TomB16 investing blog

Over the years, I have learned of many micro-optimizations that have proven to be real.

One such optimization is to find an un-indexed, mid-cap, company that has paid reliable dividends and is generally profitable with some growth potential. That company might be interesting to own. Also, that company might be interesting to Standard and/or Poors.

Once indexed, any company will be elevated to whole new levels. High valuations will go higher. People pour money into indicies with no regard for the underpinning equities.

This is exactly what happened with Dream Global REIT. Everything was great until it was listed. From there, it turned into "holy cow!"


It seems everyone is trying to work micro-optimizations like this and others. I'm talking about people who don't know how to value a company or have much detail on the companies they do buy.

For a value investor, micro-optimizations come after buying good companies. The most important thing is to buy companies that are stable and productive. Get a decent car first, then install a turbo charger and racing graphics. Without a good company to keep the fundamentals sound, you're just gambling.

 

I've come to expect great deals at the end of the year. It happens, almost each year.

This year has been odd. First, the year isn't over so we don't know if the current strength will hold. Second, I am seeing a couple of amazing values.

A couple of my old-guy stocks are not wild bargains but they are down while growth companies are up. I've scooped some nice, distributing, companies in the last week. Most of our powder remains dry, though. I expect the deals to continue and perhaps improve until the end of the year.

We own a couple of stocks which trade in tiny volumes that are tough to buy during the year. Both of these stocks have hit on reasonably priced limit orders in the last week. People are selling out before year end.

This isn't a large cash spend down for us but we are definitely buying values where we see them.

It's been quite some time since we've seen the WBI stay above 150 for more than a day or two. I plan to remain "cashed up" until there is some market easing but DRIPs will be turned back on shortly, as our cash is at extreme levels.

 

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Selling Tesla.

On Friday, I purchased a significant tranche of one of our core holdings. At the same time, I sold one third of our Tesla holding.

I still like Tesla. We continue to own a lot of it. We would have been happy to hold these shares indefinitely. In fact, if the company goes back into the value zone, I’ll buy more.

One of our core holdings is showing a bit of value. It often goes down when the market goes up. It’s an unexciting unit trust that is a heavy distributor.

It was a simple matter of seeing a core holding showing good (but not great) value, Tesla exceeding my valuation a tiny bit, and deciding to go with the holding that better aligned with our life.

This is a move we wouldn’t have had to do. It was a matter of something I like being above my indication of value while another thing I like more was below my indication of value.

Cash buffer.

Our cash position remains very similar at extreme levels.

 

Here is a little glimpse at a graph of the total market cap, as represented by the Wilshire 5000, versus the gross domestic product.

https://fred.stlouisfed.org/graph/?g=qLC#

 

Situation update.

The end of year sale didn't happen this year.

Only two of my companies dipped at year end and only one showed enough to buy. The other was close but did show sufficient value to buy on Thursday, January 2. Both are boring, distributing, stocks.

I find it odd these stocks would go down at the start of a year when there is no immediate tax pressure to log a sale. Clearly, some people were just hanging on through the epic boom year with the idea of selling in 2020.

I was not able to buy any bonds/debentures at the end of the year. This was an anomaly. Not one bond/debenture was issued that was remotely interesting to me. The couple that did IPO were sold out in hours.

All of our bonds are well up (relative to bonds which aren't volatile compared to stocks). One issue which pays an excellent rate and matures in 2024 is trading up 7% on the secondary market. Bonds have been part of a stabalization strategy so I don't have to sell stock in the event of a crash but I may sell the 2024 bonds and put it into a stock that pays more. Our bond holdings are extremely minimal so this isn't a particularly impactful decision. We already have three holes in our bond ladder and I'm not worried about it.

With the WBI at 155%, we continue to hold a ton of cash but have not engaged in any major sell-off.

 

But, back to Tesla....

