Performance Overview
For Q4 2022, the multi-asset portfolio was up 8.3%, yet down 10.8% over the full year. The Q4 starting balance was $160,358.87, and finished the quarter at $181,597.13. Contributions to the portfolio during the quarter amounted to 7,083.
As for the portfolio of individual stocks, the Q4 starting balance was $77,297.12, with an ending balance of $86,299.07. Over the quarter, there were no additions of cash into this portfolio. Performance for the stock-only portfolio was up 11.7% for Q4, and down 4.5% for the year.
Two stocks were purchased this quarter: Advanced Emission Solutions (ADES), and EMCORE (EMKR). The Sprott Physical Gold Trust (PHYS) was also added to the precious metals section of the portfolio. Several deep value stocks were sold this quarter: MI Homes (MHO), Boise Cascade (BCC), Seneca Foods (SENEA), Gray Television (GTN), and Koppers Holdings (KOP). The rolling over of tail hedge put options continued.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, deep value, 401k stocks, precious metals, and cash. It can be seen that 80.9% of the portfolio is in stocks, while 19.1% is in cash and safe haven assets.
Year in Review
This year has been the most difficult year to invest in since I started buying individual stocks in 2017. The year was not so bad because of the portfolio returns, I expect some down years worse than my performance this year. Instead, the year was frustrating because inflation was elevated, so I felt like I urgently needed to put cash to work, yet I was not finding many bargain priced stocks. Sure, the major stock indices and bonds were down quite a bit this year, and speculative junk crashed, but many quality stocks were unphased. This contrasts to March 2020, where the panic was creating a once in a blue moon buying opportunity.
Another point of frustration was the slow downward grind of the market. The SPY put options I buy as my tail hedging strategy do well during market panic, which by proxy is associated with a high level in the VIX volatility index. Since there was little panic in 2021, the VIX did not reach high levels. While the tail hedging paid off mightily in 2020, it was a drag on performance throughout 2022. Despite money burned through tail hedging, I still find the strategy appealing to provide some anit-fragility to the portfolio.
Returning to the topic of bargain priced stocks, even though I did not feel like there were many undervalued stocks worth purchasing, there were many stocks that appeared cheap. During the year, there were plenty of stocks trading at earnings multiples below 10, even several large companies trading below 5x earnings. The problem is that I am not too confident these stocks are actually cheap. The vast majority of the low earnings multiple stocks were cyclical/commodity based companies in industries such as mining, steel, fertilizer, basic chemicals, poultry, homebuilding, paper products, etc. These commodity stocks have had huge run up in earnings due to inflation and supply/demand being out of whack due to COVID. Looking at years prior to COVID, these companies had much lower earnings, and often had unprofitable years. To add a cherry on top, many of the commodity companies were trading at all time high stock prices during 2022.
It is possible that we are in a period of sustained inflation and a long term commodity bull market. However, I feel like this is more of a macroeconomic call than a story of undervalued businesses. Inflation could persist for years, or we have a recession this year that would crush all these cyclical commodity stocks. I have no idea, so I do not want to load up my portfolio with these types of companies (that being said, I do own a chemical company and some other cyclical companies, so I’m not completely missing the party).
To me, value investing is about finding companies where the stock price is beat up due factors such as the industry being out of favor, the business missed short term expectations but has solid future earning prospects, or perhaps some kind of scandal that will not dramatically affect the business. At a high level, valuing businesses usually takes the form of estimating the value of the assets, or a reasonable future earnings power. I think it is more prudent to look at a normalized 5 year earnings figure when determining value, than to give weight to current earnings that are several times higher than average. We shall see if my prudence works out or if I will regret not loading up on cyclical commodity businesses during 2023.
