Saturday, 1 October 2016

Third quarter update and reflections on the previous nine months

I'm going to address a few ideas in this post and reflect on my year to date thus far, including a snapshot of my own returns. I'm also thinking of starting an entirely new blog, as I don't believe that "building a stable dividend portfolio" really captures what I'm getting at personally.

I am still searching for an approach that suits my personality, and I continue to attempt to draw inspiration from great investors in order to conceptually refine my own approach.

I currently feel like I should be operating within the spectrum of the following possible approaches:

  1. Searching for cheap stocks in the context of Ben Graham's teachings,
  2. Searching for stocks that may not appear cheap currently, but which either have a potential legacy or reinvestment moat
  3. Searching for misunderstood stocks which fall somewhere between approaches 1. and 2. above
  4. Searching for special situations (spin-offs, merger/arbitrage, etc.)
  5. Searching for under-priced bonds relative to AAA rated bonds, and
  6. Being cognizant of risk inherent in approaches 1) through 5) above

Reflecting on the past 9 months, I have had a so-so year.  I calculated my returns through Friday's close and I have earned 4% on my assets under management (not including new capital contributions), calculated as follows:

  • AUM Jan 1 2016, $125k
  • AUM Sep 30, 2016, $150k
  • Capital contributions, $20k
  • Increase in AUM $5k (realized and unrealized gains + dividends and interest income received)

$5k/$125k = 4%

If I make no further investment decisions between now and end of December, it's pretty safe to say that I expect an annualized return of just over 5%, which isn't great, but isn't terrible either.

I also have to evaluate my performance in the context of distribution across the asset classes I own in the accounts I manage.  I've roughly averaged around 40-50% cash during the year and I hold held very little in the way of equities currently. I'm currently closer to 70% cash at present, looking to redeploy cash into workable ideas, which I'm not finding much of recently.

Relative to the S&P500 which has returned around 6% YTD (closer to 8% YTD including dividends), I'm under-performing by almost 200 BPS, although I hesitate to put too much credence into this comparison because my cash allocation throughout the year has impacted my returns. It's been a tough year for me in the sense that the market has hovered at or near all time highs for most of the year after March, and I'm extremely cautious about blindly chasing flavour of the day ideas. Remove Amazon, Apple, Facebook, and Alphabet, and I suspect that the S&P500 YTD return picture changes considerably.

I'm not going to bother comparing my performance to the S&P TSX because in my opinion, the index is irrelevant to me. I'm certainly not comfortable with a 1/3 speculative energy and materials weighting and 1/3 bank/financial concentration in my own assets under management, but for whatever reason, other investors are. I'm happy being the exception here.

My main problems with equities right now are as follows:
  • I haven't found many idea's which seem particularly cheap, especially after Feb 2016
  • Whatever I did buy in Jan/Feb is mostly gone (I sold on the way up)...and one of my regrets this year was exiting some really good ideas way too early (Children's Place, CST Brands, H&R REIT, and Information Services Corp to name a few)
  • My belief is that because equity markets are knocking up against all time highs, the most popular stocks are ridiculously overpriced and over owned. This leaves little in the way of Margin of Safety in chasing popular stocks at all time nosebleed highs (although my beliefs don't preclude stocks continuing higher)
  • Once again, the theme of "disruption" seems to have become accepted doctrine for paying, and justifying, silly prices for future growth (Amazon, Facebook, and Netflix come to mind). And this theme seems to have perpetuated over multiple years, which is perplexing to me
  • In the same way that the markets seemed manically depressed in February, they now seem stupidly euphoric.

All said, now is the time for me to sharpen my proverbial pen and refine my approach. I have to review what worked for me this year and sort out why things did or didn't work.

I have long been a proponent of actively scouring the daily 52 week lows for ideas, but 52 week lows aren't the only source of ideas. Usually, 52 week lows are made for a reason. A good friend of mine has drawn my attention to searching 13f HR's for new filings of interest. Sometimes, highly concentrated holdings by well established investors can be a source of great ideas.

I also have to revisit my analytical approach. My initial, arbitrary fcf/ wacc screen doesn't mean much unless wacc is compared to roic, in conjunction with an objective evaluation of potential growth runway.  While I've found some great ideas using my screen, I wonder whether the results were more a reflection of buying January 2016 lows vs. a result of thorough research supporting an investment thesis, a term another friend of mine has coined as "having an anchor". I believe that objectively analyzing a potential growth runway will help me steer clear of value traps (a few of which I've had the pleasure of owning).

So, on this concluding note, I've got much more work to do as my journey has really just begun.


  1. Ciao SDP,
    I think that comparisons with indexes, ETFs or funds it's really not a great idea. I am sure that you have targets in your mind and the comparison should be done against those. I feel that on the market there is always a chance to find a certain fund or ETF that "did better" than me, but I also find very hard to compare things as the way my PF is built it's quite unique and there will always be some differences with commercial products... I am also waiting for some stocks to be cheaper, markets are still pretty high despite having taken a little nudge recently.
    Out of curiosity, what is you yearly target (resturn wise)?
    Ciao caio

  2. Hi Stalflare, great comments thank you. As for target annual return, it's infinity (just kidding). I have to be realistic given the high weightings I have in cash. I would like to target 6% - 10%, but at this point, I'm more interested in developing and refining my overall evaluation process. Ideally, I want to work on focusing my approach towards in-depth rather than cursory or superficial research, and I feel that thus far, the majority of my attempted research has been cursory or superficial. I also need to work on my weaknesses as an investor. A holding period of 6 months or less hardly constitutes longevity in my approach, and the longer I participate, the more I believe that large returns are made by holding rather than actively "doing", and half the battle for me anyway, is fighting the urge to take profits once I have a nice move from my initial entry point. I believe that I can increase my overall return by stepping back and recognizing my emotional state when exiting ideas which have shown initial gains from my entries. I tend to feel fearful emotionally that the gains will revert, so I often sell.

    In 2016, this was the case with CST brands, bought as a result of my work on my 52 week lows analysis back in February at $32, on my identifying that the stock was relatively cheap vs. Casey's and ATD.

    Once the board announced that they were open to a sale process, I exited at $38 in May out of fear that the stock would revisit $32. When the sale was finally announced in August, I had been out since $38 and missed another $10. My initial process was correct, the stock was both relatively cheap (vs. Casey's and ATD), and there was a looming catalyst to unlock value, and I let my emotions get the better of me.

    The other issue here was position sizing! In the context of overall AUM's, my exposure was less than 2%, and I believe that for me to make any headway in moving the "proverbial" needle, I have to position great ideas at at least 5% of AUM. These are very tough lessons.

    Had I thought about position sizing CST correctly at 5%, I could have split the idea into two or three blocks, with a $6,500 target weighting. The initial block could have been 50 shares at $32, the next block could have been 45 shares at $36, and the final block could have been 35 shares at $42, for a target 5% weighting and 130 shares at an average cost of $36. My return on eventual sale should have been ($48 - $36) x 130 shares, or $1,560 USD, or $2K CDN, or 40% of actual realized YTD return. This is where I want to get to conceptually.

  3. Hi there, Daniel --

    At first I compared my portfolio's performance to the S&P 500. I stopped doing that. I focus on my own portfolio and try to make wise investment decisions, regardless of what's happening in the wider market.

    It is good to reflect on your goals and dreams. That's what helps to motivate you to go for it! Personally, I find setting some stretching goals for the year helps me to stay focused.

    All the best and keep at it!

    FerdiS, DivGro

    1. Thanks for your comments, very much appreciated.