CV Capital

CV Capital – 31 October 2018

To my fellow shareholders,

October has not been a kind month for stocks, the ASX 200 fell 5.5% in October. This drop was not triggered by domestic issues but rather events in the US market which spread around the globe. The phrase “When America sneezes, the world catches a cold” is especially true in the financial markets.

Given our concentrated portfolio, I had expected to report a lower return in October than in September. Our big winners did give up some gains in October but this was offset by gains from one of our smaller positions, Watpac which went up significantly due to a takeover offer. I first wrote about Watpac in March, when Besix (majority shareholder of Watpac) tried to buy 50% of the shares it did not own via a scheme of arrangement. Institutional investors voted down the scheme and seven months later Besix is back to buy 100% of the shares it does not already own. In my opinion, although Besix’s offer still undervalues Watpac, it would be risky to remain a minority shareholder in an entity which Besix may end up with a very large controlling stake.

In terms of activity, we have been very slowly buying shares in a marketing company. I say slow because our bid has been in the market for 6 weeks and only 66% of the trade has been filled. The stock’s illiquidity and my allergy to paying high prices are the main reason for this slow digestion.

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on the current performance given the short history.

The table below shows our performance (before taxes) from inception to 31 October 2018. Our cash position is circa 20% of the portfolio.

 15 Jan 1831 Oct 18Gross dividends (cumulative)Return (incl franking )
CV Capital1.001.173nil17.3%
Benchmark - STW56.754.482.6720.8%
CV Capital

CV Capital – 30 September 18

To my fellow shareholders,

September has been a relatively quiet month as I have been travelling. However, we did make our biggest exit to date.

We sold our entire position in SVWPA (my original thesis here). SVWPA was a perpetual preference share issued by Seven Group Holdings (SGH) that was trading at $82 (below par value of $100) with a dividend yield of 8.3% (fully franked) when we acquired it (it was transferred from my personal holdings). My thesis for this investment is that I believed SGH could access cheaper debt compared to SVWPA and therefore it would be redeemed eventually. I wasn’t sure when this would happen but we were getting paid 8% while waiting, which in an interest rate environment of 2% was pretty attractive.

In September, SGH proposed to convert SVWPA into ordinary shares. This was subsequently approved by the SVWPA holders. We sold our stake on market prior to the conversion for $101.40 per share (above par value). I elected not to convert the SVWPA shares into equity because:

  • SGH is a large conglomerate with many moving parts and I don’t fully understand all the businesses. In my opinion the understanding and knowledge needed for a debt investment is very different from what is required for an equity investment.
  • The stock price has nearly doubled from a year ago and is trading at a price earnings ratio of nearly 19x. Not exactly cheap and I see better risk reward opportunities elsewhere.

Including dividends and the capital gain, our return on this investment was 25% (not compounded) over a 9 month holding period. I enjoyed this trade as we made money taking very little risk.

The portfolio fell 0.4% in September. The concentration of our portfolio mean that normal price fluctuations in our big positions can affect the overall portfolio. Cash received from the above sale and dividends received in September have pushed up our cash position to be circa 22% of the portfolio.

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I do not place too much emphasis on the current performance given the short history.

The table below shows our performance (before taxes) from inception to 30 September 2018. Please note that STW went ex-dividend in late Sept with its price subsequently falling. I understand that the dividend will be paid in October. As I only account for dividends on a cash basis, September’s out-performance is slightly exaggerated.

 15 Jan 1830 Sept 18Gross dividends (cumulative)Return (incl franking)
CV Capital1.001.166nil16.6%
Benchmark STW56.757.91.2594.3%
CV Capital

CV Capital – 31 August 2018

To my fellow shareholders,

The month of August is a bit like d-day for stocks. It is reporting season for most ASX listed stocks and as an investor, August can be a make or break month for your stock thesis.

