For Q1 2023, my stock picking portfolio was up 7.9%. The Q1 starting balance was $75,407.31, and finished the quarter at $84,519.57. Contributions to the portfolio during the quarter amounted to $5,092.
Portfolio Composition
The current allocation of the portfolio is shown in the chart below. Currently, the portfolio consists of 19 stocks. The top five largest positions are British American Tobacco, Emerson Electric, Omnicom Group, Alico, and Bank OZK Preferred.
Current Holdings
My portfolio generally consists of two types of stocks. The first is quality companies that I believe are facing a negative setback in which the market has over-reacted to. I will typically perform more due diligence on these companies, and size the position around 10% of the portfolio at purchase.
The other stocks I hold could be trading at a low valuation multiple, be a net-net, special situation, etc. I usually do less due diligence on these companies, and hold them for shorter periods of time. Accordingly, I take a basket approach where each individual stock makes up 2-5% of the portfolio.
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.
For Q3 2022, the multi-asset portfolio was down 5%, and down 18% YTD. The Q3 starting balance was $162,469.10, and finished the quarter at $160,358.87. Contributions to the portfolio during the quarter amounted to $6,546.
As I mentioned last quarter, I want to also report the returns of my stock picking portion of the portfolio. The Q3 starting balance was $72,164.80, with an ending balance of $77,297.12. For the return calculation, I add the proceeds from stock sales to an “internal cash” balance. Dividends received are also debited to this cash balance. Purchases of stocks are subtracted from the internal cash, unless the internal cash is depleted. This triggers a cash flow into the portfolio. Therefore the cash flow for Q3 was $10,604. Putting all of this together means the stock-only portfolio was down 6.7% for Q3, and is down 14.5% YTD.
September saw a flurry of new stock purchases: Intel (INTC), Charter Communications (CHTR), Six Flags Entertainment (SIX), Semtech Corp (SMTC), USANA Health Sciences (USNA), Fossil Group (FOSL). Stocks that were sold this quarter include Frontline (FRO), Scorpio Tankers (STNG), First Energy (FE), and Investors Title Company (ITIC). 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 87.3% of the portfolio is in stocks, while 12.7% is in cash and safe haven assets.
During the quarter I received $401.28 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FE
48.75
BTI
124.55
GTN
10.80
BCC
6.60
DHT
8.60
EMR
43.78
COF
33.00
SPG
80.5
WSM
35.10
KOP
4.70
HXL
4.90
Total
401.28
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
5,069.35
45.72%
EMR
41.00
3,485.00
6,223.70
78.59%
SPG
74.50
3,427.00
4,128.50
20.47%
BTI
37.45
7,114.91
6,745.00
-5.20%
QRTEA
7.60
5,700.00
1,507.50
-73.55%
WBD
24.50
4,957.00
2,530.00
-48.96%
COF
63.25
3,478.75
5,069.35
45.72%
This quarter I sold my position in First Energy. The stock has reverted to fair value now that the company is moving past its bribery scandal. I considered holding FE for the long term for its dividends, however I changed my mind. The first factor is that the company is planning large amounts of capex over the next several years, and part of that is planned to be funded by equity issuance. As a long term stockholder, I do not like to see my position diluted by issuing new stock. Secondly, I believe that utilities can pass on higher costs to users, however it is a regulated process that may take a while or not keep up with inflation. If inflation persists, then the lack of pricing power would sour the benefits of owning the stock.
Cost Basis
Sale Proceeds
Realized Gain/Loss
FE
3,500.00
5,124.86
46.4%
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 Intel (INTC), Charter Communications (CHTR), Six Flags Entertainment (SIX), Semtech Corp (SMTC), USANA Health Sciences (USNA), and Fossil Group (FOSL).
Avg Price
Cost Basis
Current Value
Current Gain/Loss
BCC
55.00
3,025.00
3,270.30
8.11%
GTN
23.00
3,105.00
1,933.20
-37.74%
HXL
36.80
1,803.20
2,534.28
40.54%
KOP
31.47
2,958.18
1,953.32
-33.97%
MHO
60.00
2,520.00
1,521.66
-39.62%
SENEA
50.00
3,000.00
3,026.40
0.88%
SMTC
30.00
3,000.00
2,941.00
-1.97%
USNA
58.00
2,900.00
2,802.50
-3.36%
CHTR
360.00
3,600.00
3,033.50
-15.74%
FOSL
3.50
2,975.00
2,907.00
-2.29%
Investors Title Company was the only company sold this quarter.
Cost Basis
Sale Proceeds
Realized Gain/Loss
ITIC
1,974.48
1,986.56
0.6%
Tanker Stocks
The tankers are finally breaking even. 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
1,625.40
-7.43%
TNK
23.86
1,765.88
2,037.96
15.41%
After some progress in the share price, Scorpio and Frontline pulled back so I exited my position. In hindsight I sold too early since they have bounced back, oh well.
Cost Basis
Sale Proceeds
Realized Gain/Loss
FRO
1,738.29
1,351.21
-22.2%
STNG
1,742.67
1,992.34
14.3%
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
09/30/22
YTD Gain/Loss
YTD Contributions
Precious Metals
12,854.19
11,173.10
-13.1%
0
401k
60,578.76
60,636.83
-22.9%
16,329.14
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 $1,719.05, with no gains.
