TomB16 investing blog

We picked up two IPOs in the last year.

One is now our largest holding. That's how much I believe in these managers. The other is a significant holding, but not nearly as large.

IPOs of new companies that actually do something are extremely rare. Most IPOs are aggregation mechanisms designed to get between the people funding the aggregation organization and the assets that are purchased with that money. I ignore these parasites.

The only aggregation mechanisms that interest me are major indices.

I haven't been particularly revealing about our cash level but we are below 20% right now.

 

Perhaps I haven't spelled this out plainly enough....

When a private company IPOs, it comes in with a story and a request for money. Forget GAAP accounting, EPS metrics, or anything that will allow the charters to gamble on the stock. These things don't exist. Yahoo and Google don't even publish the float, enterprise value, or pretty much anything other than spot price for a long, long time.

By the end of the first year, the EPS are probably zero or negative. It might be the second year before EPS is above zero and no P/E ratio is published until the company has had a profitable year.

This makes these companies stealthy. My thought is to own whatever I want at IPO or during the first year, before the stock hits the radar of the casino patrons.

 

The WBI is currently at 191.7.

Our cash is currently down, at 17.%, because our portfolio is up a little. One of the perks of holding companies that other people consider "defensive" is that we do well when people are running for their fallout shelters. It is a corner case, to be fair. Mostly, our three core holdings perform a little below market.

Despite the market rollback, there are no wholesale opportunities on companies I am interested in.

 

Sorry, RTN. I did not notice your question. We have been out of town quite a bit lately, so I've been reading on my phone.

The new core holding is not Blackstone. I don't know enough about Blackstone to own it but they have the assets of three of our old core holdings. Perhaps I should like them but I just don't know enough about them to be interested.

 

I invite anyone to share their thoughts on this post.

One of my grandpa stocks is a Canadian, non-bank, mortgage company. MCAN Mortgage Corp. They are a minor holding we've had for many years. They don't normally see much activity but they had an interesting ride, today. It was wild, by their standards.

Please understand, I do not suggest investing in this company, nor do I warn against it.

The two 4% downward spikes are where the vast bulk of the volume was handled. Between spikes, there was a trickle of small trades.

Thoughts:

- Someone sold a lot of stock today in two tranches

- The big lot seller might be someone with inside knowledge, a conspiracy theorist, or someone who no longer wishes to hold this stock for fundamental or age reasons

- The small trade activity must be market orders by people not paying attention

 

The WBI is currently at 197.6

I've been thinking about how high the WBI can theoretically go.

What would it look like if the WBI was 500? Could publicly traded businesses be valued at 5 times the US GDP? That would make bonds, any bonds, look like an amazing investment. I'm inclined to think that would apply some inflationary pressure to the economy, as a lot of people would need to be adding money to the market to maintain those valuations.

 

In 2017, I picked up four micro-holdings. These were an attempt to diversify. The companies were reasonably well known to me but not with the same detail as our core holdings. All were small positions but the junior oil company was tiny, because the order never fully filled.

I've documented the trajectory of the oil company. It worked out well but not due to any investing skill.

My smallest remaining micro position is a restaurant chain that was decimated by COVID. It lost 75% of it's value early on, recovered a tiny bit, and then just stayed there about 60% down from where I purchased it three years ago. The dividend stopped in the middle of last year, also. So, it was just sitting there.

The last couple of weeks, it has taken off again. It's up near where I purchased. It is still not distributing.

This is the only micro position I plan to hold, long term.

When it was down, I did not add to it, despite intending to hold it for several years. I'm still not convinced it will do all that well, although it was performing nicely in 2017.

I'm also not incented to sell it, despite having a get-out-of-jail nearly free card.

To be direct, I'm not sure what I'm doing with this position. If it returns to distributing as it was, it wouldn't make much of a difference to us. If I sold the entire thing, we couldn't live off it for more than a couple of months.

It would probably make the most sense to sell it but we have plenty of cash and I want to see where it's going.

 

Value investing in a retail dominated market is a specialized skill.

I don't see anyone analyzing the down side of an investment. They only seem to consider what a stock price might do: "I know company $ABC is going to hit $200!"

What if a company goes bankrupt? It's value will be assets minus debt. That amount will likely be soaked up by executives who will continue to feed off the host, long after it is dead. As an example, I give you Northern Telecom who were paying themselves bonuses for many years after BK. The bonuses seemed to be for delaying liquidation so they could continue to feed off the host.

