Monthly update: June 2013

I am concentrating a lot on work. So, I did not get to do much research.

Gold collapsed and the interest rates rose during the month. The equity market also saw a lot of volatility following the comments from FED that they will ease out of “quantitative easing” soon. The change in the tone of the financial press and the market commentators was immediate. They went from “follow the trend” to why the equities will fall hard and there will be a correction. I was also of the opinion that a correction will happen and probably this was the last straw. But I was proven wrong.

After reacting strongly for a few days the market stabilised and has started its upward trend. Thankfully, I got out of HP at a very small loss. The opportunity cost for this position has been quite large in my opinion.

I added Bouygues, Tesco, E.On, Orange, MT, Santader, and Euro during the month. My net cash position went down a bit to around 52% of the portfolio. Which means that I put the HP money to good use (hopefully) and some.

Cash report June 2013

The sales/purchase figure is high because I purchased €5000 and it got added up in purchases and sales.

Liquidated my HP holding

As promised, I sold my HP position completely.

This was one of the most harrowing and hence learning experiences of my short investing career. It showed me how the qualitative aspects dominate the quantitative. How mis-management can wreak havoc to a company and how important the role of the BoD is.

I plan to write this in more detail but for now I am happy to get out at these prices. The stock may appreciate in the short term but frankly I am increasingly convinced that this company is not a great long term investment.

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.

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!

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.

Power of savings

Savings

 

This is the progress of my portfolio over the last 2 years. I started with 0 balance at the beginning of 2010. Three years and a few months later, I am sitting on a pile of $100k.

The jumps in the graph are due to cash deposits to the portfolio. If you look closely my performance/stock picking is nothing to boast about – at least so far. I have managed a measly 5% compounded return. Still I can boast about my savings rate. Averaging over the last 3 years my savings rate has been 41% of my after tax salary.