Performance Overview
For Q2 2020, the portfolio is up 6.65% and is up 4% year to date. The Q2 starting balance was $80,525.94, and finished the quarter at $89,241.80. Contributions to the portfolio during the quarter amount to $4,551.
No stocks were sold during this quarter, but four new positions were added. The four companies I have bought are Teekay Tankers (TNK), Frontline Ltd. (FRO), DHT Holdings (DHT), and Scorpio Tankers (STNG). These positions are oil tanker companies, and all were bought at the end of April and early May.
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of discretionary value stocks, oil tankers, 401k stocks, precious metals, and cash. It can be seen that 39.1% of the portfolio is in stocks, while 60.9% is in cash and safe haven assets. I would prefer to deploy more of the cash to undervalued stocks, but I am remaining cautious despite the market surging during the second quarter.
During the quarter I received $260.65 total in dividends, which is broken down in the table below.
| Ticker | Quarterly Dividend |
| FRO | 114.1 |
| STNG | 6.8 |
| DHT | 75.25 |
| EMR | 42.5 |
| COF | 22 |
| Total | 260.65 |
My Thoughts
Under normal circumstances, it should be a boring quarter where I don’t feel the need to rant comment on current events. However these last few months have been insane. Here are some of the notable crazy things, things that confuse me, things that worry me that have happened this quarter:
- Unemployment around 20% and much higher for the service sector
- The S&P 500 nearly breaking even for the year despite the quickest 30% selloff ever and then follows it with the best quarter since 1938
- The Federal Reserve upping their game by buying bond ETFs
- Consumer spending somehow rebounded quickly
- Compelling arguments on either side saying that COVID is as bad as predicted, or not that bad at all
- Whether you wear a mask is a strong indicator of your political affiliation
- Rookie traders who stereotypically use the brokerage Robinhood gambling on airlines, cruise ship, vaccine biotech, work from home tech stocks among others
- Barstool Sports founder Dave Portnoy becoming a stock market influencer…stocks only go up suckers
- Hertz, Chesapeake Energy, probably others, massively rallying after announcing bankruptcy
- Although they called it off, Hertz almost issued stock to gamblers after they declared bankruptcy…that means selling stock to suckers that will go to zero when the bond holders wipe them out
- Protests…which I’m all for if done peacefully, but we are still in a pandemic which is scary
- Riots (not cool) and autonomous zones
- Nikola, a Tesla clone that makes trucks is now worth $20 Billion, an 8x increase in stock price, despite not having actually built a single truck
- Negative $40 a barrel of oil…ie paying people to take the oil because it costs too much to store it
It’s like we’re living in the tech stock mania of the late 90’s, social unrest of 1968, and the economy of 1932 all at the same time. I’m just trying to think rationally, be empathetic of others, filter out the noise, do my best to keep my family healthy, and do my best to efficiently allocate my capital.
Or ya know, stocks only go up…
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), and Simon Property Group (SPG). All three were bought during the March sell off. 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 | 3,442.45 | -1.04% |
| EMR | 41 | 3,485.00 | 5,272.55 | 51.29% |
| SPG | 74.5 | 3,427.00 | 3,145.48 | -8.21% |
After the March lows, EMR quickly rebounded, which makes sense because it is probably the best quality company I own. Since March, COF and SPG were struggling, both down around 20-30% from purchase. Recently, the market has raised all ships, where all three of these companies were in the green for me…however the market has taken back some of those gains.
Notable News
There is not too much news to report for this set of stocks. Simon began reopening their malls in May, so hopefully Q2 results show some optimism. SPG also canceled their merger with Taubman Centers (TCO), which is another large mall REIT. These properties would be a nice addition to Simon since the ownership of quality malls is pretty concentrated to a few large players. However, given that 2020 is going to be very rough on SPG, it seems prudent to reserve capital.
