End of year update

With each passing year I realize that I should concentrate much more on my best ideas, instead of having a few more businesses for the sake of diversification.

The specific examples were Facebook, Apple and Moody’s this year.

With Facebook, I decided to not go over 20% of my IB account. At approximately 130$ a share, Facebook was a no brainer and an incredible opportunity. Looking at FB around those prices, I kept thinking about the salad oil crisis of American Express. If I am not incorrect, Buffett had put 40% of his portfolio in it.

With Apple, I reasoned that I already have positions via Berkshire – 10% of my portfolio. I also was concerned that I am being too aggressive on tech names. With Google, FB, and Apple – I was touching 70% of my IB portfolio! With these reasons in mind, I only put 10% of my portfolio in Apple.

Screenshot_20200102-101948

Moody’s was a mistake of omission. Last year, to teach a value investing course … I needed to come up with an example with a serious moat that has survived several problems and came out stronger. After rejecting Visa/MasterCard, and Google/Facebook, I finally zeroed in on Moody’s.

Moody’s has a phenomenal moat and has survived a direct attack in 2009 (profit was up ~ 20% that year). Arguably, the stupidity of rating agency models were responsible for the pervasiveness of the financial crash of 2008. Still, they were able to argue that ratings qualified as free speech and hence are protected by the Constitution, even if they are way off the mark.

I ran my simple valuation model (earning multiple = growth + dividend) and came up with a price of 135$, while the stock was at $150. I decided to pass and wait for a lower price.

My mistake was not to adjust my simple model for business quality.

Captain Hindsight

I am in two minds about learning from these “mistakes”.

Would I have put my decision making through a reevaluation if my return this year (~ 26%) exceeded that of S&P500 (~ 31%)?
To compare, last year I did ~ 1% while S&P500 did ~ -4%. I was not bothered that much then. My gains came from a near double of (Hikma Pharmaceutical) and I was much more active. I fail to see why I did not put myself through the grinder then even though it was clear that I made many decisions then. In particular, I decided to reduce the number of positions I had from ~ 12 to 5! A more interesting question to ask is if that was a mistake?

Should I have gone over 20% of portfolio for Facebook?
I was extremely sure about the fact that FB will come back. I see the trident of Facebook, Instagram and Whatsapp as a set of apps which are almost impossible to kick for a user. But then, I have a rule of 20% to protect myself from my overconfidence. Did the strength of my confidence allow me to break my rule?

Should I have built a larger position in Apple?
This one, at least, is a clear yes. A harder question to ask is: should you worry about sector specific risk in your portfolio? What made me uncomfortable is a > 70% concentration in technology stocks. There are several mental gymnastics to get out of this predicament. One can just say that Apple is not a tech company, albeit a product company. I am going to give this question some thought and see why this makes me uncomfortable.

Lessons

  • Still keeping the rule of 20% for max p

 

 

 

Review: 2018

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

chart

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

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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.

Reflections for 2016

Savings

This was a great year in terms of making money but a horrendous one in terms of savings. We had higher than usual expense because of the number of travels we made. In short, we made around 128k (~ 10.7k*12) in normal income and were able to save only 43.7k (~3.5k*12). So, we have been saving 35% of our income and spending the rest i.e., 65% of the income. Given my target of 50%, this was a bad rate by any standards.

Portfolio Performance

This year, I decided to take a measure of my performance. In particular, I wanted to know if I have been adding any value, when compared to the Swiss Leader Index (SLI).

My performance (below) is being compared against SLI (without dividends) assuming that I bought the index for all the “cash in” on the first trading day of the year. For comparison, I also have my performance compared against a 10% absolute return.

portfolio-2016

TL:DR; my performance has been approximately 6% compounded over the years, with most of the out-performance coming from the current year (luck?).

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I have 17 positions in total (Altius Minerals is repeated twice), and cash is 20% of the portfolio (larger when I transfer the savings for 2016 into my brokerage account).

Philosophy

I am offering an investment course where I work. It is a 270 minutes overview of everything related to investments. It can be split into three major parts: (a) the basics of investing (stocks, bonds, gold, real estate), (b) the business of investing (risk, asset allocation, portfolio construction, active-vs-passive money management, and (c) the implementation i.e., what to do with your money (recommendation being: invest in a ETF).

I learned a lot from the exercise. In particular, when I ran my calculations, I realized that saving 30k purchasing power a year for 30 years at 5% inflation adjusted return will help me achieve my goal of having 100k/year purchasing power forever (after the savings phase of 30 years of course!).

I also feel quite good about myself this year. I made very small number of decisions and felt quite OK when 15% of my portfolio was gone in the beginning of Jan because of SNB breaking the CHF/EUR peg. I feel much more comfortable in “my skin” so to speak.

I am looking forward to the next year.