Quarterly update (Q2, 2020)

Here we are after a very interesting quarter.

At the end of February, I was chatting with an investor friend and he mentioned the Coronavirus situation in China and how it is already starting to spread in Italy. For all practical purposes, the West was treating the virus as a non threat. “The Chinese are not able to deal with it, but we with our great health care infrastructure will be able to handle it!”. The friend was of the opinion that we should protect our portfolios by buying puts on the market.

“Shouldn’t we spend 5% of our portfolio on protecting our ~30% gains from last year?”

This was a good way to approach the situation. I acted, but unfortunately, in a very half assed way. I only put 0.5% of my portfolio in protecting myself. Even that was really hard for me to do because I have labeled myself as a long term investor and had promised to not get into options. I am happy that I was willing to change my mind. But, I am rubbing my nose in the mistake I made by not putting a more reasonable portion. I think putting 2% would have been a good strategy.

Learning: Do not put labels on yourself. Your goal is to maximize your wealth in the safest way possible. It is not to subscribe to a certain way of thinking.

COVID Strategy

Fortunately, all the stocks I had were Corona proof. My whole portfolio consisted of only 5 companies: GOOG, FB, HIK.L, IBKR & BRK.B. I bought puts on S&P, sold BRK.B and decided to let this blow over. 

The speed of the drop was incredible. The S&P 500 dropped ~ 34% between Feb 20 and March 23. And then did a V-shaped recovery. My portfolio fell 25% — but I handled it quite well. I started a 1% position in MSFT, and added to FB, IBKR & GOOG. I also used the opportunity to lighten Hikma pharma (sold 40% of the position) at 1835 & 2052 Gbp.

Square

During this time, I finally decided to look into Square & Shopify. Square was the one which was punished much more and it made sense to look into it. Square has some really interesting products. Their payroll solution seems to be the second most used in the US, just after Quickbooks. They also went into personal finance via Cash app, which is looking at fantastic growth while their merchant solutions segment is only seeing a GMV growth of ~ 20%.

“US payments volume via cards was $7t in 2018 with a growth rate of ~ 8%. Furthermore, 25% of transactions are still done via cash in the US. Thus, with a current payments size of $10t in the US, Square is currently at 1%.

Square is already making progress internationally. One of the main reasons for Jack Dorsey’s move to Africa was the cash rich economy and the growth in payments.”

Square vs Shopify

Comparing it to Shopify, it seems Square and Shopify are targeting similar merchants. Shopify is transitioning from online -> brick & mortar, while Square is going the other way. Furthermore, Square’s strategy of moving into personal finance via Cash App is not something that fits Shopify’s strategy.

In terms of pricing, there are also differences. Square can be tried for free and add-ons can be added for additional charge. Shopify, on the other hand, seems to have a price tier based on GMV.

“On the other end, Square’s economic moat is challenged by Shopify’s entry into physical retail with it’s retail kit that eerily mimics Square’s aesthetic. Time will tell if Shopify can gain adoption and gain market share away from Square. But one thing is for certain, Shopify will be able to leverage its existing 500K active businesses using its product as a qualified customer list. “

— link

Back to Square

Unfortunately, Square has a 10% dilution due to stock based compensation. This was something I was not able to handicap. I am also not sure about the moat of a personal finance app. EU itself has Revolut and Transferwise and I think people generally have both accounts. The Cash App also seems to be targeted at people with low financial education — which is probably quite a large market worldwide. You can buy bitcoins and fractional shares.

All in all, I decided to take a pass. The combination of competition from Shopify/Wix, huge dilution and low moats of personal finance apps leads me to a proposition which is too hard for me to evaluate.

Performance

At the end of June, I am up 3.5% since the beginning of the year, with 24% of my portfolio in cash. The cash is included in the performance number. Meanwhile, S&P500 (without dividend) had lost 4.8%.

Comment on cash

Even at the worst of the crisis, I could not find good ideas where I can go in — except maybe Microsoft. At $137, I found it still too expensive. The cash is, hence, a byproduct of not having ideas. Worse, I thought that COVID would finally lead me to a portfolio without cash but it did not come to pass. I started with ~20% of the portfolio in cash and finished with 24%!

Probably, 24% is too much. I will look into ways of reducing it to 10% of my portfolio.

New rule: Keep your cash position under 10% of your portfolio.

New rule: when you start a new position, the first buy has to be 2.5% of your portfolio.

Quarterly Update (Q1’2019)

No change in the portfolio for this quarter.

I looked at a few things over the last 3 months but none of them excited me. For example: Record Plc, Eurofins Scientific & Be Think Solve Execute. I finally decided not to take any of the positions because I did not feel like I understand them enough.

I continue listening to Berkshire Hathaway Shareholder meeting recordings which are now available on Youtube. I started with 1995 and am now listening to 2002. They are 4-5 hours long and I enjoy them immensely.

I feel that the portfolio has a significant runaway still, even after a huge 18% run up year to date. I especially feel that Google, Facebook & Apple are still undervalued.

I do not feel that strongly about Distribution Now. But, I do not have any use for the cash. This will be the first position to go if I find a good new position to add.

Review: 2018

This is what my portfolio looked like at the beginning of 2018.

This is what it looks like at the end of 2018.

A few changes that immediately jump out are:

• I am completely invested at the end of 2018. Since I started dabbling with investments, I almost always had ~ 25% cash. I liked to keep cash because I thought of using it when the markets crashed. I was completely invested in 2012. And, crash or not, I am completely invested now.
• I went from holding 14 stocks to only 7. I like to think that this is a by product of discipline and not buying things I do not understand. A lot of companies that I was holding at the beginning of 2018, I will never invest now. For example: Silverchef, LSL Properties, Rolls-Royce etc.

