Categories
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
franking)
CV Capital1.001.05905.9%
Benchmark STW56.755.980.790420.1%
Categories
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.

Conclusion

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.

 

Categories
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%)
Categories
CV Capital

CV Capital – 15 March 18 update

To my fellow shareholders,

For the first half of March, I managed to buy more shares in a stock which we’ve already owned. The main reason I added to our position is that I believe we have a good opportunity to reduce the cost base of our holding.

Let me explain. We own shares in a company called Watpac (construction company). These shares were from my personal holdings which I transferred into CV Capital. Recently, the largest shareholder of Watpac (Besix) made an offer to acquire 50% of the shares that it did not own. The offer price represents a 36% premium to the average traded share price over the last 12 months. This transaction will need to be approved by a special resolution.

In such transactions, typically the other key shareholders would have already been sounded out prior to the announcement. So I’m quietly confident the transaction will go through. Even if it falls through, the current offer is low enough for Besix to either come back with a better offer or takeover 100% of the company at some stage in the future.

The cost base of our shares was 66.5 cents prior to the acquisition announcement. After the announcement, I bought more shares which increased our cost base to 69.5 cents. If the acquisition goes through then we’ll make a profit of 23 cents on half of our total holding which Besix will acquire. This will reduce the cost base of our remaining shares to 47 cents, a 29% reduction from our original purchase price. Watpac has cash (which I define as cash + receivables – payables – debt) of 40 cents and net tangible assets of 83 cents, making it a very attractive investment at a cost base of 47 cents.

Of course, if I didn’t add to our position our cost base would be even lower. However, after the sale to Besix we would be left with a very small holding in our portfolio and I like Watpac as it is a cheap way to get exposure to the upcoming infrastructure boom.

I’ll report on CV Capital’s performance at the end of the month.

Categories
Regional Express

Regional Express – 1HY18 results

Click here to see my original post on Rex.

It was a solid half year result for Rex. No surprises and my views are pretty much the same as my last post. A few points to highlight:

  1. The passenger and load factor increases were the main driver of the 60% increase in profit before tax. An illustration of this is the cost comparison between the prior comparable period (pcp). Total cost for 1HY18 only increased by $1.5 million from the pcp, whereas passenger revenue increased by $5.4 million.
  2. Based on seven months of operating statistics, it appears that after many many years of decreasing passenger numbers and load factors, there is a recovery underway.
  3. There is some seasonality in the business, the first half tends to be marginally more than the second half. The split is around 52:48, so I expect the second half results to fall marginally short of the first half.
  4. I see the new RPT win in WA being marginal. The Perth to Carnarvon and Monkey Mia route has  combined annual passengers of less than 30,000. Perth to Albany and Esperance has combined passengers of 100,000 pa. These two new routes will still be helpful in defraying some of the fixed cost base at Perth.

In terms of outlook, management has flagged a 20% improvement in the full year result. These guys are pretty conservative so that number probably has a bit of buffer in it. Factors that may further improve the FY18 results include more charter revenue wins from an improving outlook in commodities (coal and copper), depreciation in the USD:AUD exchange rate leading to cheaper spare parts and possibly even fuel cost.

Categories
CV Capital

CV Capital – 28 Feb 18 update

To my fellow shareholders,

The second half of February was good for CV Capital. Not only did some of our stocks post good results during the reporting season which saw their share price rise, I also managed to make our first investment. I actually made two new investments for CV Capital.

The first company is a very profitable financial institution listed in an emerging market which is trading on a very low multiple given its growth and profitability. The reason it is cheap is due to the current difficult economic conditions of the jurisdiction it operates in and the fact that this jurisdiction is very much “off the beaten path”. This jurisdiction is rich in energy and therefore still hurting from the low energy prices. In my opinion, one of the key things of investing in a financial institution is to understand its culture towards risk. From my research and speaking with an ex-CEO, I believe this financial institution has a conservative risk culture.

The second company is a gaming company. I’ve been following this company for 2 years and they had some issues in 1HY18 which saw their share price falling more than 60% from last June. At these levels the stock is very cheap and I believe that the issues are temporary. The year to date results for February 2018 suggests that the issues have largely been resolved. We’ll have to wait for a trading update to confirm.