We were fortunate at CV Capital that the reporting season has resulted in a monthly gain of 7.9%, our largest monthly gain to date. The portfolio gains were mainly driven by gains in our largest and 5th largest position (based on cost). Our largest position in the fund, Schaffer Corporation (see original thesis here) increased by 18.4% in August on the back of strong earnings from its automotive leather business. Our 5th largest position (I’m not ready to disclose this) increased by 48% in August due to more favourable industry conditions moving forward. We could have gained more except for the fact that I made a mistake by being too conservative with the buying and therefore did not end up with the full target weighting for this stock.

In terms of activity, we did not buy or sell any shares in August.

Our portfolio currently consists of ten stocks with the top four positions making up 62.9% of the fund (based on market values). The concentration of the fund has gone up in August due to further gains in our largest positions. We are still comfortable holding these large positions as although they have appreciated, they are not overvalued.

Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I place little emphasis on the current performance given the short history.

The table below shows our performance (before taxes) from inception to 31 August 2018. Our cash position is circa 11.2% of the portfolio.

 15 Jan 1831 Aug 18Gross Dividends
Return (incl
CV Capital1.001.171nil17.1%
Benchmark STW56.759.691.2597.5%
CV Capital

CV Capital – 31 July 2018

To my fellow shareholders,

We raised new capital in July and as a result issued 163,125 new shares. I took the opportunity to transfer more of my personal shares into CV Capital. As a result, most of my personal portfolio now resides in CV Capital. The way I account for these transfers is to adopt the close price of the transferred shares at the subscription date as the value of the new capital.

In terms of activity, we managed to put some money to work in July by mostly adding to existing positions. I also trimmed our position marginally in Steamships Trading (you can read my thesis here). Given we’re also building a position in another company with exposure to PNG, the combined portfolio’s exposure to PNG country risk was making me think about it more often than I would have liked. So I reduced it and am now more comfortable with the overall position.

Currently the portfolio comprises of ten positions with one position above 20% weighting, another two position between 10% – 15.5% weighting, six positions between 5-10% weighing and one position marginally below 5% weighting. These weightings are based on the equity portfolio and exclude cash. Last month I assumed that our largest position will be diluted with the capital raising, however the stock went up in July and therefore still maintained its above 20% portfolio weighting.

Overall, the portfolio’s returns increased by 3.7% in July (compared to June). This increase was primarily driven by an increase in our top two weighted stocks and also a recovery in the share price of a losing position. We also received some dividends which contributed to the return. Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I place little emphasis on the current performance given the short history.

The table below shows our performance (before taxes) from inception to 31 July 2018. I have not prepared these returns on a compounded basis to make it easier for you to rework the calculations. Our cash position is circa 12% of the portfolio.

 15 Jan 1831 July 18Gross dividends
Return (incl
CV Capital1.001.08608.6%
Benchmark STW56.758.811.2595.9%
CV Capital

CV Capital – 30 June 18 update

To my fellow shareholders,

Six months have gone pretty quickly and here we are at our first half year milestone. Overall, I’m pretty excited about the portfolio.  For most of our positions, the stock price has not changed materially since we purchased them and if my thesis plays out then I think the gains are still ahead of us.

Over the past 6 months, I’ve added three new positions to the initial portfolio which was transferred into CV Capital. The rest of the trading were either adding to or selling existing positions. The current elevated market means that there is not that many opportunities available but I continue to be very vigilant and will not lower our standards in selecting stocks.

I have not added any new stocks to the portfolio in June. Currently the portfolio is currently made up of eight positions with two large positions exceeding 20% weighting each, two more positions having weighting between 10%-15% and four positions with weighting less than 10%. I expect our large positions to be diluted when we open for new subscriptions in July (please contact me by 2 July if you are interested in subscribing to more shares). One reason is because I will be transferring more shares from my personal portfolio into the CV Capital. My goal is over time transfer all of my shares into CV Capital but taxation (CGT) consequences mean that I can’t transfer them as quickly as I would like.