Our trajectory

I knew Tesla would fail until the summer of 2015. The model S was selling well, they released the PowerWall, and they just announced the model X. Using the power of long division, I realized the demand for the PowerWall would outstrip supply so badly, Tesla would make a ton more money if they stopped selling cars and only sold energy storage products.

Our first tranche was purchased in the 2nd half of 2016 when the price was in the $180s. The intention was to hold for 10+ years.

By the summer of 2017, the price had risen to the high $380s. I knew it would go down but didn't sell, because I'm an investor. When the price came back down to close to $300, I bought a bit more and was happy to hold for 10+ years.

By 2019, I had full confidence in Tesla. Nothing changed in the fundamentals but a heavy onslaught of lies and smears drove the price down. I bought quite a bit more in the $250 range. Our holdings remained small, compared to our portfolio, and I was comfortable holding long.

The price eventually dipped into the $180s again. I bought heavily at $190, knowing the price would come back but not knowing when. At that point, we owned a lot of Tesla. It still wasn't in our top 5 holdings but it was becoming significant. I was comfortable with the situation, barely.

It was an exciting time. Several media articles would voice the same anti-Tesla narrative, the price would go down, Tesla earnings would come out, and the price would soar again. Money was taken from Tesla traders like candy from an infant. People are easily shaken from their point of view. The primary fundamental changes during the period were positive. Negative fundamental problem was Panasonic failing to scale cell production as contracted. In fact, this was a huge problem limiting production and profits significantly.

One third of our Tesla holdings were sold when the price hit $415.


Let's deconstruct the deconstruction

How was I able to buy these bargains?

When the WBI is over 100, I like to have a cash buffer. I scale our buffer with the WBI. This past summer, the WBI was high. It was so high, in fact, that I turned off some of our DRIPs. As well as that, a buy-out of one of our core holdings left us with a lot of cash laying around.

I would have bought stock, had I seen values, but there was a dearth of values to be had. I have found a couple of values between then and now, and purchased them, but our cash ratio remains high.

For us, Tesla was a case of distributing companies buying a growth company. Funds distributed from our productive assets were re-allocated into the best value of the time, Tesla.

This has been a lesson in symbiosis. A growth company dovetailed into our distribution strategy brilliantly. It's good to be lucky. As well as luck, our decade long strategy of maintaining a small cash buffer has continually proven it's value to provide opportunity beyond market gains.

During this time, we didn't actively sell any of our stock. The only divestment was the buy-out. Recently, with the WBI at 155%, I have been actively selling a company that I feel is so far beyond the value threshold (about double my conservative valuation) that it will take longer than I have for it to grow into the valuation.

Our strategy is not active value trading. My goal is to own productive companies on the long term.

Buy indicators (and):

- strong fundamentals
- estimated corporate value beyond a threshold I decided on in 2012


Sell indicators (or):

- weak fundamentals
- change in management
- estimated value below a threshold I decided in 2015 (before that, I did not sell a company for value reasons)


Back to Tesla

I was able to hold a lot of Tesla because I believe in the company and want to be partnered with them. I sold them because there is another company I prefer, not because I don't like Tesla. We still hold quite a bit.

I bought Tesla call contracts twice in 2019, near significant events. This is because I was holding a lot of Tesla and didn't prefer to hold more. In both cases, I would have been OK actioning the calls and holding those shares long, despite already holding my comfort limit. In both cases, we made a significant amount of money in a couple of weeks.

These calls are the first I've purchased in 20 years. I have no intention of ever buying another call, although I will if more opportunities come up.

I do sell puts on occasion. Specifically, when I want to hold a stock and would purchase it at a given price, anyway. Mostly, I just buy stock when it fits but there are times when puts can be a nice option (pun intended).

 

The WXYZ thread got me thinking about investment advice.

On every other web site I've been on, new people join and they are immediately indoctrinated with, "Couch potato! Couch potato!" If they push back, the response is, "You aren't as smart as me so you can't manage your own investments. You need couch potato."

My gawd.

Think for yourself. Believe in yourself. Be skeptical of those who explain how much smarter they are than you.

