Performance Overview
For Q4 2021, the portfolio was up 2.7%, and finished the year up 20.6%. The Q4 starting balance was $146,562.65, and finished the quarter at $159,295.45. Contributions to the portfolio during the quarter amount to $9,390. The starting balance of the portfolio at the start of 2021 was $111,461.88. Total contributions to the portfolio for the year was $23,590, where $17,590 of that was 401k contributions.
A few new positions were added this quarter in several of the portfolio categories. On the discretionary side, Discovery Inc. (DISCK), and Qurate Retail (QRTEA) was purchased. The Deep Value category saw the addition of Boise Cascade Company (BCC), Gray Television (GTN), Seneca Foods Corp (SENEA), Koppers Holdings (KOP). This quarter saw more rebalancing of the precious metal holdings with additional purchase of the SLV silver ETF.
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 86.9% of the portfolio is in stocks, while 13.1% is in cash and safe haven assets.
During the quarter I received $1,397.62 total in dividends, which is broken down in the table below. The boost in dividends this quarter was due in large part to the special dividends paid by QRTEA, BCC, and ITIC. Total dividends received for the year amounted to $2,447.91.
| Ticker | Quarterly Dividend |
| QRTEA | 625.00 |
| FE | 48.75 |
| BTI | 137.13 |
| GTN | 10.80 |
| BTG | 19.04 |
| STNG | 6.80 |
| BCC | 171.60 |
| DHT | 4.30 |
| ITIC | 221.52 |
| EMR | 43.78 |
| COF | 33.00 |
| SPG | 75.90 |
| Total | 1,397.62 |
My Thoughts
One of the biggest financial stories this year was the meme stock phenomenon. AMC theaters and Gamestop were the two high profile meme stocks. In both cases, these companies were shorted by a few hedge funds. A group of amatuer speculators who gathered on Reddit were trying to create a short squeeze to cause large losses to the hedge funds, thereby sticking it to the man. Part of the motivation for the Reddit crowd was to inflict financial pain on firms involved with “payment for order flow”, and because they thought the hedge funds were intentionally trying to kill the meme stocks by shorting them. Also there was the promise of great riches if the Redditors did pull off the short squeeze.
The Reddit crowd had an arcane thesis on how to pull off the short squeeze, and to explain why the “mother of all squeezes” hasn’t happened yet, going on months, despite the hedge funds supposedly bleeding from the interest payments on their shorts. Support for this thesis included:
- A get rich quick narrative
- Complex financial terminology such as dark pools and naked short selling
- Anecdotal evidence such as the Redditors control a large portion of the shares outstanding, and that the hedge funds interest payments are killing them
- Logical fallacies such as ascribing the causation of a company going bankrupt due to short selling
Lucky for me, my investing strategy does not involve knowing what dark pools and naked shorting are. I basically try to buy boring, out of favor, maybe even hated stocks with the belief that eventually the market will forget why the company is out of favor. Most people would think it is no fun bragging to friends and family about owning shopping malls, HVAC equipment manufacturers, or electric utilities.
A key part of my investing philosophy is thinking in terms of years (sometimes decades) instead quarterly or long enough to make a quick buck. The power of compound interest is miraculous, however it takes years to appreciate its effects. It almost seems like it is a genetic mutation to be able to delay gratification, to be able to hold investments for the long term to let them compound. The simple recipe to do well financially is to live below your means, then invest your savings and not mess with it. Now I understand that it is easier said than done for some socio-economic cohorts, but the goal should be to make it practical for everyone to be able to save and invest. Unfortunately, we are all susceptible to get rich quick schemes. I am not too concerned about the person who throws a small amount of their money into this meme stock mania. What is more worrisome is the speculator who loses a substantial amount of their money, blames the system, and swears off the stock market…forgoing the tool of long term compounding.
Another big finance story this year was inflation. While pessimists have been calling for inflation for the past 10 years, now every day there is a news article discussing inflation. Much of the talk has been whether or not the price increases are “transitory”. I think the use of the word transitory is misleading, it implies that prices have risen, but will fall back to where they were. What economists and the Federal Reserve really mean is the rate of change in inflation is transitory, meaning the inflation rate goes from 2% to 7% back down to 2%. A large part of the inflation is due to the complex system that is our supply chains, where one bottleneck has massive ripple effects. Hopefully the supply chain works itself out soon, and luckily the fear mongers were wrong: we didn’t have any trouble getting our Christmas presents.