Overall, our portfolio fell by 0.7% in June (compared to May) which was mainly caused by two positions; one falling by 11.8% and another position falling 14.7% in June. The portfolio only fell marginally as these were smaller positions in our portfolio. Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I place little emphasis on the current performance given the short history.

The table below shows our performance (before taxes) from inception to 30 June 2018. I have not prepared these returns on a compounded basis to make it easier for you to rework the calculations.  Our cash position is circa 11% of the portfolio.

 15 Jan 1830 June 18Gross dividends
Return (incl
CV Capital1.001.04904.9%
Benchmark STW56.757.990.790423.7%


CV Capital

CV Capital – 31 May 18 update

To my fellow shareholders,

Firstly, I would like to share this long but excellent article on investing by Peter Guy. At CV Capital, we share 95% of the investing philosophy expressed by Peter and as I couldn’t have written it better than Peter, I highly recommend taking the time to read this article.

Secondly, CV Capital will be open to new subscriptions in July. The deadline for new subscriptions is 6 July 2018. Please contact me directly if you would like to subscribe to more shares.

In relation to our portfolio we opened a small position in a new opportunity. I have been following this company for the past 12 months and decided to invest due to some of its key competitors recently filing for bankruptcy. Although this company is not cheap by traditional benchmarks, I believe that the recent bankruptcies will strengthen the company’s position and create opportunities to grow its market share. We will continue to slowly build our position over time.

Our portfolio returns fell marginally (0.4%) in May. This was mainly due to one of our positions falling 32% from 1 May to 31 May. This same position then increased by 24% on 1 June. This shows how volatile stocks can be on a short term basis and doesn’t lend itself to an objective measurement of investing “skill”; luck plays a bigger factor in the short term. Although I have been reporting CV Capital’s performance on a month end basis, I’ve done it mainly for the purposes of transparency. CV Capital’s objective is to beat the benchmark over the long term (3-5 years) and therefore I place little emphasis on the current performance given the short history.

The table below shows our performance (before taxes) from inception to 31 May 2018. I have not prepared these returns on a compounded basis to make it easier for you to rework the calculations.  Our cash position is circa 12% of the portfolio.

 15 Jan 1831 May 18Gross dividends
Return (incl
CV Capital1.001.05505.5%
Benchmark STW56.756.550.790421.1%
Mental models

Multidisciplinary approach to thinking – speech by Peter Kaufman

I would like to thank my good friend Peter Phan for sharing this excellent talk. Peter Kaufman is a successful entrepreneur who has studied and learnt Charlie Munger’s method of using the “big ideas” from various fields to solve real life problems. I found this speech to be very illustrative of the multidisciplinary approach. Sometimes when Charlie talks about this, it can be quite hard to understand as he doesn’t always give real life examples.

Although the talk is a bit long at 45 minutes it is jam packed with wisdom not only about investing but how to live a happy life, so it’s well worth listening to.


CV Capital

CV Capital – 30 April 2018 update

To my fellow shareholders,

April has been a good month for the overall market. The market losses in March were pretty much all recouped in April. In relation to our portfolio, a combination of a big position falling by 2.7%, two smaller positions increasing by 15.9% and 3.3% in April meant that increases in our portfolio for the month were not as good as our benchmark.

We bought a position in Capral.  I am familiar with the company having invested personally in Capral (prior to CV Capital) and even wrote a thesis here. This investment is a result of me having more confidence in the company after following and learning about it over the course of 12 months coupled with a recent pullback in its share price.

Capral represents the sort of investing situation I find attractive. It has limited downside and there are multiple ways of making a return. Capral is trading below its working capital, this means even in the event of liquidation (which is unlikely given it has no debt and profitable), the most we would lose is a small proportion of the sum invested. On the other hand, there are many outcomes which can lead to a higher share price:

  1. The automation project scheduled in FY2018 and consolidation of WA’s warehouses result in cost savings that could potentially lift net profit by 30%.
  2. A favourable outcome of the anti-dumping case against the large Chinese aluminium importer may led to reduced imports and allow Capral to increase its market share.
  3. Lower Australian dollar may reduce imports and result in Capral increasing its market share.
  4. The possibility of the market re-rating Capral given its actually making a decent return on the book value of its assets and paying 12.8% gross dividend yield at current prices.
  5. Corporate action that unlocks the value of the tax losses (currently $281.2 million).