EMR and Portfolio Management
At one point this quarter, Emerson was up 70% from my cost basis. While it was exciting to see the stock run up so much within three months of purchase, it creates quite the dilemma. A lot of people spend the majority of their time finding and researching stocks in order to make a buy decision. However that is only half the work. Now that you own the stock you have to decide when to sell, which could be:
- The Stock runs up some random amount that makes you feel good, so you sell to take some money off the table
- The stock reverts back to your estimate of the stocks true value, so you sell to find another undervalued stock
- Lastly, you hold onto the stock indefinitely, allowing the businesses earnings to compound which will steadily increase the share price
Plus I’m not even getting into the thoughts that enter your head when a stock is down…The naive investor probably does the first scenario, buying a stock and selling it some arbitrary gain. There’s technically nothing wrong with the second scenario, but you’ll have to pay capital gains tax and it only makes sense if you have another good opportunity to roll your gains into, which is never guaranteed. The last scenario reflects investing in its truest form, and makes your life a little easier by reducing your tax burden, reducing the chance you’ll roll your gains into something dumb, and generally more hassel free. If you think about it in terms of internal rate of return (IRR), on paper the last option most likely will have lower (but still attractive returns). It’s possible to have higher returns value trading, but there is execution risk involved.
Long story short, it’s tempting to sell Emerson, but for now I don’t have a better company to reinvest in. I consider EMR fairly priced right now, my thought process might change if it becomes significantly overvalued. At this valuation, Emerson should have slightly above-inflation business growth, and throws off an attractive amount of free cash flow (I like cash flow over earnings but that’s a different tangent) from here.
Tanker Stocks
During the last quarter I jumped on the oil tanker trade (see my analysis) and entered positions in DHT, FRO, STNG, TNK. The table shows my cost basis, the current value, and the current percentage losses. I will probably do a write up revisiting the tanker thesis so I’ll keep this short. Oil tankers were very profitable during the first quarter. Oil tankers probably earned as much or more during the second quarter which will reflect the crazy high spot rates seen in April. In other words, the thesis played out just as the smart people predicted. The oil tankers have made record profits in the last 9 months, some even paying juicy dividends…yet I’m down 50%.
For now at least, the craziness in the oil market has subsided which has shortened the duration of the tanker thesis. However there are some other factors that are positive for tankers in the medium term. I was hoping this trade would have panned out by now, but I still think the value of these companies will eventually be realized.
| DHT | 8.17 | 1,755.90 | 1,102.95 | -37.19% |
| FRO | 10.66 | 1,738.29 | 1,137.74 | -34.55% |
| STNG | 26.63 | 1,742.67 | 871.08 | -50.01% |
| TNK | 23.86 | 1,765.88 | 948.68 | -46.28% |
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 last asset class is the decent allocation to precious metals, which 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.
| 12/31/19 | 6/30/20 | YTD Gain (Loss) | YTD Contributions | |
| Precious Metals | 7,861.00 | 8,712.56 | 10.83% | |
| 401k | 10,962.24 | 17,301.35 | -9.37% | 7,728.00 |
Value Papers
If you think this post is boring, or want to nerd out on value investing research papers, then check these papers I read this quarter.
Is Systematic Value Investing Dead?
A Quick Survey of “Broken” Asset Classes
Books I’m Reading
Usually I try to focus on one book at a time, but the past few months I’ve been multitasking. Eventually I may do full reviews of these books, but for now a little summary. I just finished The New Jim Crow: Mass Incarceration in the Age of Colorblindness. Given the current events, I thought I should go out of my comfort zone and read about race and the criminal justice system. It was a very powerful book that made me question some of my beliefs on why society is the way it is.
Next, I’ve been slowly making my way through Titan: The Life of John D Rockefeller, Sr. This book is huge, so it’ll take me awhile to plow through it. So far I’m at the stage of his career where things are really starting to pick up. It was fascinating to learn about the very strange childhood Rockefeller endured.
Finally, I’m almost done with The Rise and Fall of the Conglomerate Kings. This is a business history book of the founders and the companies that led the high flying conglomerate movement in the 1960’s. This includes Textron, Litton Industries, Gulf + Western, ITT, and LTV. These guys were pioneers at buying other companies and using financial engineering to drive up their stock prices. This book highlights these companies’ capital mis-allocation, which contrasts to everyone’s favorite conglomerate, Berkshire Hathaway.
Conclusion
This wraps up my Q2 2020 portfolio update. Hopefully Q3 is less eventful and my stocks go up…or better yet some new buying opportunities emerge.
A write up of my Q1 2020 results can be found here
Check out my summary of Berkshires Q1 portfolio changes