Get a spreadsheet and A/B couch potato vs Warren Buffett's dead simple plan of 90% VOO and 10% bonds. You will see the WB-DS plan wins in almost every case. The only exceptions where high bonds win the day is if you try to retire on a low nest egg, immediately before a major market down turn. Even then, bond ETFs (which are almost always recommended) strip most of the advantage because they take a big hit during a market sell-off. If you have been saving for years, as you should have been, the 10% bonds in the WB-DS plan would easily carry you from 2008 to late 2011 when the market recovered most of the gains lost in the GFC.

It's not that hard to run some objective scenarios and see what is objectively better. It's black and white. Running the scenarios will teach you how the money flows through your portfolio. It's an amazing exercise.

I'm 99% confident the people recommending couch potato have never A/B compared it to anything. In fact, most of them likely have never A/B compared anything to anything. They are just parroting out a system they believe is simple enough for "the stupid people".

My Mom lived a life of poverty but was an aggressive saver (fortunately, this trait is hereditary) and taught herself basic investing. She has done very well. She is now much better off and lives a much higher standard of living than she did during her working years.

She is not dumb at all. She is a smart lady but she also doesn't spend countless hours studying companies, markets, and macro factors like I do. She invests a reasonable amount of time and she lives a comfortable life. You can too. All you need is a pragmatic disposition and an IQ of 100 or higher. It's not easy but it's not all that hard, either.

Rant off.

 

I was just reading an InsideEVs article on FUD. Interesting read.

Everyone seems to want stock prices to go up. As an investor, I want prices to go down. To that end, FUD is an ally.

The only time it is advantageous to have a high market evaluation is when you want to sell a position. The rest of the time, high valuations feed the ego and steal from the portfolio.

- Any DRIPping position will benefit from lower price.

- Any position you are expanding will be done more efficiently at a lower price

FUD is our friend. Now that I think of it, Tesla *IS* about to go bankrupt. They just don't know it, yet.

 

Sure, although it would have been better if you had asked questions that could be answered in sound bites.



To a significant extent, my micro positions are an experiment. It is just a coincidence that I write about them more than I write about our core holdings, as our core holdings are boring.

You have asked about a position that had an interesting process but makes up 0% of our portfolio.

I've shared my position in Crown Point Energy in near real time because it's one of the few interesting things happening in our portfolio. I have other similar positions and all have done well.

This is a time when most companies in most industries appear over-valued to me. I'm not buying market indicies.

The main bright spot I currently see is oil. The industry appears to have been wildly over-sold.

Oil does not have the bright future it once did but it has a future. I have no expectation of CWV.V being valued at $1B in 10 years. It might have gone out of business by then but I already have 100% of my original stake back. When I bought CWV, the EPS was over half the share price. That was before the return of capital.

I knew they didn't have much opportunity to expand the business. Without reinvestment opportunity, I was confident there would be a return of capital. A similar story is playing out at several junior oil companies.

I believe oil production is currently under valued.

An industry doesn't have to promise to make me rick quickly to attract me. I see oil as medium term profitable and over-sold. I'm happy to own profitable businesses that pay a dividend, regardless of the stock price.

I rarely identify what I buy or even mention it publicly. I am not prepared to forfeit my privacy. Please consider that what I buy doesn't matter to you, or anyone other than me.

What matters to other investors is the thought process that went into creating a portfolio, not the portfolio.

A decade ago, I would have been talking about how I feel REITs are over-sold. I still hold a ton of REITs but if I were to discuss REITs in proportion to my portfolio, it would be easy to think I'm saying they are a great investment. Generally speaking, they are not. Generally speaking, they were. My current focus is in other areas.


I look for companies that have been battle-hardened operators. I look for specific traits. When I find those traits, I know that difficult markets will filter out the weak and leave the strong. When markets recover, the weak will be gone and the opportunity will be divided among a smaller group of players.