Discretionary Summary
Discretionary value is the label I’m giving to the positions that are fairly large (~5% of the portfolio) I believe are undervalued and may have the following characteristics: quality business, competitive advantage, misunderstood by the market, or a good company in a heavily sold off industry. The current discretionary value stocks I own consist of Capital One Financial (COF), Emerson Electric (EMR), Simon Property Group (SPG), British American Tobacco (BTI), Qurate Retail (QRTEA), and Warner Bros Discovery (WBD). The table below shows the cost basis, current value, and gains/losses for these positions.
| Avg Price | Cost Basis | Current Value | Current Gain (Loss) | |
| COF | 63.25 | 3,478.75 | 5,112.80 | 46.97% |
| EMR | 41.00 | 3,485.00 | 8,165.10 | 134.29% |
| SPG | 74.50 | 3,427.00 | 5,404.08 | 57.69% |
| BTI | 37.45 | 7,114.91 | 7,596.20 | 6.76% |
| QRTEA | 7.60 | 5,700.00 | 1,222.00 | -78.56% |
| WBD | 24.50 | 4,957.00 | 2,085.60 | -57.93% |
Most of my discretionary value picks have been humming along this year without any major news. Emerson Electric did recently announce that they were selling a majority stake of their HVAC business to Blackstone. The deal values the HVAC unit at $14B and Emerson will initially receive $9.5B for their stake. The Emerson management stated they want to focus on the higher growth automation side of their business. Between this deal, and the recent AspenTech deal, Emerson is making some big capital allocation moves. I will have to spend some time reviewing my position in Emerson with these big changes happening at the company.
Qurate Retail has been my worst investing mistake so far, with the share price constantly grinding lower not long after I made my purchase. What drew me to the business was the qualitative aspect. Qurate is the holding company for QVC and HSN shopping channels, which are popular with older women. These channels provide entertainment in a way that e-commerce does not provide, with a demographic that may be more resilient to switching to online shopping. Additionally I was lured in by the siren call of Qurate’s large special dividend.
Not long after I bought Qurate, a fire destroyed one of their distribution centers. Supply chain issues also affected the company late 2021 and through 2022. For example, Qurate was unable to have the right product mix during the 2021 holiday season, lacking consumer electronics which typically drives sales during that season. Supply chain issues and management missteps seemed to have mucked up QVC’s “daily special value” segment that draws in customers.
Despite the issues within Qurate’s control, and beyond their control, I still held onto a stock that declined 80%. I should have focused more on the company’s financials and performed a more rigorous valuation of the company before my purchase. A big reason why QRTEA stock declined so much is the high debt load. A small decline in sales can crush a heavily indebted business. I typically shy away from companies with high debt unless they have a history of steady cash flow. So with Qurate, I learned a lesson that I already knew.
Warner Bros Discovery is also a sore spot in my portfolio. Originally I owned Discovery ahead of their merger with Warner Bros, which was spun out from AT&T. I believed Discovery was undervalued due to the uncertainty of the merger, and I thought the merger would provide an opportunity as a special situation. Discovery produces cheap, but popular content should pair well with the quality content from HBO and other parts of the Warner Bros library. Once the merger gets sorted out, I think WBD can be a top tier streaming service.
The problem is that the restructuring costs from the merger are high, content is expensive, and the merger occurred right during a slump in advertising revenue. WBD also has a lot of debt from the merger, but luckily it is at low interest rates and pretty distant maturities. While it is frustrating that the stock has not performed well so far, I think if they can reduce costs and put up a mediocre level of EBITDA in 2023, then the stock will be on solid ground to revert back to a market multiple.
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This is a quantitative strategy that buys a basket of statistically cheap stocks. The metric I use is EV/EBIT, based on the wonderful book The Acquirers Multiple. Historically, this strategy has provided excellent returns, although it has not kept up with the S&P 500 the past few years. Additionally, I am making an effort to apply this strategy to microcap companies. Microcaps are classified as having a market capitalization between $50M-300M. These small companies are more volatile, but have the potential for attractive returns.