For Q2 2022, the portfolio was down 9.15%, and down 13.66% YTD. The Q2 starting balance was $168,049.53, and finished the quarter at $162,469.10. Contributions to the portfolio during the quarter amounted to $14,696.
This quarter I want to try something new by breaking out the results of just the individual stocks that I own. The performance of just the individual stocks will certainly have more volatility than the overall multi-asset portfolio, which can be a benefit or at times a hindrance. I may phase out of reporting my full multi-asset portfolio to just focus on the individual stocks. However, I have not made up my mind on this.
The Q2 starting balance was $76,209.80, with an ending balance of $71,930.35. For the return calculation, I am considering stocks sold during the month as negative cash flow (like a distribution), and purchasing a stock is cash flow positive (money coming in), dividends are treated as distributions as well. Therefore the net cash flow for Q2 was $6,005. Putting all of this together means the portfolio was down 13.3% for Q2, and is down 14.2% YTD.
Three new stocks were bought this quarter: Williams-Sonoma (WSM), Omnicom Group (OMC), and BASF (BASFY). I added to my position in Warner Bros Discovery by buying 50 more shares. Stocks that were sold this quarter include Quidel (QDEL), B2Gold (BTG), Madison Square Garden Entertainment (MSGE), and Biogen (BIIB). 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 81.4% of the portfolio is in stocks, while 18.6% is in cash and safe haven assets.
During the quarter I received $486.53 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FE
48.75
BTI
129.28
GTN
10.80
STNG
6.80
BCC
114.1
DHT
4.30
ITIC
5.52
EMR
43.78
COF
33.00
SPG
75.90
KOP
9.40
HXL
4.90
Total
486.53
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 Warner Bros Discovery (WBD). The table below shows the cost basis, current value, and gains/losses for these positions.
During the second quarter, Discovery Inc. finalized their merger with Warner Media, forming Warner Bros Discovery. I think WBD can use the cash generated by the linear TV advertising to transition into one of the top streaming platforms.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
5,730.45
64.73%
EMR
41
3,485.00
6,760.90
94.00%
SPG
74.5
3,427.00
4,366.32
27.41%
FE
28
3,500.00
4,798.75
37.11%
BTI
37.45
7,114.91
8,152.90
14.59%
QRTEA
7.6
5,700.00
2,152.50
(62.24%)
WBD
22.53
4,957.00
2,952.40
(40.44%)
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 are Williams-Sonoma, Omnicom Group, and BASF.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BCC
55.00
3,025.00
3,271.95
8.16%
GTN
23.00
3,105.00
2,280.15
(26.57%)
HXL
36.80
1,803.20
2,563.19
42.15%
ITIC
164.54
1,974.48
1,882.68
(4.65)
KOP
31.47
2,958.18
2,128.16
(28.06%)
MHO
60.00
2,520.00
1,665.72
(33.90%)
SENEA
50.00
3,000
3,332.40
11.08%
WSM
115.00
5,175.00
4,992.75
(3.52%)
OMC
65.86
4,610.37
4,452.70
(3.42%)
BASFY
11.54
4,269.80
4033
(5.55%)
Four of the deep value positions were sold this quarter due to the one year holding period. The table below summarizes the realized gains and losses. In this case, they are all losses. Obviously this is not preferred, but I do not think this batch of losers is indicative of a flawed strategy.
Cost Basis
Sale Proceeds
Realized Gain (Loss)
BTG
2,499.00
2,379.92
(4.8%)
BIIB
2,475.00
1,937.77
(21.7%)
MSGE
2,000.00
1,698.46
(15.1%)
QDEL
2,520.00
2,414.97
(4.2%)
Tanker Stocks
The tankers have seen a recovery lately, with Scorpio Tankers finally showing a gain.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,317.95
(24.94%)
FRO
10.66
1,738.29
1,444.18
(16.92%)
STNG
26.63
1,742.67
2,346.68
34.66%
TNK
23.86
1,765.88
1,304.62
(26.12%)
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
06/31/22
YTD Gain (Loss)
YTD Contributions
Precious Metals
12,854.19
12,019.64
5.96%
0
401k
60,578.76
63,924.8
(19.62%)
3,696.00
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 $1,582.70, with proceeds of $891.81, leaving a net cost of $690.89.
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.
For Q3 2021, the portfolio is down 0.65%, and up 17.4% YTD. The Q1 starting balance was $144,722.98, and finished the quarter at $147,690.65. Contributions to the portfolio during the quarter amount to $3,948.
A few new positions were added this quarter in several of the portfolio categories. On the discretionary side, British American Tobacco (BTI) was purchased. The Deep Value category saw the addition of M/I Homes (MHO). Finally, SLV silver ETF was added to the precious metals holdings.
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 72.1% of the portfolio is in stocks, while 27.9% is in cash and safe haven assets.