As a general rule, I rather not disclose the names of the stock until I have bought enough shares for the portfolio. Some of our investments are quite illiquid and a few more buyers in the market can easily drive up the price.

Our performance (before any costs) since inception to 28 Feb 2018 is as follows:

 15 Jan 201828 Feb 2018Return
CV Capital1.001.032.8%
STW Benchmark56.756.52(0.3%)
Categories
Capral

Capral FY2017 results

See my original post on Capral here.

The floor didn’t cave in and the stock price went higher. When I wrote my original post, my opinion was that the market at that time was pricing in a bad result for FY2017. Turns out, the FY2017 result was actually pretty decent.

FY2017 results were pretty similar to FY2016’s results so there isn’t anything major to highlight. It was pretty much business as usual. Some notable developments include:

  • Normalised net profit (normalised for inventory revaluations) was down 12.7%, this was mainly due to aluminium metal price rising in 2017.  Half of the sales volume is derived from sales contracts with LME aluminium pricing and there is a time lag between the spot price is when the price is charge to the customer.  As LME metal prices rose throughout 2017, Capral’s were unable to fully pass on the metal cost to the customer and therefore margin fell. However, when LME metal price falls, the opposite will happen.

  • Housing starts are slowing with multi residential market falling by 9% and detached units falling by 2%. Capral’s main market is detached housing, so this slight fall has marginally affected sales volumes. The latest HIA reports forecast slowing housing starts for NSW and Victoria in FY2018/19 with the multi residential market falling significantly more than detached housing.
  • Capral sales to the industrial sector have offset the decline in the housing market. Strong demand for truck trailers (e.g. Maxitrans), marine (e.g. Austral) and other infrastructure projects have contributed to a 4.2% increase in revenue (excl scrap revenue) in FY2017.
  • Capral flagged higher capex at the AGM in March 2017 and capex increased by 41% to $5.8 million in FY2017. Capex is expected to further increase to $10 million in FY2018. Capral is introducing more automation in its factories which will further reduce operating costs.
  • New anti-dumping cases have been launched against two of China’s largest aluminium extrusion importers into Australia. I understand that the anti-dumping commission has used a more advantageous cost formula to calculate a “fair price” for the extrusion products which should increase the dumping duties.

At the time of writing, the share price is 17 cents which imply a market capitalisation of $80.7 million.

Based on the current update, I don’t see any reasons why the dividends cannot be sustained as the payout ratio is at 50% and the company has cash of $34 million. I continue to hold this stock.

Categories
Schaffer Corporation

Schaffer – cracker 1HY18 result

See my original post on SFC here.

Howe Leather

Howe Leather hit the ball out of the park with it’s 1HY18 result. The biggest surprise to me was the improvement in earnings margin. To illustrate how big an improvement this was, the table below compares my estimate of the 1HY18 EBIT margin to historical EBIT margins.

Management attributed the strong margins to an appreciating EUR:USD exchange rate as 60% of their variable cost are denominated in USD. Based on historical exchanges rates, I compared the change in average EUR:USD and the prevailing EBIT margins for various periods.

If EUR:USD continue at these levels till the end of the FY18, I won’t be surprised if 2HY18 EBIT margins exceed 20%. Current EUR:USD levels are still below average levels if compared to the past 10 years. EUR:USD maybe back on an uptrend since the decline in 2014.

Revenue for 1HY18 was $105 million and management announced that “steady state” volumes have been achieved. The company looks set to easily beat my previous revenue forecast of $180 million for the full year. Although management has indicated the expected revenue for Howe Leather in 2HY18 to be similar to 1HY18, I noticed that since 2015, there has been a seasonality factor which wasn’t previous present; see table below:

If this seasonality pattern continues in 2HY18, a combination of this seasonality factor with the current EUR:USD exchange rate would an even better result in 2HY18.

Building materials

In my opinion, management achieved a good price for the Limestone quarry assets and Urbanstone business; which were not making money. The selling price was approximately 1.5x of the net asset value.

Property division

Not much material change on this front except that the company has gotten state approval for rezoning of the Jandakot property. The next step is getting a local development plan. The Jandakot property development will be a few more years in the making.