The other aspect of the inflation story is the labor shortages, which is a complicated topic. People can debate the pros and cons to the quickly rising wages, but what is certain is that the wage increases are not transitory. While I do not want to predict how long high inflation will persist, the point is that 2021 definitely experienced inflation.
Here is an example of the sting felt by this year’s 7% inflation print: I purchased British American Tobacco at an attractive 8% dividend yield, but real terms that is only a paltry 1% yield this year. Now think of the hurt from the people who own bonds that yield less than 1%. Luckily, BTI should have the ability to pass on price increases to its customers. Owning companies that have pricing power is one of the best ways to fight inflation.
In my strategy, I do not go out of my way to purchase investments to hedge inflation. However occasionally there is an overlap between a company that is undervalued and also has some degree of pricing power. These scenarios are a win-win. The investments in my portfolio that should navigate an inflationary environment reasonably well include British American Tobacco, Simon Property Group, oil tankers, precious metals, and potentially Capital One and First Energy.
In the past few years, Environment-Social-Governance (ESG) investing has increased in popularity. While I think businesses should be mindful of their ESG impact, I am not sure that there needs to be labels or a rating attached to companies. My impression is that many companies operate with short term thinking, like making sure next quarters earnings hit analyst projections. I would rather have companies focus on the long term, which should benefit the long term owners of that business. Perhaps I am being naive, but it would seem that a company needs to factor in all stakeholders to be successful over many decades, or else Karma would set them straight.
Another issue I have with the ESG movement is that Wall Street jumps in to create ESG funds that charge higher fees than a generic index fund. Oftentimes the holdings of the ESG fund are nearly identical to the broad index! With the rise of ESG funds, certain stocks and industries see increased buyers of their stock, while other industries are left behind. These companies left behind could present opportunities to investors. It is usually a good strategy to fish where no one else is fishing.
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), FirstEnergy (FE), British American Tobacco (BTI), Qurate Retail (QRTEA), and Discovery Inc (DISCK). The table below shows the cost basis, current value, and gains/losses for these positions.
Emerson Electric and AspenTech Deal
The main piece of news this quarter was that Emerson announced a deal with the industrial software company AspenTech (AZPN). Emerson is providing AspenTech its industrial software subsidiaries, and $6B in order to have a 55% stake in the New AspenTech. New AspenTech will still be listed as (AZPN). After the deal, AZPN is expected to have FY 2020 revenues of $1.1B and EBITDA around $500M. The earnings of the new company will be consolidated to Emersons financials, so Emerson will directly benefit from any earnings growth the new company will experience. Usually Emerson buys entire companies, so they are mixing it up with this deal. Additionally, EMR has only been doing smaller acquisitions of late. In contrast, Emerson’s $6B outlay represents about 10% of their market cap. The deal is expected to close in the second quarter of 2022.
Discovery Inc. Purchase
The first addition to the portfolio this quarter was Discovery Inc. (DISCK). Discovery includes the cable TV station of the same name, as well as Food Network, HGTV, Animal Planet, plus others. The company has responded to declining cable viewership by introducing the Discovery+ streaming app. The bigger story is that Discovery is merging with Warner Media via a Reverse Morris Trust. Warner Media is currently a subsidiary of AT&T (T), and consists of Warner Brothers movie library and IP, HBO, and has HBO Max as a streaming option.
Warner’s movies and TV shows are big budget affairs, known for their quality. In contrast, Discovery’s main content is reality based TV shows that are cheap to make. These reality shows are nice background noise for a cable TV watcher who just wants to put on an entertaining show. Given this situation, it appears Discovery will have a tough time getting people to go out of their way to pay for their streaming content. However, Discovery’s reality based content coupled with Warner Media’s library of movies and TV shows should create a very strong package. It is possible Warner-Discovery could be in the top tier of streaming platforms in the coming years.