During the quarter I received $231.90 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FE
48.75
DHT
4.30
ITIC
5.52
EMR
42.93
COF
66.00
SPG
64.40
Total
231.90
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). The table below shows the cost basis, current value, and gains/losses for these positions.
The newest addition to the discretionary portfolio was the purchase of British American Tobacco. Cigarette volumes have been declining at a rate of 5% annually, and that trend is expected to continue. BTI is preparing for a “post-cigarette” world by developing alternative tobacco products that they claim is much more safe than combustables. While ESG funds are not allowed to own British American Tobacco, I don’t mind BTI’s 8% dividend yield.
Capital One recently announced they will enter the Buy-Now-Pay-Later (BNPL) space to compete with companies like Affirm. BNPL seems like a crowded space, so it will be interesting to see if COF can make an impact. With this announcement, it looks like I will be doing some homework on the competition..
First Energy announced their settlement with the DOJ concerning their bribery scandal. The company will pay $115 million to the US Treasury, and another $115 million to Ohio utility customers. These payments will be spread out over three years. With this scandal receding into the background, hopefully FE can revert to their pre-scandal price.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
8,507.95
144.57%
EMR
41.00
3,485.00
8,180.40
134.73%
SPG
74.50
3,427.00
6,002.08
75.14%
FE
28.00
3,500.00
4,651.25
32.89%
BTI
37.45
7,114.91
6,703.20
(5.78%)
Tanker Stocks
Tankers have slightly improved this quarter, but are still a sore point in my portfolio. I wouldn’t be opposed to selling these stocks. However, I don’t have any better ideas, I already have a large cash position, and there is some hope they will work out in the medium term.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,395.35
-20.53%
FRO
10.66
1,738.29
1,467.00
-15.60%
STNG
26.63
1,742.67
1,499.40
-13.96%
TNK
23.86
1,765.88
1,067.08
-39.57%
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.
Note: MSGN merged with MSGE during the quarter
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BIIB
275.00
2,475.00
3,116.43
25.91%
BTG
5.25
2,499.00
2,003.96
-19.81
HXL
36.80
1,803.20
3,057.60
69.56%
ITIC
164.54
1,974.48
2,095.56
6.13%
MSGE
16.00
2,000.00
1,822.50
-8.88
QDEL
120.00
2,520.00
2,690.52
6.77%
MHO
60.00
2,520.00
2,427.60
(3.67%)
RSKIA, FF, and BBSI were sold this quarter since I’ve held them for a year. RSKIA and BBSI realized attractive gains, while FF produced a loss. Last quarter Future Fuel paid out a special dividend, which I received about $300. With this special dividend, my return with FF was closer to breaking even. The new addition this quarter was the home builder M/I Homes (MHO).
Cost Basis
Sale Proceeds
Realized Gain (Loss)
RSKIA
1,740.75
2,690.23
54.54%
FF
1,794.00
1,310.99
(26.92%)
BBSI
1,767.50
2,572.48
45.54%
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 100 units of iShares Silver Trust (SLV) at a cost basis of $20.52 a unit. The table below shows the YTD performance for the precious metals and 401k, which includes the effects of contributions.
12/31/20
9/30/21
YTD Gain (Loss)
YTD Contributions
Precious Metals
9,964.00
9,682.04
-6.84%
2,054
401k
32,252.43
54,845.18
21.91%
14,200.00
Books I’m Reading
This quarter I read “Kochland: The Secret History of Koch Industries and Corporate Power in America”. Prior to reading the book, I was not too familiar with the Koch brothers besides them controlling the largest private company in the country, them being libertarians, and that they are controversial. This book covers the history of Koch Industries, Charles Koch’s management philosophy, various Koch Industry scandals, and Charles Koch’s lobbying machine. Kochland has a somewhat negative bias against Charles Koch, which I kind of knew before reading, so the negative portrayal did not bother me.
Much of the book consisted of explaining how Koch Industries went into a new line of business, then some crises happened in that new business, then presenting 1st hand accounts from key people navigating said crisis. This process repeated several times. The book did provide a good overview of the history of the company. I wish it provided more financial data, but apparently Koch Industries is extremely secretive so that info is not usually released.
The chapters on Charles Koch’s political network were very interesting. I was not aware of how impactful Koch’s lobbying groups were at amplifying the Tea Party movement, blocking climate legislation, and meddling with Trump’s tax plan. Overall the book was quite the page turner, I just might seek out other books on Koch Industries to get an additional perspective.
For Q2 2021, the portfolio is up 6.37%, and up 18% YTD. The Q2 starting balance was $132,799.55, and finished the quarter at $144,722.98. Contributions to the portfolio during the quarter amount to $3,386.
A few new positions were added this quarter in the deep value category. These include Biogen, MSG Networks, Investors Title Co, Quidel, and B2Gold. Additionally, Richardson Electronics was sold for a gain.
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 72.1% of the portfolio is in stocks, while 27.9% is in cash and safe haven assets.
During the quarter I received $587.72 total in dividends, which is broken down in the table below. It should be noted that FutureFuel paid a special dividend in addition to their normal dividend, which amounted to $345.