Our portfolio is currently made up of seven counters with two large position exceeding 20% weighting each, two more positions having weightings between 10%-15% each and the rest below 10% weighting each. Other than one preference share, the rest of the positions are ordinary equities.

The table below shows our performance (before taxes) from inception to 30 April 2018. I have not prepared these returns on a compounded basis to make it easier for you to rework the calculations.  Our cash position is circa 17% of the portfolio.

 15 Jan 1830 Apr 18Gross dividendsReturn (inc
CV Capital1.001.05905.9%
Benchmark STW56.755.980.790420.1%
Steamships Trading

Steamships Trading

As opposed to my usual assortment of cheap low quality companies, Steamships (ticker: SST) is a high quality business currently trading below the market value of net assets with incoming strong tailwinds.

Steamships has a long history operating in PNG, this year marks its 100th anniversary. Its controlling shareholder, Swire group (72% interest) of the UK, was founded in 1816. A company that survives and thrives for 100 years is a rare breed and I believe testament to its management and culture.

My thesis for Steamships is predominantly a play on liquid natural gas (LNG).

Steamships has three main divisions as categorised in the annual report:

  1. Logistics (FY17 – 46% of consolidated revenue).This division has three businesses. Consort lines is the largest operator of coastal shipping in PNG with 16 vessels. Pacific Towing is the leading provider of harbour towing and mooring services, operates 11 tugs and 10 associate vessels in 5 ports across PNG. East West Transport is one of the main multifaceted transport and logistics operator and JV Port Services – which is a collection of joint ventures that provides a full range of stevedoring and handling facilities across many ports in PNG.
  2. Hotels & Property (FY17 – 32% of consolidated revenue)Coral Hotels with seven hotels (546 rooms) and apartment complexes (129 apartments) is the largest hotel group in PNG. Pacific Palm Properties (PPP) is one of the largest real estate landlords and property developer in PNG. PPP’s business model is to develop strategically located commercial and industrial properties for yield and long term property appreciation.
  3. Commercial (FY17 – 21% of consolidated revenue)Laga Industries is one of PNG’s largest consumer good business manufacturing and distributing ice cream (Gala ice cream – No. 1 ice cream brand in PNG), vegetable oil, condiments, powdered milk, snack food and beverages. SST also has a 50:50 joint venture with Colgate Palmolive to market and distribute Colgate’s oral, personal and home and fabric care products in PNG.

SST has many leading businesses in logistics, hospitality and consumer products in PNG and therefore its fortunes are highly correlated with the overall PNG economy.

Why do I like it?

There are two main reasons why I think SST is a good bet. The first is its current market capitalisation is backed by property. The second is that I believe earnings are set to double in the next 3-5 years.

As I write this post, SST is trading at a $18.50 a share which gives it an enterprise value of A$710 million or kina $1.78 billion (exchange rate of A$1:K$2.50).

Enterprise value backed solely by the property portfolio

The FY2017 annual report shows the range of market values of its property portfolio:

Investment properties are properties that are leased out and are mostly industrial and commercial properties. Other properties are real estate that are used by the businesses and includes hotel premises, offices and warehouses.

Based on say the mid-point value for the properties (k$1.8 billion), it appears that the market is only appreciating the value of the property portfolio and essentially assigning no value to the logistic and commercial businesses (which represents more than half of the consolidated revenue).

I have no reason to suspect that the reported property values are overstated. I based this opinion on reviewing 1) the rental yields and 2) comparing the growth in reported market values to net book value of the investment properties over a 10 year period.

