklist manifesto by Atul Gawande

Convinced me to begin with my own checklist while making investment decisions.

The limits of human knowledge has expanded quite drastically, more so in the last century. It is impossible for any man to know everything about a particular field. Be it architecture, medicine, computer science or astronomy. This has lead to specialisations and if that is not enough, super specialisations. Invariably then we need a lot of people to work together to achieve an end. A surgery for example takes a number of doctors, anaesthesiologists, nurses and so on. It becomes imperative to manage information and make sure that people work in a group. It is also very important to keep track of who has done what and if everything important has been done.

In these cases, saying that checklists help is an understatement. Checklists help you get rid of the mundane and concentrate on the important things which require creativity.

I recommend this book very highly.

Don’t quit and If

I remember reading this poem a few years ago. It did not effect me as much as it does now. It has similar undertones as Seth Klarman’s lines that I talked about in this post.

When things go wrong, as they sometimes will,

When the road you’re trudging seems all uphill,
When the funds are low and the debts are high,
And you want to smile, but you have to sigh,
When care is pressing you down a bit-
Rest if you must, but don’t you quit.
Life is queer with its twists and turns,

As every one of us sometimes learns,
And many a fellow turns about
When he might have won had he stuck it out.
Don’t give up though the pace seems slow –
You may succeed with another blow.
Often the goal is nearer than

It seems to a faint and faltering man;
Often the struggler has given up
Whe he might have captured the victor’s cup;
And he learned too late when the night came down,
How close he was to the golden crown.
Success is failure turned inside out –

The silver tint in the clouds of doubt,
And you never can tell how close you are,
It might be near when it seems afar;
So stick to the fight when you’re hardest hit –
It’s when things seem worst that you must not quit.

– Unknown

There is another poem which seems very relevant. It is called “If” and was written by Rudyard Kipling.

IF you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:
If you can dream – and not make dreams your master;
If you can think – and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you’ve spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build ’em up with worn-out tools:

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: ‘Hold on!’

If you can talk with crowds and keep your virtue,
‘ Or walk with Kings – nor lose the common touch,
if neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And – which is more – you’ll be a Man, my son!

Rate of return

As every investor, my portfolio is performing quite well. I want to note a few things about my medium term goals.

My savings were shown in a previous post (see here). Following should be the value of my portfolio by the year end, assuming different rates of return compounded annually. Note that I have not included my savings for the year 2013 to my overall calculations here.

Rate of return (in %) Value (CHF) Gain (CHF)
0 75,000 0
10 92,000 17,000
15 101,000 26,000
20 111,000 36,000

Given that my portfolio is up CHF 9,500 I don’t think I can achieve more than CHF 26,000 by the end of this year. I have also stopped buying and have continued to lighten up some of my risky holdings. This puts further contraint on my portfolio given the underlying appreciation of stocks in general.

I expect recovery in MT, E.On, BAC, SAN and CAF. A 30% appreciation overall is certainly achievable. This will add around 6000 to my portfolio. So, if I do not find any new opportunities and the market continues to run wild then I am looking at more like 10% rate of return.

Oct 25, 2013 I am up sfr 25,000 already, which is a 15% annualized rate of return since I started investing. I have been helped amply by luck and the fact that the stocks are becoming more and more expensive. If the crazy run lasts, I might even be looking at a 20% annualized rate of return since I started investing.

Buying MT and selling AA

I was already buying MT. I increased my position significantly and I now hold 600 shares at $13.7 each. I also hold 200 stocks via options at strike $8 expiring Jan 2015. I paid $6.15 for each. This represents nearly 8% of my current portfolio.

As I discussed earlier, I have started selling AA. I sold everything except 200 options at strike $5 expiring Jan 2015 which I bought at $3.76 each. I will sell them in the next few months.