Ticker
Quarterly Dividend
FF
353.28
STNG
6.80
FE
48.75
DHT
8.60
BTG
19.04
ITIC
5.52
BBSI
21.00
EMR
42.93
COF
22.00
SPG
59.80
Total
587.72
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), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.
Recently, FirstEnergy announced a deferred prosecution agreement with the DOJ. This will probably result in a fine, and hopefully the scandal will be put to rest. The Fed released the results of their latest bank stress test. Capital One was one of the strongest performers in the stress test, meaning. COF has plenty of excess capital to weather a storm. Or since it appears things are returning to normal, hopefully Capital One can return some of this cash to shareholders.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
8,507.95
144.57%
EMR
41.00
3,485.00
8,180.40
134.73%
SPG
74.50
3,427.00
6,002.08
75.14%
FE
28.00
3,500.00
4,651.25
32.89%
Tanker Stocks
Tankers have slightly improved this quarter, but are still a sore point in my portfolio. I wouldn’t be opposed to selling these stocks. However, I don’t have any better ideas, I already have a large cash position, and there is some hope they will work out in the medium term.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,395.35
-20.53%
FRO
10.66
1,738.29
1,467.00
-15.60%
STNG
26.63
1,742.67
1,499.40
-13.96%
TNK
23.86
1,765.88
1,067.08
-39.57%
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)
BIIB
275.00
2,475.00
3,116.43
25.91%
BTG
5.25
2,499.00
2,003.96
-19.81
FF
13.00
1,794.00
1,324.80
-26.15%
HXL
36.80
1,803.20
3,057.60
69.56%
ITIC
164.54
1,974.48
2,095.56
6.13%
MSGN
16.00
2,000.00
1,822.50
-8.88
QDEL
120.00
2,520.00
2,690.52
6.77%
RSKIA
8.25
1,740.75
2,743.00
57.57%
Since I sold some deep value stocks last quarter, I used the proceeds to buy a few new companies this quarter. The new additions are Biogen (BIIB), B2Gold (BTG), Investors Title Co (ITIC), MSG Networks (MSGN), and Quidel (QDEL). Some of the remaining deep value picks, such as FF and RKIA, are coming to their one year anniversary so they will probably be sold next quarter. Finally, Richardson Electronics was sold this quarter for a nice gain.
Cost Basis
Sale Proceeds
Realized Gain (Loss)
RELL
1,802.25
2,997.32
66.31%
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.
12/31/20
6/30/21
YTD Gain (Loss)
YTD Contributions
Precious Metals
9,964.00
9,682.04
-2.83%
401k
32,252.43
49,930.84
19.68%
10,252.00
Books I’m Reading
One of my recent reads was “The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60’s”. I was looking for a market history book that covered the 1960’s market boom, then the stagflation bear market of the 70’s. A part of me feels like history is repeating, so I was interested in learning more about this time period and I’ve heard this book mentioned before. Unfortunately, Go-Go Years does not cover the high inflation of the 1970’s. It is mostly focused on the 60’s and ends with the recession in 1970. Despite this, the book was still quite interesting because I was not aware of all the stock market drama going on in the 1960’s.
The book starts off early in the decade, painting the picture of a market moved by individuals instead of institutions. Then the growth mutual funds pioneered by George Tsai, and copied by many, took advantage of the technology companies of the day. Conglomerates became a new phenomenon with Textron, Litton Industries, Gulf+Western and the like. Financial engineering and shoddy accounting was spreading throughout corporate America. Go-Go Years culminated with the 1970 recession that crushed the overleveraged stock brokerage industry. This era does not get mentioned as much as 1929 or 2008, but if you enjoy market history, Go-Go Years is a good read.
The second book I read this quarter was the personal finance classic “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy”. I thought I knew the gist of the book, “live below your means and invest”, but Millionaire Next Door presented some interesting information that made it an enjoyable read. Many of the millionaires profiled in the book come from humble, or even poor beginnings, yet they build a small company, save, and invest. The example millionaires were frugal, but to my surprise, they didn’t drive 15 year old Honda Civics. The authors’ surveys found that many of the self made millionaires bought newer cars, they just bought Cadillac’s and Ford Explorers instead of high end BMW’s. A big theme of the book was that you can have a high income, but if you spend it all on status items you can look rich but actually have little net worth. Now whenever I think about making a big purchase, I’ll ask myself “What would a millionaire next door do?”.
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Performance Overview
For Q1 2021, the portfolio is up 11.09%. The Q1 starting balance was $113,027.88, and finished the quarter at $132,799.55. Contributions to the portfolio during the quarter amount to $6,866.
No stocks were bought this quarter, however a few positions were sold. Paul Mueller Co, Friedman Industries, and Surge Components were all sold for a gain.
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 64.2% of the portfolio is in stocks, while 35.8% is in cash and safe haven assets.
During the quarter I received $230.67 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FF
8.28
STNG
6.80
FE
48.75
DHT
10.75
RELL
24.30
FRD
7.06
EMR
42.93
COF
22.00
SPG
59.80
Total
230.67
My Thoughts
I don’t have much thoughts this quarter, except to say that the r/wallstreetbets and GameStop ordeal is dumb.