SFC Capital

The company announced the formation of a new division to invest the cash generated from Howe Leather. I’ll wait till we get better clarity on how the capital is being invested before giving my opinion on this.

This has been a stellar report by SFC and the share price has acted accordingly by rising to a 12 year high. In many ways, you could have predicted the strong results due to:

  • Management guidance during the mid November AGM for further increase in volumes and profitability in 1HY18
  • The Chairman then proceeding to buying $1.37 million worth of shares two weeks after the AGM. An important lesson here!

Bottom line

I still think the company is undervalued. At Howe’s current volumes and profitability, the market capitalisation of $172 million still only mostly represents the value of Howe Leather. There is value upside from 1) revaluation of the Jandakot property to recognise conversion to industrial use, 2) future cyclical upturn in construction 3) development of the North Coogee and Jandakot sites.

 

Categories
CV Capital

CV Capital – 16 Feb 18 update

To my fellow shareholders,

Our one month milestone has passed. Although the market (ASX 200 index) fell by 3.5% from 6,121 (close at Friday, 2 Feb 2018) to 5,904 (close at Tuesday, 6 Feb 2018), individual stocks which I have been monitoring did not fall to levels which I felt gave us a big enough margin of safety. Nonetheless, I continue to look for investments “off the beaten track”. We have the advantage of having small sums of capital to invest and I want to fully exploit this advantage by investing in places where the market is less efficient. Every good angler knows that to catch fish, you have to fish where the fish are. The same applies in investing.

In general, I expect our portfolio to fare worse than the market during a bull market but fare much better than the market during a downturn. In other words, our portfolio should rise less than the market during a bull market and fall less than the market in a bearish market.

Our benchmark (STW) closed on 2 Feb 2018 at 57.1 and on 16 Feb 2018 at 55.25; representing a 3.2% fall for this period. Over the same period our portfolio (excluding cash) increased by 2.5% and including cash increased by 1.6%. I don’t expect our portfolio to have a negative correlation with the market, I do however expect it to fall less than the market during a downturn. At the moment, our portfolio has a thinly traded security which has contributed to this unexpected result. A few small parcels of this stock were traded on Friday which has pushed up its value.

The result of our portfolio since inception to 16 February is (0.03%). This compares with the benchmark’s return of (2.56%).

Categories
Musings

Another cuppa, moms and dads?

I was inspired to write this post after reading a recent article in the SMH by Noel Whittaker.

Cappuccino or latte (cafe latte) is about $3.50 in Sydney. Can you build a nest egg just by forgoing one cuppa a day? You bet.

As a parent with a young toddler, I believe starting an early savings plan for my child is an exceptional idea. With a long runway, not only can kids fully harness the power of compounding but the savings plan can teach them the benefits of delayed gratification/ savings.

The idea is to start a retirement plan the day your bundle of joy is born.

The investment horizon is 65 years (that’s sort of the average retirement age) and the fund would be invested in shares. Shares do not only produce very good long term returns (history has shown that these returns are anywhere between 6%-9%), they can also be bought with relatively small sums of money (as opposed to real estate or commodities), brokerage is cheap and they have zero maintenance cost.

A low cost ASX 200 ETF will be a reasonable way to accessing these returns.

If you start an investment plan which invests $3.50 a day (I would recommend investing into the market on an annual basis to avoid paying too much brokerage fees) for your child and assuming an annual compound return of 8%; the nominal value of the plan at the end of Year 65 would be $2.55 million (before brokerage fees and fund management costs). Assuming a 2% long run inflation rate, this would be equivalent to $704,909 in today’s dollars, not too shabby for just one latte a day huh.

I would argue that after seeing such wonderful results, your child would probably be eager to contribute much more than $3.50 a day when he/ she enters the workforce.

I’ve included the math in the table below. Like me, if you start the plan when your child is older than zero, then just subtract his/ her age from year 65 and take the value from that corresponding year.

The table below shows a combination of daily savings rate (from $1 to $10) and long run annual return (6% – 10%) and the resulting balance (nominal dollars) at the end of Year 65.

 

Read here for the Noel’s article. If you read his article, I suspect the difference between his figures and mine are due to different compounding frequencies.

This post gives me some motivation to update the ASX All Ordinaries long run return, originally posted here.