Despite all of this, investors seem to be quite pessimistic about Discovery, with its share price steadily decreasing ever since the merger was announced. I believe the negativity surrounding Warner-Discovery has to do with potential regulatory issues, complexity of the Reverse Morris Trust arrangement, the relatively high Debt/EBITDA the new company will have, and uncertainty in the war for streaming market share. I think the negativity is overblown, and that even if the deal did not pan out, DISCK would be undervalued. Additionally, the great capital allocator John Malone is a large shareholder of Discovery, and will be on the board of the new company. I don’t mind riding on people’s coattails…
Qurate Retail Purchase
The other large purchase this quarter is also involved in the John Malone complex of companies. This purchase was Qurate, which is a holding company that mostly consists of QVC and HSN cable TV channels. Shopping through cable TV would seem quite the melting ice cube with the trend of cord cutting and ecommerce, that is probably true. Despite these headwinds, Qurate’s sales primarily come from older women who may be slow to adapt to modern shopping. Additionally, a decent chunk of QRTEA’s sales come from “super users” who make many repeat purchases.
Even though Qurate’s bread and butter is cable TV, they are working on pivoting to the direct-to-consumer streaming model. Since the sentiment regarding Qurate is quite negative, the company trades at a price to free cash flow multiple of around 4, which is very cheap. The company’s capital allocation policy involves returning most of the cash flow back to shareholders instead of reinvesting in its low growth business. Qurate does not pay regular dividends, but pays a hefty special dividend. In my view, QRTEA will not shrink as fast as people think, and if they nail the landing with their streaming strategy then the business could be generating cash for years to come.
| Avg Price | Cost Basis | Current Value | Current Gain (Loss) | |
| COF | 63.25 | 3,478.75 | 7,979.95 | 130.25% |
| EMR | 41.00 | 3,485.00 | 7,902.45 | 126.76% |
| SPG | 74.50 | 3,427.00 | 7,349.42 | 114.46% |
| FE | 28.00 | 3,500.00 | 5,198.75 | 48.54% |
| BTI | 37.45 | 7,114.91 | 7,107.90 | -0.01% |
| QRTEA | 7.60 | 5,700 | 5,700.00 | 0.0% |
| DISCK | 24.50 | 4,165.00 | 3,893.00 | -6.53% |
Tanker Stocks
Tankers are still trading a lot lower than my purchase price. I wouldn’t be opposed to selling these stocks. In the medium term, oil tankers should recover once oil demand rebounds from the pandemic.
| Avg Price | Cost Basis | Current Value | Current Gain (Loss) | |
| DHT | 8.17 | 1,755.90 | 1,115.85 | -36.45% |
| FRO | 10.66 | 1,738.29 | 1,152.41 | -33.70% |
| STNG | 26.63 | 1,742.67 | 871.08 | -50.01% |
| TNK | 23.86 | 1,765.88 | 806.60 | -54.32% |
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.
| Avg Price | Cost Basis | Current Value | Current Gain (Loss) | |
| BCC | 55.00 | 3,025.00 | 3,916.00 | 29.45% |
| BIIB | 275.00 | 2,475.00 | 3,116.43 | -12.76% |
| BTG | 5.25 | 2,499.00 | 2,003.96 | -25.14% |
| GTN | 23.00 | 3,105.00 | 2721.6 | -12.35% |
| HXL | 36.80 | 1,803.20 | 3,057.60 | 40.76% |
| ITIC | 164.54 | 1,974.48 | 2,095.56 | 19.82% |
| KOP | 31.47 | 2,958.18 | 2942.2 | -0.54% |
| MHO | 60.00 | 2,520.00 | 2611.56 | 3.63% |
| MSGE | 95.24 | 2,000 | 1477.14 | -26.14% |
| QDEL | 120.00 | 2,520.00 | 2834.79 | 12.49% |
| SENEA | 50.00 | 3,000 | 2877 | -4.10% |
No deep value positions were sold this quarter. Additions to this section of the portfolio include Boise Cascade Company (BCC), Gray Television (GTN), Seneca Foods Corp (SENEA), Koppers Holdings (KOP).
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. This quarter, I added another 49 units of iShares Silver Trust (SLV) at a cost basis of $21.71 a unit. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
| 12/31/20 | 12/31/21 | YTD Gain (Loss) | YTD Contributions | |
| Precious Metals | 9,964.00 | 12,854.19 | -2.91% | 2,054 |
| 401k | 32,252.43 | 60,578.76 | 26.96% | 17,590.00 |
Tail Hedging
This quarter I reimplemented 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 $1,652, with proceeds of $472, leaving a net cost of $1,180.
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