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), and FirstEnergy (FE). The table below shows the cost basis, current value, and gains/losses for these positions.
The only bit of news with these stocks is that Emerson’s long time CEO David Farr retired, replaced by Lal Karsanbhai. A long tenured, quality CEO is a consideration when looking for quality companies. I will have to keep an eye on the new management to see how their capital allocation stacks up.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
COF
63.25
3,478.75
6,997.65
101.15%
EMR
41.00
3,485.00
7,668.70
120.05%
SPG
74.50
3,427.00
5,233.42
52.71%
FE
28.00
3,500.00
4,336.25
23.89%
Tanker Stocks
Tankers have slightly improved this quarter, but are still a sore point in my portfolio. I wouldn’t be opposed to selling these stocks. However, I don’t have any better ideas, I already have a large cash position, and there is some hope they will work out in the medium term.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,274.95
-27.39%
FRO
10.66
1,738.29
1,165.45
-32.95%
STNG
26.63
1,742.67
1,255.28
-38.82%
TNK
23.86
1,765.88
1,028.6
-41.75%
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This 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)
BBSI
50.50
1,767.50
2,410.10
36.34%
FF
13.00
1,794.00
2,005.14
11.77%
HXL
36.80
1,803.20
2,744.00
52.17%
RELL
4.45
1,802.25
2,579.85
43.14%
RSKIA
8.25
1,740.75
2,795.77
60.61%
This quarter I sold off three of these deep value positions. Paul Mueller Co was sold for a 102.5% gain, Friedman Industries for a 65.67% gain, and Surge Components for a 120.77% gain. With this quantitative strategy, I would typically hold the stocks for one year, then rebalance into a fresh set of undervalued stocks. I sold MUEL and SPRS early because they have run up massively lately. It would be expected that some of these microcaps will shoot up in price randomly. But over the past few months, it seems like all of these small deep value companies are rapidly rising. Maybe I’ll regret selling too early, but it seems hard to regret taking a 120% gain. As for FRD, it was a net-net when I bought it. The price reverted back to its net current asset value, so I made my exit.
Cost Basis
Sale Proceeds
Realized Gain (Loss)
MUEL
1,768.00
3,580.18
102.5%
FRD
1,800.10
2,982.13
65.67%
SPRS
1,819.30
4,016.47
120.77%
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.
12/31/20
3/31/21
YTD Gain (Loss)
YTD Contributions
Precious Metals
9,964.00
9,281.20
-6.85%
401k
32,252.43
43,020.27
10.93%
6,866.00
Books I’m Reading
The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success was a book that I kept hearing people talk about, so I finally read it. The CEOs covered in this book include Warren Buffett, John Malone, Catherine Graham, Tom Murphy, Henry Singleton, Bill Anders, Bill Stiritz, and Dick Smith. Obviously I’m familiar with Buffett, and knew a little about some of these CEOs. However, it was nice to read about these capital allocators at General Dynamics, Ralston Purina, General Film, that I never heard of. The book emphasizes how these CEOs outperformed Jack Welch of GE, the poster boy of a successful CEO. Each of these CEOs focused on going against the herd, and expertly allocating capital instead of doing dumb acquisitions, or focusing on quarterly results. This book was a quick read, and very much enjoyable.
The second book I read this quarter was Skyscraper Dreams: The Great Real Estate Dynasties of New York. Dynasties is a good word to describe these New York real estate players since many of these are multi-generational family businesses, which I found fascinating. The book starts with Manhattan back when it was mostly fields, and progresses towards the early 1900’s where skyscrapers appear onto the scene. As the 20th century unfolds, you learn about the skyscraper boom leading up to the Depression, the post-war boom, the changing of the guard in the 1960’s, and New York’s financial woes in the 1970’s. I wasn’t too familiar with NYC history, let alone the stories of the people who built it. If you’re interested in a financial history book that’s a bit different than stock investing or business, I recommend this one.
For Q4 2020, the portfolio is up 13.21% and finished the year up 23.47%. The Q4 starting balance was $96,383.61, and finished the quarter at $113,027.88. Contributions to the portfolio during the quarter amount to $3,656.
No stocks were bought or sold during this quarter. During October and November I owned some SPY puts as tail hedges, but I let that position run off in December.
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 66.7% of the portfolio is in stocks, while 33.3% 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 ripping higher towards the end of the year.
During the quarter I received $427.04 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FF
8.28
BBSI
10.50
FRO
81.50
STNG
6.80
FE
48.75
DHT
43.00
RELL
24.30
FRD
7.06
RSKIA
88.62
EMR
42.93
COF
5.50
SPG
59.80
Total
427.04
My Thoughts
2020 in Review
Going into 2020, my portfolio was a mess. Once upon a time, I was going for a multi-asset strategy. My portfolio consisted of value stocks, emerging markets, commodities, precious metals, money market, and tail hedge puts. In mid-2019 I sold my value stocks to buy a house, which created a gaping hole in my portfolio that remained early in 2020. As the market started to react to COVID, I quickly tried to get my portfolio in order. The primary focus was to reorient my portfolio to mostly focus on value stocks, and taking advantage of the market selloff to buy some quality companies at a discount.