ArcelorMittal’s management has been making some mis-steps recently in terms of capital allocation. They paid $0.64 in dividend in fiscal year 2009, 2010, 2011 and 2012. This according to the share outstanding was worth around $1 bn  each year for a total of $4 bn. It is understandable because Laxmi Niwas Mittal’s daughter Vanisha Mittal Bhatia who sits on the BoD, his son Aditya Mittal (CFO) and he himself hold nearly 40% of the shares outstanding. The dividend is a good source of income for them.

The continuing pressure on steel and the debt load on MT has led to downgrade in the debt rating of MT. They have cut the dividend to $0.2 a year and have sold shares and convertible bonds to increase equity and reinforce the balance sheet. If they had not paid the dividends (tax inefficient) they might have been able to pay down the debt and the need to raise the capital would have vanished. A similar situation happened with Transocean – which I sold out recently.

I continue to hold ArcelorMittal because I believe that with Steel it is harder to make these decisions. It is not clear when the market will go up and when it will go down. It is hard to decide if one should pay dividend or preserve the cash to pay down debt instead.

Selling Transocean (RIG)

I am selling Transocean from my portfolio. The reasons for this decision are as follows

  • A management with bad capital allocation record. They paid their first ever dividend of 4 times $0.79 in fiscal year 2011 (dividend ~$1 bn). They then went on to acquire Aker Drilling at a premium of nearly 100% i.e., double Aker’s market value for $1.5 bn in Aug 2011. This took a toll on their balance sheet and they were threatened with a debt downgrade to junk. They then issued 29.9 mn shares for $1.2 bn to protect themselves in Nov 2011. This in my opinion is gross mismanagement and reflects poorly on the judgement of the CEO Steve Newman.
  • Transocean has an ageing fleet and will need to increase its capital expenditure to replace rigs and their equipments. This would not have been a huge problem for me if I had faith in the management.

I made a small profit on the sale. I bought the stock for Sfr 50 and sold it for Sfr 52.7. Not great considering that I held the stock since Jun 2011.

The lesson to be learned here is keeping track of the management. If you do not agree with their capital allocation strategies, exit as soon as possible. I will not repeat the mistake I made with Hewlett-Packard (HPQ).

Another note is to look at capital expenditure of the company. In this case, I could have found out that Transocean had an ageing fleet and will see an increase in Cap-Ex over the coming years – before starting a position. The information was publicly available. This shows lack of due diligence from my side. I hope to not make this mistake again.

The cash continues to build.

Keynes vs Hayek by Nicholas Wapshott

I start my economics study with Keynes vs Hayek – a book I presume is aimed at the masses as a general overview of the theories and the political/economic backdrops where they were applied. The book does not delve deep into the theories per se but paints a very entertaining and engaging picture of the era and the main players.

Keynes has a talent for showmanship – which results in his participation at the Versailles.   The short sightedness of the leaders, their constant bickering and lack of any compassion for the losing countries disillusions him so much that he ends up writing “The economic consequences of the peace” – a very astute and foreboding book predicting the collapse of Mark and civil upheaval in Germany. The book catapulted Keynes to popularity not only in much of central Europe (i.e., Germany, Austria) but also in the US. He was much sought after in magazines and newspapers for opinions on thorny economic issues of the times.

While Keynes was enjoying the limelight, Hayek was getting his education under Mises in  University of Vienna and lates joined LSE in 1931 – on recommendations of Lionel Robbins. This set the dual with Keynes at Cambridge and Hayek at LSE.

Keynes published The General Theory of Employment, Interest and Money in 1936, which advocated state intervention to ameliorate the sufferings during the low points of economic crises. Classical economist believed in Say’s law, which says that “supply creates its own demand”. Keynes rejected this and claimed that demand, not supply is the key variable. He argued that by artificially increasing demand (say by state sponsored public works) will decrease the sufferings and unemployment at the low points in the economic cycles.

Hayek on the other hand believes that booms and busts are natural parts of economic cycle. A bust comes because of bad allocation of capital and as long as the capital is not correctly allocated, the problem will continues. Spending money by creating artificial demand is not a viable course of action. Left to its own devices the market will come to equilibrium.

I am going to read a serious economics textbook soon. Meanwhile, this is a very worthwhile read.