The chart below shows the rental yields achieved for the investment properties over the past 5 years.

Yes, one can only dream of getting such yields for commercial properties in Sydney or Melbourne. Based on my understanding the above yields are consistent with the market in PNG. Therefore from the rental yield perspective, the reported market values for the investment property do not appear to be bullish. Note that FY2017 rental fell due to a fall in occupancy from 90% in the prior year to 80% in FY2017.

As PPP business model is to develop new properties to lease, I’ve also reviewed the growth in the property portfolio’s net book value (NBV) and reported market value (MV) over the past 10 years. The chart compares the growth in NBV and MV from 2008 to 2017.

The chart shows that the growth in NBV exceeded the growth in MV and that management has not increased the MV since 2013. This suggests that additions to existing property and/or new developments are the main drivers of growth as opposed to revaluation gains.

In this regard, I am quietly confident that the reported market values may even be conservative.

But plenty of conglomerates trade for less than the sum-of-their parts…

Yes, it’s true that many conglomerates trade at a discount to their sum-of-the-parts values. However, in SST’s case I believe there is also a clear earnings catalyst in the next 3-5 years which is likely to double its current earnings.

Let’s take a look at its past earnings and focus on SST’s underlying profits.

Underlying profit more than doubled between 2008 and 2012. The reason? PNG LNG. The PNG LNG project led by ExxonMobil was PNG’s first mega LNG project. Construction of the project began in 2010 when the size of the PNG economy was US$11.6 billion (source: Worldbank). It took four year and US$19 billion to complete the project. Given the size of the project relative to PNG’s economy at that time, the economy doubled from 2010 to 2014 during the project construction period. You can watch this video to understand the scale of this project.

SST benefited from the hive of activity during the construction period with both the hotel and logistics divisions enjoying high utilisation rates. Hotels and apartment rentals did well with the expatriate workers flying in and out of Port Moresby and the logistics division was busy with high levels of cargo and equipment being transported.

Isn’t that history?

PNG is endowed with gas fields which have low extraction cost. For example, the chart below shows the breakeven cost for PNG LNG project being lower than any Canadian or Australian gas project.

The PNG LNG has performed well since commencing operations and has consistently operated above its name plate facility of 6.9 million tonne p.a. (MTPA). So much so that its owners have recently agreed to expand the PNG LNG project which will see it doubling its output to 16 MTPA at a cost of US$13 billion (see Reuters’ report).

Part of this expansion also involves the development of another large gas field called Papua LNG (Elk-Antelope gas field) which is led by Total S.A. The gas resource for Papua LNG is 6.5tcf as compared with PNG LNG of 9tcf (prior to the recent upgrade).

All up, the owners plans to add three more LNG trains, with two underpinned by gas from Elk-Antelope and one underpinned by existing fields and a new P’nyang field operated by Exxon. The map below illustrates the location of these gas fields.

The expansion will result in a total LNG annual output of 16MTPA, slightly larger than Gorgon and equivalent to the North West Shelf in Australia. Asian LNG prices looked to have recovered from their 2016 lows which should provide good incentive for these projects to move ahead.

Once these projects kick-off (in the next 3-5 years), Steamships is well positioned to reap the benefits from its hospitality and logistics divisions and I foresee that profits can exceed the record underlying profit achieved in 2012.

In addition, the following large resource projects in PNG’s pipeline will also benefit Steamships if developed:

  • Wafi-Golpu: Newcrest and Harmony JV copper-gold mine estimated to contain 20m oz of gold and 9.4m tonnes of copper.
  • Frieda River: Copper-gold mine estimated to contain 19m oz gold and 12m tonnes of copper. This project is led by Guangdong Rising Asset Management, a Chinese state owned enterprise.