One of the key factors that shaped this year’s performance was holding about $500 in SPY put options. The idea is that they would provide a buffer so that the portfolio could break even even if the market dropped by 20%. In late February these options were doing their job, so I sold them at a value of about $9,000. In hindsight I should have held onto them into March, but I can’t complain. The rest of the portfolio was primarily cash, plus stocks from my current 401k, and some precious metals.
The proceeds of this hedging was used to buy the first batch of quality companies. In March, I bought Capital One, Emerson Electric, and Simon Property Group. To my surprise, the market panic didn’t last long, so the deals quickly dried up.
During April and May I jumped onto the oil tanker trade. While the thesis played out, these companies made a ton of money, the stock returns have been abysmal. I probably bought these stocks at the peak, but that’s the way it goes.
The summer months saw me dip my toe into buying deep value stocks. These are stocks that traded at less than 5 times enterprise value over EBIT. Most of the companies I bought were microcaps, which have a market capitalization of less than $300 million. I didn’t know it at the time, but my timing in buying these stocks was great. The deep value universe got slaughtered during the March selloff, down around 50%. During the summer these stocks turned the corner and rallied all year so that they ended the year down only 7%.
In August I bought some First Energy hoping their bribery scandal is overblown. Finally during the fall I started up the tail hedging strategy again in case of worsening COVID, no stimulus getting passed, and election drama. All of those things happened, but the market ripped higher on vaccine news, causing me a small loss on my SPY puts.
It felt like there was a lot of action in 2020, however I also tried to be measured in my capital allocation. Most of the year I carried a large cash balance, waiting for another chance to buy some undervalued stocks. In hindsight I should have gone all in, but I’d rather act conservatively and survive as an investor.
Luck vs Skill
While I am proud of my performance this year, I am trying to reflect on my decision making. Many of my decisions, and outcomes, were the result of some part skill. However, I am aware I had some lucky tailwinds as well. Since I can be jealous sometimes, I also look at other investors and wonder how much of their results were based on luck or skill.
The way I see it, there is a spectrum of complete luck (roulette wheel) to skill (chess), and most things fall in the middle. Everything in investing probably has some degree of luck involved. But there is a difference between making sound, well thought out decisions, and speculating without even being able to provide a thesis besides “stocks only go up” or “it’s different this time”. It is probably impossible to quantify luck vs skill in investing, but I’m going to ramble on a bit anyways.
I’m not sure if it was luck or skill that I was hedged in February. The outcome of this hedging dramatically impacted this year’s performance.
I chalked it up more towards skill that I was buying in March when everyone was panic selling. On the flip side, if Great Depression 2.0 happened, I’d probably be complaining that I pulled the trigger too early.
Perhaps I got on board with the oil tanker trade too late, my timing being bad luck, or maybe it was a lack of skill.
The deep value universe was turning the corner right when I was buying in the summer. I’ll take this lucky timing since Paul Mueller Co, Barrett Business Solutions, Friedman Industries, and Spark Components have really helped me out.
During the summer, Emerson was up 50%. It was tempting to sell it and get those quick gains. However I am trying to be more disciplined and hold my stocks longer, which worked out because now Emerson is up nearly 100%.
I think you can see there are arguments for luck and skill in many of my decisions. As I look around, I wonder about other investors (or speculators). Is betting on government stimulus, accommodative Federal Reserve, record vaccine development luck or skill? Is it luck or skill to buy cruise ships, airlines, Zoom, NIO and the like? Good for the people who made massive gains this year, but it would probably be wise to reflect on your decision making.
One issue with the stock market is that many people focus on the short term. This short termism makes it easy to think the market is just a casino. Instead, I view owning stocks as owning a slice of a business. Holding a stock for the long term reduces the role of luck since the returns are more driven by business economics. I believe having a long time horizon, and taking advantage of behavioral psychology, allows an investor to make their own luck.
Rationality and Wealth
It seemed like a lot of people lost their minds in 2020. I wish more people would think like Charlie Munger when he says “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do”. Too many people fill their minds with toxic information, surround themselves with toxic people, and allow their cognitive biases to be exploited. An idea that I am developing is that you can’t build wealth (whether that is financial, or in mind/body/spirit) without rational thought. By rational, I mean thought based on first principles, facts, logic, reason, and removing your biases from the equation. You can get rich being irrational, but I think you will have a hard time building long term wealth without being rational.
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), and FirstEnergy (FE). 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
5,436.75
56.28%
EMR
41.00
3,485.00
6,831.45
96.02%
SPG
74.50
3,427.00
3,922.88
14.47%
FE
28.00
3,500.00
3,826.25
9.32%
There has not been a lot of news to report with these stocks. Simon Property Group announced the acquisition of Taubman Centers (TCO), which should close early in 2021. This deal was supposed to happen early in 2020, but it was called off due to COVID19. At least now SPG will pay $43 a share for Taubman instead of the original $52.50.
FirstEnergy drama has deepened this quarter with the firing of their CEO and a couple other executives for misconduct. The company hasn’t disclosed yet what this misconduct was. While FE is looking a little more guilty at the moment than when I made my purchase, the stock has not sold off. I will continue to monitor this company, hopefully the bad news is overblown and the stock will revert back to its pre-scandal levels once the investigation progresses.