At the end of the year, I am holding the following companies.

• GOOG: I can’t add to what has already been said many times about the significant moat Google has. In my opinion, YouTube is a significantly undervalued business and cloud/self-driving are some bets which might pay hugely. On top of this, Google sells cheaply for a cash adjusted forward PE multiple of 19 and grows at ~ 20%. If you compare Netflix & YouTube, you can ballpark how much YT is worth. People watch ~ 1b hours of YouTube per day! I estimate the value of YouTube to be at least $200b.
• Facebook: Lots of bad news this year. The stock got hammered and I was able to correct my mistake of not buying FB at ~ $25. On the plus side, now they have a proven business model, make a lot of money, have $40b in cash and grow at ~ 40% YoY. Currently, FB sells at cash adjusted 18 times forwards PE. This is even cheaper than Google & FB grows more quickly.
• Hikma Pharmaceuticals: I bought Hikma in March after it got kicked out of FTSE250. This is an owner operator and the family owns ~ 25% of the shares. They have three equal sized businesses: Branded Generics, Generics & Injectables. The bad news coming from the Generic segment drowned out the performance/moat they have in Injectables. The company just became too cheap to pass up. I invested big and luckily the stock appreciated by over 50% in the next few months.
• Apple: Started buying again when the stock sold off in December. I bought it one day before the China sales warning. The thinking here is simple. They have a great eco-system. Their position wrt privacy is a source of moat which no other Software/Hardware companies offer and the products they design & sell are well thought out and a joy to use. The Watch 4 is getting rave reviews and I am not going to pass off a company like this selling for < 12 times earnings.
• Booking: Booking has built an OK moat in hotel bookings in Europe. I started with AirBnB but have found myself using Booking more and more. One of the major reasons is that you get an immediate confirmation of your booking. Furthermore, the app/website is quite intuitive and easy to use. Unfortunately, Booking still competes on price and face significant competition from Google/AirBnB and also meta search engines like Trivago. This will never be a > 5% position for me.
• BRK: Berkshire should be able to return 10% a year. And, I plan to keep this position as a safe holding.
• DNOW: A well run company selling cheaply. This is the only company in the portfolio that I understand the least. But, I like the management and I like the numbers. It is a marvel to see how they manage working capital during downturns!

In order of things I would sell, if push came to shove, are: BRK, DNOW, BKNG.

Monthly update: Mar 2014

Following is the cash report for the month of March. Around 6,000 more was invested during the month. Altius, Lamprell, and Kinder Morgan were the stocks I bought.

I finished writing my thesis. I am looking to graduate by July end. The job search is on. This is one of the reasons why I don’t get much time to either blog or find new ideas.

2013: Year in review

This post will be updated again later.

This was a transformational year for the way I think about investing. This had some drastic effects on my portfolio. In particular, I sold almost everything I did not have a good grasp on.

This year I started with 50% cash in my portfolio and it has built up through the year. I now have 70% of my portfolio in cash.

Meanwhile, the portfolio value has gone from 75,000 at the beginning of the year to 115,000 at the end. Taking out the 20,000 cash which I put inside the portfolio, the performance has been close to 20%. Interestingly, given that I was only 50% in stock, the performance has been more like 40%. But this probably is cheating.

One chart to go

S&P500 in green vs my portfolio in blue.

Changing my benchmark from SLI (Swiss Leader Index) to S&P500 gives the following results. Compare this chart with the one given in my previous performance analysis [src].

SLI vs My portfolio

After 2 years at IB …

It has been 2 years since I opened my Interactive Brokers account. I paid sfr 160 in account management, received sfr 2,281 in dividends and my cumulative return has been a measly 1.86%. The cumulative performance graph is shown below.

SLI (green) vs My portfolio (blue)

Period (25 May)	My portfolio	Swiss Leader Index (SLI)	Relative
2011-2012	-17.43%	-12.22%	-5.21%
2012-2013	25.75%	39.2%	-13.45%

Given that my target return is 20% — in absolute terms, this is a very sobering fact. It would have been much better for me to invest in the Swiss Leader Index (SLI). It seems that with time the gap has increased instead of narrowing.

If this continues for the next 3 years then I will have to confront myself and switch to investing in indexes. At the moment I have an excuse that I am still in the early stages of my learning phase.

Rate of return

I have been saving money since 2009. The following table lists the amount of money I have saved in a particular fiscal year.

Year	Savings (in CHF)
2009	5,000
2010	20,000
2011	25,000
2012	25,000

Calculating the rate of return in such cases has complications. I have then decided to simplify things. I will assume that the money saved in a particular fiscal year is only invested at the beginning of the next year. This way on Jan 1, 2012, the 5,000 saved in 2009 had 3 years to appreciate while the 25,000 in 2011 had only one. If we assume the rate of return to be x then on Jan 1, 2012 my account will have

5*(1+x)^3+20*(1+x)^2+25*(1+x)

Looking at the portfolio I found that as of today (Mar 21, 2013) it is worth 6,000 more than the total money I have put in.

Solving for x gives me a compounded rate of return i.e., x = 7.3%.

Nothing great and much below my goal of 20% rate of return. But given that I made some major mistakes in 2009, 2010 and 2011 … I am happy that I have been able to beat the savings account in Switzerland (1.5% at most) by a wide margin.