Other reasons I like Steamships:

Good professional management

I like Steamships’ management as they have been performed well and taken care of shareholder’s interest. For example, the company has not raised equity capital nor issued a single ordinary share going back as far as I can check to 2002, over the past 14 years Steamships has managed to pay a dividend every year and grew its net asset/ equity at a compound annual grow rate of 11%.

Bear in mind that the property assets make up a large proportion of assets and that the above growth rate is based on book value and not market value. Current market value of the properties is circa k$1 billion (based on the average of the market value range) above the book value so using the market value would result in the net asset’s growth rate exceeding 11%.

Growing property portfolio

Assuming that none of the resource projects get off the ground (which is extremely unlikely), the property development business should still be a value driver. Over the past 10 years the NBV of the property asset has grown by a CAGR of 13.4% (refer to above chart on growth in real estate’s NBV and MV). I understand that the company still has vacant land in good locations to develop.

The property portfolio represents by far the biggest fixed assets on the balance sheet. Out of a total of k$1,168 million of fixed assets in FY2017, the property assets make up k$736 million or 63% of the total value.

Why is Mr. Market undervaluing Steamships?

I think the first reason is the perceived economic risk of operating in PNG. The PNG government has been running a budget deficit for the last few years and government debt has currently increased to circa 30% of GDP (source: PWC PNG 2017 budget report). A current shortage of foreign currency is also causing significant economic problems for PNG’s economy which has arguably been in recession since 2015.

The budget deficit was caused by a significant overestimation of tax revenues from the PNG LNG project by the government. Tax revenues fell short because of subsequent collapse in LNG prices compounded with the generous concessions given by the government. One example of this is that the royalty payments are calculated based on a “well-head value” which allowed for deductions on repayments of the US$19 billion project loan, capital allowance and operating costs. Other tax concessions include a 10 year depreciation allowance, GST exemptions etc, royalties treated as advance payment of income tax. For more information, please refer to this Worldbank report on PNG.

Although the forecast revenue is currently falling short, as the loan and assets are amortised, more and more revenue should flow to the government. So I believe this shortfall in tax revenue to be temporary. Once material tax revenue starts rolling-in, this should alleviate the budget deficits. To give an idea of the size of the potential tax revenue, the 2013 national budget forecast k$2 billion in revenue to the government from this project. This would represent 17% of PNG government’s revenue in FY17.

The second is reason is well its PNG so there is a perception that it could end up a failed state ala Somalia/Yemen/Zimbabwe . I think that the chances of PNG blowing up like those countries is low for four reasons: 1) PNG’s society is very fragmented with more than 800 tribes; there are currently 20 political parties in parliament with the leading party only winning 27 out of the 111 parliamentary seats (not enough to form government). In fact no one party in PNG’s history has ever won enough seats to form government. Therefore I believe it is unlikely that a strongman leader will emerge that can maintain support amongst all the various groups long enough to ruin the country. 2) A common denominator of failed states is internal conflicts/ civil wars. Conflicts in PNG tend to be on a much smaller scale (possibly due to more numerous groups) than compared to say civil wars in some failed African or Middle Eastern countries which absolutely decimated those countries. 3) PNG has an independent judiciary; this is a rare among failed states. 4) If things really do go downhill, Australia is unlikely to sit idle as she can’t afford to have a humanitarian crisis at her doorstep.

The third reason is that some economists believe that the kina is 30% overvalued against the US$ even though the kina has devalued by 25% since June 2014.  This may be true but I believe once the project revenue starts flowing and coupled with the new LNG projects, the currency should strengthen considerably over the longer term. At the same time the foreign currency shortage would also be resolved.

The fourth reason is that the stock has very low levels of liquidity and zero institutional following.


I believe this is a quality company currently trading below the market value of its net assets. The stock price is currently depressed due to the poor economic conditions currently being experienced in PNG that is affecting its earnings. However, Steamships’ earnings is likely to get a huge boost from the LNG projects coming on stream in the next 3-5 years given its leading positions in hospitality and logistics. This should see the stock exceed its high of $40 set in June 2014.