Tanker Stocks
Tankers have continued to be disappointing, despite their great profitability this year. Oil tanker spot rates went from a massive peak to a massive trough. Luckily most these companies have used their abnormal profits to shore up their balance sheet. Now that the tankers have to pay less interest on their debt, the break even spot rate is much lower. Recently steel prices have had a large increase, which hopefully means people will be scraping their old tankers soon. One dollar increase in steel prices increases the scrap value of a VLCC by $40k. Plus, less supply of tankers equals higher spot rates to ship the oil.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
DHT
8.17
1,755.90
1,124.45
-35.07%
FRO
10.66
1,738.29
1,013.86
-41.67%
STNG
26.63
1,742.67
760.92
-56.34%
TNK
23.86
1,765.88
814.74
-53.86%
Deep Value
Deep value is a sub-strategy I’m employing in my portfolio. This 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)
BBSI
50.50
1,767.50
2,387.35
35.07%
FF
13.00
1,794.00
1,752.60
-2.31%
FRD
5.10
1,800.10
2,421.58
34.52%
HXL
36.80
1,803.20
2,376.01
31.77%
MUEL
26.00
1,768.00
2,257.60
27.69%
RELL
4.45
1,802.25
1,907.55
5.84%
RSKIA
8.25
1,740.75
2,126.88
22.18%
SPRS
1.31
1,819.30
3,074.70
69.00%
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.
12/31/19
12/31/20
YTD Gain (Loss)
YTD Contributions
Precious Metals
$7,861.00
$9,964.00
30.52%
401k
$12,871.20
$32,252.43
14.59%
$14,108.00
Tail Hedging
During October and November I implemented the hedging strategy that I had on early in the year. My initial position in October was buying $495 worth of SPY puts. In November, I sold the first batch of puts for $50, and bought another batch for $487. This second batch was sold in December for $175, and I haven’t bought any more since then. The net loss for this hedging was $757, or about 0.67% of the portfolio.
Books I’m Reading
The main book I read this quarter was The Philosophy Book: Big Ideas Simply Explained. Prior to this book, the only other philosophy work I have read was the classic Stoicism work “Meditations” by Marcus Aurelius. Whenever I would venture to Wikipedia to read about a philosophy concept, I would get bogged down by all the jargon. This book finally built the foundation for me to understand the high points of philosophy. In fact, I wish I would have read something like this a long time ago because I found the material extremely interesting. Not only does reading about philosophy feed my natural curiosity, but it applies to investing as well (maybe not the weird metaphysical concepts). Understanding why people do the things they do is very important to navigating the investment world. Maybe soon I’ll dig into a specific philosophical work like “On Liberty” by John Stuart Mills…
Cable Cowboy: John Malone and the Rise of the Modern Cable Business is a book I received for Christmas and read within a few days. This book is about John Malone, and his career building TCI and Liberty Media. I was not familiar with Malone, but I knew he was renowned as a great capital allocator so I was looking forward to learning more about him. Malone took over as CEO of TCI in the early 70’s, and transformed the nearly bankrupt company to a cable giant. Once he sold off TCI, Malone has focused on Liberty Media, which he still controls today. Malone’s capital allocation is different from Buffett’s, he utilized debt and focused on cash flows over GAAP earnings. Reading this book makes me want to dig more into cable and media companies in the future.
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Performance Overview
For Q3 2020, the portfolio is up 4.49% and is up 9% year to date. The Q3 starting balance was $89,241.80, and finished the quarter at $96,383.61. Contributions to the portfolio during the quarter amount to $3,135.
No stocks were sold during this quarter, but nine new positions were added. The nine companies I have bought are Barrett Business Services (BBSI), Hexcel (HXL), Friedman Industries (FRD), George Risk Industries (RSKIA), Paul Mueller Co. (MUEL), Richardson Electronics (RELL), Surge Components (SPRS), FutureFuel (FF), and FirstEnergy (FE).
FirstEnergy is a sizable position, while the rest of the purchases were smaller allocations. FRD and RELL were net-nets (trading below net current asset value) at purchase. The rest of the smaller positions make up my foray into deep value investing, meaning they trade at very low EV/EBIT ratios. Many of these stocks are microcaps, meaning their market capitalization is below $300 million.
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 69.8% of the portfolio is in stocks, while 30.2% 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 third quarter.
During the quarter I received $318.08 total in dividends, which is broken down in the table below.
Ticker
Quarterly Dividend
FF
8.28
BBSI
10.50
FRO
81.50
STNG
6.80
DHT
103.20
EMR
42.50
COF
5.50
SPG
59.80
Total
318.08
My Thoughts
This quarter has been pretty drama free for my portfolio. The pandemic and economic difficulties have appeared to mellow out…but I wouldn’t be surprised if there is more trouble on the horizon. Despite my cautiousness, I did some buying this quarter. My goal of building out about 20 deep value positions started this quarter, with my purchase of eight companies. For the foreseeable future, I want to move towards an allocation of 70% stocks, 30% safe haven assets. I believe this will allow me to put some cash to work, while also having some ammo if the market corrects again.