My position sizing is smaller than the discretionary side of my portfolio because I want to own a basket of about 20 stocks. Since this is a quantitative strategy, I do not spend much time analyzing these businesses. The main idea is that these companies are trading at very cheap valuations, and the winners will (hopefully) outnumber the losers.
The new additions to this part of the portfolio were EMCORE (EMKR), and Advanced Emission Systems (ADES).
| Avg Price | Cost Basis | Current Value | Current Gain/Loss | |
| EMKR | 1.00 | 2,003.95 | 1,925.00 | -3.94% |
| WSM | 115.00 | 5,175.00 | 5,171.40 | -0.07% |
| OMC | 65.86 | 4,610.37 | 5,709.90 | 23.85% |
| BASFY | 11.54 | 4,269.80 | 4,555.44 | 6.69% |
| SMTC | 30.00 | 3,000.00 | 2,869.00 | -4.37% |
| USNA | 58.00 | 2,900.00 | 2,660.00 | -8.28% |
| CHTR | 360.00 | 3,600.00 | 3,391.00 | -5.81% |
| FOSL | 3.50 | 2,975.00 | 3,663.50 | 23.14% |
| ADES | 2.75 | 3,025.00 | 2,673.00 | -11.64% |
| INTC | 30.00 | 3,000.00 | 2,643.00 | -11.90% |
| SIX | 20.00 | 3,000.00 | 3,487.50 | 16.25% |
| HXL | 36.80 | 1,803.20 | 2,883.65 | 59.92% |
Several companies were sold this quarter due to the one year rebalancing of the portfolio. Several of these stocks were sold for a loss, so hopefully the next batch of deep value stocks perform better.
| Cost Basis | Sale Proceeds | Realized Gain/Loss | |
| KOP | 2,958.18 | 2,042.56 | -31.0% |
| GTN | 3,105.00 | 2,020.88 | -34.9% |
| SENEA | 3,000.00 | 3,048.52 | 1.6% |
| BCC | 3,025.00 | 3,494.65 | 15.5% |
| MHO | 2,520.00 | 1,720.32 | -31.7% |
Tanker Stocks
Oil tanker stocks performed pretty well this year. I will continue to hold them, but if they start to go against me again they will be sold off.
| Avg Price | Cost Basis | Current Value | Current Gain/Loss | |
| DHT | 8.17 | 1,755.90 | 1,909.20 | 8.73% |
| TNK | 23.86 | 1,765.88 | 2,279.94 | 29.11% |
Dividends
During the quarter I received $378.35 total in dividends, which is broken down in the table below.
| Ticker | Quarterly Dividend |
| BTI | 120.75 |
| DHT | 8.60 |
| EMR | 44.20 |
| COF | 33.00 |
| SPG | 82.80 |
| WSM | 35.10 |
| HXL | 4.90 |
| OMC | 49.00 |
| Total | 378.35 |
401k and Precious Metals
My 401k is through my current employer and actively receives contributions. The 401k consists of a Blackrock Target Date Fund (which is no longer being funded), and the Oakmark Fund. The Oakmark Fund is a large cap value fund. Since I am actively contributing to my 401k, it will naturally have a growing influence on my portfolio.
I also have a decent allocation to precious metals that are used as a bond substitute, recession and inflation hedge. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
| 12/31/21 | 12/31/22 | YTD Gain/Loss | YTD Cont. | |
| Precious Metals | 12,854.19 | 15,091.98 | -0.1% | 2,100.00 |
| 401k | 60,578.76 | 70,943.77 | -15.3% | 20,466.14 |
Tail Hedging
This quarter I continued a tail hedging strategy that I have used in the past. The strategy involves buying 30% out of the money SPY put options that expire in a couple of months. Each month options are sold and a new set is bought. This quarter, the options have had a cost of $2,491 and proceeds of $1,116, resulting in a net cost of $1,375. For the full year, the hedging strategy cost $8,261 with proceeds of $3,159, resulting in a net cost of $5,102.