Review: 2018

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

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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.

Links

“History cannot be interpreted without the aid of imagination and intuition. The sheer quantity of evidence is so overwhelming that selection is inevitable. Where there is selection there is art.”

— repeating themes

… in March 2009 and realized that a few companies you did not own had fallen by 80-90% in the previous fifteen months … When you woke up in June 2018, Unitech was down another 85% from your buying prices, and Suzlon and Jaiprakash Associates were down another 85% and 70% respectively.

high quality vs low price

Most of our attention goes to things that are huge, profitable, famous, or influential. And when most of what you pay attention to is the result of a tail, you underestimate how rare and powerful they really are.

The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain.

Charlie Munger followed up: “If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average.”

tails you win

“Perfection is finally attained not when there is no longer anything to add, but when there is no longer anything to take away.”

succeed at work

Having rules actually protects us. Imagine you invited me to do something and I said, “I’m sorry. I have a rule. I don’t give more than 10 talks a year, or I don’t do X, or Y, or Z.” You would not feel good saying, “Oh, would you please break your rules once for me?”

If you said, for example, “I’m going to eat dessert on only one out of every four days,” odds are that you would cheat yourself. You will end up eating more dessert that you wanted. But if you have the rule that says, “I never eat dessert,” or, “I only eat dessert on Saturday,” that would be easier for you to keep.

rules vs habits

You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there’s no precise numbering you can put to these factors. You know they’re important, but you don’t have the numbers. Well, practically (1) everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.

pursuit of worldly wisdom by Charlie Munger

 

 

 

Changing the process (2017)

In the last few years, I have suffered from one major problem: too many positions. The average number of positions that I have held is approximately 15, while my ideal number is 8 — twice as much! My dissonance arises chiefly from the oversight that this was not a number I was overly concerned about. My guiding philosophy was more akin to a collector. Once I decided that I want to own a stock, I would justify buying it and pay no attention to the relative valuation of the stock compared to the stuff I already own.

I have decided to change.

Interestingly, the motivation to change comes from the travel vloggers that espouse minimalist living. One of the actionable advice is to only buy things as a replacement for something you have. In particular, if you want to buy something, you need to throw out something else that you already own. I don’t want to be that dramatic but I would like to have more discipline when buying stocks.

In particular: the maximum number of positions that I will allow myself to have is 10, ideally aiming for 7.

I currently hold: Google, Hikma plc, Berkshire, Facebook, Distribution Now, Altius Minerals, Silver Chef, and Cheesecake Factory.

The rise of Theodore Roosevelt

“I wear the chain I forged in life,” replied the Ghost. “I made it link by link, and yard by yard; I girded it on of my own free will, and of my own free will I wore it.”

Charles Dickens, A Christmas Carol

One of the best books I have read in my life. Not only because Roosevelt was an impressive, sometimes funny bordering on ridiculous. But also because of his grit and determination. The determination to be healthy. To live life on his own terms. Not minding the asthma attacks. Not minding the frequent fevers. Not minding the bouts of coughing and the weak eyesight. And not minding the express advice of doctors who kept telling him that he will die if he continues to exert himself so much.

Someone who has struggled with health problems his entire life, I had an immediate connection with Roosevelt. He was born a sickly child with congenital and debilitating asthma and a weak eyesight. The weakness of his eyesight was not recognized until much later. His father has a significant influence on him. He told Roosevelt one day “Young man, your first duty is towards your morals, then your body and only after that comes your mind.” In so many words, his father asked him to rebuild his body.

Roosevelt was a man of incredible discipline. He managed to do so much in his life and this book only covers the part until he becomes the president of the United States after McKinley is shot dead.

He was a man with a vast range of interests. A taxidermist. A Zoologist. A rancher. A hunter. A biographer. A historian. And a damn good politician.

Apart from the interesting subject, the book is quite well written. I enjoyed listening to it on Audible. It is narrated by Mark Deakins. He is a joy to listen to. The voice makes or breaks an audiobook and especially for a book which is near 27 hours long, you have to like the narrator.

I enjoyed the book immensely and recommend it wholeheartedly.

 

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.

 

Restaurant Group (LON:RTN)

The Restaurant Group operates over 500 restaurants and pub restaurants. Its principal trading brands are Frankie & Benny’s, Chiquito and Coast to Coast. The Group also operates Pub restaurants and a Concessions business which trades principally at UK airports.