Still, there may be some money left over. That money will go to creditors, preferred shareholders, and common shareholders. In that order.

In the case of Nikola, I estimate they would liquidate for perhaps $20M. I know they paid $23M for their land near Phoenix and they have perhaps $10M into construction but liquidated assets don't sell for retail price. They will be lucky to get $20M. There is a $4.77B company that would liquidate for $20M, $0 of which would go to common shareholders.

If we consider Tesla, they have considerable assets in terms of both technology and manufacturing. There would be a bidding war on Tesla battery tech. Grohmann would go for more than Tesla paid. Tesla owns a lot of property beyond factories but they wouldn't get much for it. Perhaps $0.15 on the dollar. The automation equipment would sell for perhaps $0.50 on the dollar. The supercharger network could be converted a standards compliant network, so it brings value of perhaps $0.40 on the dollar. The patents would do very well. The energy division would also do very well, as Tesla owns about 4GW of generation and a ton of other stuff.

I speculate Tesla would liquidate for $75M. That's not bad for a $600M company.

Let's consider a REIT. I have purchased REITs with a market cap plus debt being less than the net asset value. It's not even all that rare. A well managed portfolio of properties should bring 10% profit. REITs that don't are either not well managed or management is soaking up the money.

I'm not presenting REITs as a panacia. Nobody is going to get rich quickly from a REIT. What I am trying to point out is there isn't a lot of down side risk, with some REITs. If you can find one that is well run with strong assets, it's a slam dunk for a modest return.

With REITs, you need to analyze the assets to see if they are reasonably worth book value. Sometimes it can be difficult to tell, particularly for REITs with marquee properties in expensive locations, but you develop an ability to detect reasonableness.

Bad things happen. Companies used to go bankrupt. These days, nearly everyone gets bailed out but I do not believe that will go on forever.

 

At 6:50 in this video, Charlie Munger crystalizes a thought I've had for 15 years. I make better decisions when I own good quality businesses than I did when I was mostly a couch potato or used other approaches.

 

For the record, I am not against crypto. I like the idea of a decentralized currency and I hope it succeeds. When BitCoin began, I knew it would come to a bad end but that like of thinking has turned out to be incorrect.

However, there is no crypto investing. There is crypto speculating. There is crypto hedging. Just not investing.

Cash isn't an investment, either, but I have quite a bit of that. So, I'm not anti crypto. It just isn't a value investment.


This entire line of thought is why I prefer to own companies than hold cash. Companies have value. Cash represents value but is not value itself.

I think of cash like bullets. You cannot eat bullets but you can use bullets to put food on your table. My life goal is to avoid shooting bullets in the air on the fifth of May and celebrate with mezcal and tacos, saving the bullets for an opportunity to fill my freezer for the winter.

 

Not sure if I've shared this but I consider it a gem...

Peter Lynch has said that market PE should be about 20 - inflation. So, when inflation goes up, PE should go down. IE, stocks should go down.

He described a market explosion in Japan when they had no inflation and a reasonably priced market turned into a crazy high market. He described the decade that followed as high inflation, extreme real estate prices, and a lot of economic pain.

 

"If you can predict interest rates five times in a row, you can turn $10,000 into $2B. There are not a lot of people with $2B but there are a lot of people predicting interest rates." - Peter Lynch (1997)

 

WBI = 200.4

We are extremely pleased with our portfolio. I've never been more comfortable with our holdings than I am right now. If the stock market closed for a year, I wouldn't care all that much.

So, I'm about to change investing strategies. Specifically, I will change from value investing (which has been extremely good to us for the last 15 years) to either index investing or an index derivative.

I've been comfortable with our holdings about 50% of the time, over the last 20 years. There have been times we have held something we knew we wanted to get rid of, or we wanted to buy, and we waited months or years for the value to show. This is not that time but it will soon be.

The point is, I try to enter and exit the market as efficiently as reasonably possible.

Our current portfolio is ultra-conservative. It is designed to under-perform the S&P 500 index. Not specifically, but non of our companies are particularly dynamic. We have out performed the S&P500 with corporate buy-outs, buying dips, and Tesla.