CV Capital

CV Capital – 31 March 18 update

To my fellow shareholders,

Hope your Easter break was good. Moving forward, I’ll post the shareholder updates on a monthly basis as there may be limited activity to report on a more frequent basis.

In many ways, investing is like a game and with a game there are certain rules. However, as these rules are not universally agreed on, different participants may believe in a different set of rules and  what you believe the rules are will dictate how you play the game. Therefore as fellow shareholders and partners, I think it is important that you understand what I consider to be some of the important rules.

  1. Less than 50% of all market participants can beat the market

The market return (represented by ASX 200 index return) is the average returns of all the securities that make-up the index (200 companies). For example, if 200 individual investors each randomly picked a single company from the index to invest in at the beginning of the year and held it through to the end of the year, research shows that less than 50% of the participants would have beat the average return.

For a start, the statistical definition on an average means that only 50% can ever beat that average assuming a normal distribution of returns. However, research shows that the index return isn’t normally distributed and that large out sized gains in a few securities skews the average returns upwards. This means that in reality less than 50% beat the market.

In addition to the skewness, fees and transaction costs makes it even harder for the average investor to keep pace with the average.

Based on this, I have done two things; i) Set up CV Capital to operate on a minimum cost basis. If you know a better value broker offering a better deal than $19.95, let me know!  ii) I have adopted the index (represented by the ETF: STW) as our benchmark knowing that it is a worthy adversary.

  1. More opportunities in less crowded areas

There are usually more opportunities in less crowded areas of the market. Just like on the weekends at the mall, assuming the car park and mall entrance is at the ground level, there is a higher chance of finding a vacant car park space on Level 5 than there is on the ground level.

Usually the crowded areas of the market are the household names which tend to be the top companies on the ASX. These companies have a large following of analysts and smart money managers.

Some of the less crowded areas of the market include: illiquid securities, small cap securities, companies in out-of-favour sectors and companies with business operating in overseas markets. Compared to say the ASX50 companies, foraging in these parts provide a higher chance of finding the gems simply because they are less likely to be picked over.

So rest assured, CV Capital is foraging through the unloved parts of the market.

  1. Stock market returns and time horizon

Many assets like term deposits or bonds pay interest at pre-determined time intervals which creates a nice predictable annual return, year-in and year-out. Whilst long run stock market returns are good, in the short term returns are unpredictable and volatile. Benjamin Graham said that the stock market in the short run is a voting machine (popularity contest) but in the long run, it is a weighing machine (driven by fundamentals).

Behind every share certificate, there is a business and the share price return is ultimately driven by the underlying performance of the business.  As Warren Buffett said in his 1983 shareholders letter:

“why should the time required for a planet to circle the sun synchronise precisely with the time required for business actions to pay off?”

Therefore judge the performance of CV Capital over a 3-5 year period and not on its annual results.

  1. Don’t lose money

The laws of maths are unkind once an investment loss is made.  Assuming the same investment size, to break-even on a 50% loss from a prior investment, you would have make a 100% gain on the new investment.

At CV Capital, we try not to lose money (which is defined as a permanent loss of capital) by being very selective in our investment decisions.  A potential investment needs to passed through several filters and available at the right price before we consider investing. The implication of this is that I consider it a good year if we can find 3-4 investments within a year. On the other hand it is also possible that we may not find a single suitable investment in a 12 month period.

CV Capital update

March has been a disappointing month for equities. The markets appear to have been spooked by the possibility of a trade war between the US and China. Our investments held up quite well during this period. One of the benefits of owning a portfolio of out-of-favoured stocks is that there are less correlated with the market and have less height to fall from. We received some dividends in March and did not buy or sell any securities since our last update. Our cash position is circa 18% of the portfolio.

The table below shows our performance (before taxes) from inception to 31 March.

 15 Jan 1831 Mar 18Return
CV Capital1.001.0454.5%
Benchmark STW56.753.83(5.1%)