It does approximately £600M of revenue and £128M of EBITDA. At the current prices of £3.45/share, the company is selling for £712M and has very low debt (new £38M). Depreciation is ~ £40M.

Red flags: New CEO. Not a significant insider holding (~3x annual salary). Vanilla shareholder letter.

Investment thesis: 10% dividend. 10% growth. Low debt. No share dilution. Investing in growing the business.

Remuneration: Financial performance measures (profit before tax, earnings per share (EPS) and total shareholder return (TSR)) are used as the key performance indicators (KPIs). The combination of EPS and TSR performance conditions provides a balance between rewarding management for growth in sustainable profitability and stock market outperformance. TSR is a clear indicator of the relative success of the Group in delivering shareholder value and, as a performance measure, firmly aligns the interests of Directors and shareholders. The EPS target range will require growth from the current all-time high level of profitability and the TSR condition will be based on recent share price performance. Performance against EPS and TSR targets are reviewed by the Committee

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Cullen/Frost Bankers (CFR)

I recently started a position 50 share position in CFR @$44. I see this as a very long term investment and will continue to build the position if the price goes south of $42.

Management

The management at CFR is very stable. They believe in promoting people from the inside.

Phil Green, who has been with Frost for 35 years and has served as chief financial officer since 1995, is now president of Cullen/Frost, with greater responsibility for and involvement in all areas of the company. Jerry Salinas, who has served as treasurer for 18 years, is now chief financial officer. Paul Bracher, who has been with Frost since 1981, is our chief banking officer, with responsibility for, and as a steward of, our banking operations. And Bill Perotti who, in his 34 years with Frost, has been responsible for both credit and risk, is focusing more time as chief risk officer. – AR 2014

The average tenure with the Company of the five Named Executive Officers included in this proxy statement is in excess of 35 years. – Proxy 2014

Also, the management has significant skin-in-the-game.

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The CEO gets paid according to the net income of the company (traditionally capped at 0.8% of net income). But, it has been generally around 100% of his base salary. The performance measure for the CEO is very qualitative. Frankly, I don’t know how they actually arrive at anything reasonable.

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The primary criterion for annual incentive payments for the Named Executive Officers (other than the Chief Executive Officer) is the measurement of financial performance vs. budgeted net income for Cullen/Frost.

Valuation

The business has done quite well over the years. Here is the balance sheet data from 2010 to 2014 (right to left).

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The growth in deposits have been 10% for the last 5 years !

Frost Bank received the highest ranking in customer satisfaction in Texas in the J.D. Power and Associates 2014 U.S. Retail Banking Satisfaction StudySM for the fifth consecutive year.

At the current price, the company is paying 5% in dividend. So, at current prices, I am looking at a return of > 12%.

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The earning per share on the other hand, has only grown at 4.4% a year during the same time period (2010-2014). This has been happening because of the fed rate being so low.

The Corporation is primarily funded by core deposits, with non-interest-bearing demand deposits historically being a significant source of funds. This lower-cost funding base is expected to have a positive impact on the Corporation’s net interest income and net interest margin in a rising interest rate environment. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. To date, the Corporation has not experienced any significant additional interest costs as a result of the repeal; however, the Corporation may begin to incur interest costs associated with certain demand deposits in the future as market conditions warrant.

So, if the Dodd-Frank Act does not ruin the advantage completely, the earnings of CFR will increase nicely in a higher interest environment.

The Corporation’s balance sheet has historically been asset sensitive, meaning that earning assets generally reprice more quickly than interest-bearing liabilities. Therefore, the Corporation’s net interest margin was likely to increase in sustained periods of rising interest rates and decrease in sustained periods of declining interest rates. In an effort to make the Corporation’s balance sheet less sensitive to changes in interest rates, the Corporation entered into various interest rate swaps which effectively converted certain variable-rate loans into fixed rate instruments for a period of seven years.

Second Level Thinking

Why is the company cheap ? The recent drop in oil prices has scared the investors. This is a Texas bank and CFR itself says that they have exposure to oil companies.

Outstanding loans in the energy sector represent about 16 percent of our loan portfolio. That means that 84 percent of our loans are in other sectors, so our portfolio is very well diversified.