As for the market, it still appears irrational. Everyone and their plumber is making easy money in the market right now. Everything seems easy when the market keeps going up, but let’s not forget everyone freaking out in March. I strongly believe there is a difference between gambling speculation and investing (ok oil tankers are a speculation, but at least there’s a reasonable thesis behind it). I’m here trying to build wealth, not make quick gains.
Also, the election is coming up, which I’m sure will be completely drama free…but if you think your portfolio is going to tank because the other guy won, well, you’re doing it wrong. As Buffett has said, don’t bet against America. Our businesses and country have been the place to be for 200 years. And if you’re that worried about a Great Depression 2.0, then you can always invest in a resiliant multi-asset portfolio.
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), and FirstEnergy (FE). 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
3,952.3
13.61%
EMR
41.00
3,485.00
5373.45
59.93%
SPG
74.50
3,427.00
2975.28
-13.18%
FE
28.00
3,500.00
3,588.75
2.54%
FirstEnergy
FirstEnergy (FE) is an Ohio based electric utility company. FE services Ohio, Pennsylvania, West Virginia, Virginia, Maryland, New York and New Jersey. The reason FE is cheap is because it has been caught up in a bribery case involving Ohio Bill HB 6. FirstEnergy contributed to a political action committee to support this bill. This piece of legislation deals with the bankruptcy of FirstEnergy’s previously owned nuclear power plants.
These nuclear plants were spun off from FE a few years ago, into a new company called First Energy Solutions (now named Energy Harbor). FirstEnergy’s management separated from spin off three years before the HB 6 bill was proposed, and FirstEnergy Solutions went bankrupt a year before HB 6. FE management claims they did nothing wrong. Based on the info so far, it appears FE washed their hands of the nuclear plants years before the bill, and the legislation does not benefit FE that much.
Part of my strategy is to find stocks that are heavily sold off from negative news. These situations can create opportunities because oftentimes the market becomes overly pessimistic on the stock. I believe FE has a good chance of coming away clean from these allegations, but I will monitor the situation in the coming quarters.
This holding could either be a “value flip” or a longer term, bond substitute that will protect against inflation. Once this negative news gets settled, it is possible FirstEnergy will revert back to its pre-selloff price. I purchased FE at $28 at share, and it was trading around $45 a share before the negative headlines. While I wait for this reversion, I will get a safe 5.5% dividend yield and hopefully enjoy the low volatility typically associated with utilities.
Tanker Stocks
Tankers have continued to be disappointing, despite their great profitability this year. I probably bought these stocks at the top, which is frustrating, but I’ll continue to push through the pain. Frontline and DHT have been rewarding shareholders with juicy dividends, so that somewhat alleviates the sting. The Twitter account @calvinfroedge has been a great resource for oil tanker investors, and he nicely sums up tankers so far this year:
Tankers, let's review:
– Made years worth of earnings in 9 months – Lowered net debt by as much as 50% – Bought back up to 10% of shares – Shares trade in some cases at / near all time lows – Fuel demand is normalizing after covid shock – Best fleet growth picture in 20 years
Deep value is a sub-strategy I’m employing in my portfolio. This 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. This quarter I added eight positions, which can be seen in the table.
Avg Price
Cost Basis
Current Value
Current Gain (Loss)
BBSI
50.50
1,767.50
1835.40
3.84%
FF
13.00
1794.00
1569.06
-12.54%
FRD
5.10
1800.10
1643.95
13.74%
HXL
36.80
1803.20
1643.95
-8.83%
MUEL
26.00
1768.00
1836.00
3.85%
RELL
4.45
1802.25
1688.85
-6.29%
RSKIA
8.25
1740.75
2557.70
29.70%
SPRS
1.31
1819.30
1869.75
2.77%
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.
12/31/19
9/30/20
YTD Gain (Loss)
YTD Contribution
Precious Metals
$7,861.00
$9,964.00
26.75%
401k
$10,962.24
$23,687.33
11.36%
$10,863.00
Interesting Articles
If you think this post is boring, then check these articles I read this quarter.
A few weeks ago I went to the local used book store for the first time since the pandemic and found a copy of the classic Buffettology. This book contains a lot of info that Buffett die hards will have seen elsewhere. However, I think it is a great book for a newer investor to gain the right mindset about investing. One of the main points is thinking about a stock like owning a piece of a business, which is something I totally agree with. The book presents an interesting business valuation method. A gripe I have is that I think this method suffers from some hindsight bias, so I’m not sure how practical it is to use.
Another book I read this quarter was Capital Allocation: The Financials of a New England Textile Mill 1955 – 1985. This book is the history of Berkshire Hathaway in the decade prior to Buffett taking control, and his capital allocation decisions up until the mid 80’s. Capital Allocation tells the story of how a struggling textile mill became one of the strongest companies in this country. My favorite part of this book is the deep dive into the financials of Berkshire and its early investments that I have not seen elsewhere. I loved nerding out over all of the financial statement snippets. Capital Allocation has a new place in my top 5 investing books.