I haven't owned Tesla since January. I do not expect a buy out in the next three years. Lastly, there has been an atypically low number of dips. These factors, are only part of the strategy shift.

Without buy-outs, we will under-perform the market. I have no plan to sell what we have but everything gets bought out eventually and I'm ready for an index based strategy.

With regard to index investing, I am aware of two strategies that work. One is to buy/hold VOO. The other is to buy/hold a representative core of the S&P 500 directly, minus the dogs I am aware of. So, VOO minus GE, BA, etc.

This breaks down in an interesting fashion:

Value investing -> buy what you know and believe will do well

Index investing -> buy everything

Negative index investing -> Buy everything you know to be good, buy everything you don't know, do not buy that which you know to be bad

 

I've been thinking about the different approaches taken by the best investors of all time. It's clear Ben Graham, John C. Bogle, John Templeton, Peter Lynch, Warren Buffett, and a couple of lesser known investors I have studied, all have different thought process. Yes, I consider Warren Buffett to be quite distinct from Ben Graham.

And yet, they hold so much in common.

- the market is predictable on the long term
- nobody can predict the market on the short term
- must be brave, when others are fearful


I suspect WXYZ holds these same core beliefs, also. Certainly, I do.


There are a few investing approaches which have proven successful over long periods of time. Every gentleman cited in the top paragraph is a top performer. This demonstrates room for individual thought, although not a lot of room.

 

Thank you for chiming in with confirmation. Yeah, I was pretty confident you would hold this core view.

WBI = 201.5

We are loving this R-E market. We have a property in escrow that was purchased by the winner of a bidding war. Since the deal closed, I notice my car gets better fuel economy, the stereo sounds better, my wife has turned into a nympho, and my arthritis has mostly gone into remission.

Peace and love to all Stockaholics.

 

"The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed." - Peter Lynch

 

Read the following at your own risk.

After following for over a year, I went heavily into Northview Apartment REIT (NVU.UN:TSE) in 2016. The first tranche was purchased below $20. The books looked very good. The property portfolio looked fair. I followed it long enough to believe it was being run by honest, competent, management. So, I hit it heavily.

We kept pumping up that balloon until it hit the mid $24 range. The last NVU I purchased was at $26.25 in 2019 and it was a small quantity that was purchased to clean up some cash in an account.

NVU went to 36 a few days before they announced a buy-out at $36.25. In other words, one or more people had more information than had been made public.

It was distributing like crazy. I would have rather had the company than the money. Our longest held REIT, Dream Global, had just been bought out by Blackstone 10 months earlier so we were awash in money.

Here is why I am sharing this story....

I don't recall where but I read NVU CEO Todd Cook was not part of the buy-out and would be pursuing new ventures along with some other NVU management. When the prospectus cited Todd Cook as CEO of Northview High Yield REIT (NHF.UN:TSE), I knew I would be buying that company. Twenty four hours later, the IPO was offered and I registered our interest in a number of shares that I still shudder to think about. That was in late Q2, 2020.

The IPO sold out quickly but didn't fill until early Q4, 2020 at 12.50. Shortly after the start of trading, it went down to $10.75 and I bought a bunch more. Two months later, it started distributing at 10.5%. The yield is much lower now, based on the current quote of $15.36 (NHF-UN.TO), but the dividend is the same.

For the moment, this the largest single holding in our Canadian accounts.

We bought the NHF IPO solely based on our experience with NVU management. Todd Cook and the crew navigated NVU into GAAP reporting, reducing the loan to value below 0.5, and consequently into the S&P 300 Canadian index.

For the moment, NHF is trading at a price 23% above IPO based on nothing but the reputation of the management team. The property portfolio is new and, in my opinion, just OK but not special in any way.

We likely won't know how profitable NHF is for more than 18 months.

If the dividend holds, it seems reasonable to expect the price to go up until the yield is around 8%. That would put an expected price of $16.50 in roughly 2023.

If the dividend doesn't hold, the bottom is pretty low but there is considerable value to the real estate holdings so I don't see a blood bath unless Management starts pilfering money, or something.

What I expect going forward is navigation into GAAP accounting by 2025, or so, and also a reduction of LTV below 50% in a similar time frame. If that happens, NVU should be uploaded into the S&P 300, causing another nice gain.


This is not intended to be an endorsement of NVU.UN:TSE. It's just some insight into one investor's thought process and approach.