If oil went down to $20/bl for 5 years, my portfolio would gradually skew heavily in that direction. This, even when I know there would be a lot of forced mergers in junior oils and a lot of bankruptcies the field services industry.

 

I don't think many people understand the relationship between business and holding stock. I believe people see fluctuating numbers as an ocean of money that exists for them to surf on. If they can catch the right wave, they can get rich quickly.


Let's say you can buy a business for $100,000 that creates $25,000 of profit per year. The business could do anything but let's pretend it bakes bread. Low overhead. One employee. It's a room with a few ovens, a bagging room, some preparation equipment and three part time staff.

I've looked at such a business. Regret not purchasing. The return on equity is among the highest I've seen.

You buy the business and make $25K per year for the rest of your life. There are years when you make $35K and there are years you make almost nothing but you generally average $25K per year.

That is a wildly successful business.

Now, someone comes along and tells you about a bread baking business they bought for $30,000 that pays them $25,000 per year. You are probably going to feel bad about the business you own. You will wish you had gotten that good of a deal. That person will declare themselves superior and smarter to you.

But, consider how long you've owned the business. Perhaps you've already made more than $70K in profit? Consider the market when you bought, compared to the current market. If you are a good business man, it shouldn't have been possible to buy a bread bakery for $30,000 when you bought yours. To a near total extent, the person declaring themselves smarter is attributing luck to prowess.

We do the best we can in the situation we are in. If you have a good portfolio, it's good no matter what anyone else is doing.

An experienced investor knows when there simply isn't anything good enough to engage. This is where the ability to value companies comes in. Right now, I have a ton of near cash and it is slowly rising. I don't like it but it is the best position I'm aware of.

 

If the trade war deal is signed and China purchases $200B worth of us product, that will have a positive impact, albeit very small, on the us economy.

I don't love trade wars but it was a battle that had to be fought, at some point.

This is positive news.

 

I'm not going to call our current moves a sell off, although that's what they are.

We are clinging to our core holdings like life itself but we have some "non-core" holdings with ridiculous valuations. It's time to move them.

I've long felt every portfolio ought to have a utility. For many years, we did not. We picked up quite a bit of a small power utility in 2017.

I wanted it so bad, I ignored my rule of buying at a 30% value discount. It was right around my calculated value but I thought it had the potential for growth so I threw in.

Now it's at roughly 2.5x my calculated value. I know it is going to grow but not 2.5x in a relevant time span so we are back to not holding a utility.

I think it's fair to say we are beyond the "just don't reinvest" mode and into a mode of trimming the portfolio back to core or near-core positions for durability reasons.

Our near cash position is getting crazy. I'm starting to consider a gic ladder with some of the cash.

 

I will try to keep my crabbing to my own thread since I'm in a very tiny minority in terms of thought process. Lol!

This is trading versus investing... Again.

When my nephew tells me he is going to a poker game because he needs money, I ask him why he doesn't get a job. He replies, it's too much work and takes too long. Suffice to say, I don't have much confidence he will amount to anything.

I know it's difficult to resist the urge to buy and sell anything that isn't bolted down in the hopes of making money but business works. We can all make money from a productive business that returns profit to the owners. Traders redistribute wealth among themselves exactly like a poker game.

Business works. A properly run business generates wealth and paces inflation. I encourage anyone who wants to retire one day to leave the gambling to my jagoff nephew.

 

Another value sell-down is Norboard (OSB). we have only held this company for seven months and we're not thinking short term at time of purchase. Nothing against the company at all.

Even though I suspect a recession in the near future, I don't believe it will not be deep. Of course, I don't know but there is a lot of money on the sidelines. I have no problem with owning manufacturing companies and would like to own something in this sector.

If the price comes into the value zone, I will buy again. It's just too over valued and doesn't distribute enough to hang on at this valuation.

Talk is of a good Q4 result. We will see.

At this point, we aren't very diversified. We haven't expanded our core and we only have a few non-core assets. We may need to consider some alternative ideas for storing our cash.

 

This man knows his coleslaw.