Monday, May 21, 2018

10 Year Portfolio Performance

It has been 10 years since I started on my investment journey. Not an easy one. Along the way, there are many “landmines” encountered. Many of these “landmines” may masquerades as “gold” where you may find hard to resist. If you are lucky, you just lose a “finger”, but if you are not, it may be the end of the road.

Temptations are abound in the world of investing. You learnt how to curb your basic instinct that may be harmful. Here are some lessons I learnt over the years.
  • Humans are not wired to sit on their butt but you have to learn how to sit on your butt no matter how itch you are if you want to increase your chances of success in investing. The more activity you find yourself in, the more you pay the piper and the more mistakes you commit. A "10x return in 10 years" type of investment increases by making a one-time buying decision and not by buying and selling multiple times, thinking each time you can get in at the low and sell at the high - it is harder than you think it is.
  • You learnt how to be a contrarian. This can be learnt too by reading on successful practitioners like Warren Buffett and the likes. If I had not come across their sage advice – to be greedy when others are fearful and vice versa – I would be operating based on my basic human instinct which is to be fearful when everyone is fearful. This is because humans are social animals where we seek safety in groups and numbers.
  • You learnt how to differentiate between needs and wants. A good investor would have to ask themself, would they risk something they want but do not need by betting with something they need? If the answer is yes, you should not be in the business of investing.
  • There are many snake oil sellers in the world of investing. There are many who try to masquerades their style like “Buffett” or the “3G” in the investing world. In recent years, for example, in the food sector, one of the most successful operator is Bill Stiritz. Frankly, I am unsure he would actually be so successful if his endgame is not to sell to the next monkey. So one of his key selling points is to buy businesses at adjusted ebitda at 10x after accounting for “synergies”. His latest vehicle is Post Holdings. He has had success for a very long time prior to POST. There are a few others who tried to copy him – TreeHouse Food and B&G food. Both too are acquisitive companies that acquire businesses with the same modus-operandi. For a period of years, both had success in driving their stock prices higher. But recently, both of them suffered operationally at the same time, coincidentally. Both delivered underwhelming results and both paid through their stock price. This modus operandi is not only unique to the food sector, you can find it in other sectors and you get some pretenders that may be starting to unravel – in the consumer space, Spectrum Brands is an example, and the king of all examples is Valeant Pharmaceutical.

You don't need to be a genius to succeed in investing. You don't need to solve rocket science. But there are two basic ingredients I think are essential to successful investing: 1) buy it at a good price, 2) have the patience to wait and sit tightly on your butt. If you have only one of the two, you are unlikely to make it.

Impact of 30% withholding tax on dividend on U.S stocks

Over the 10 years, if one has invested $1 in S&P500 etf, he would have gotten $2.38 if there isn't a 30% withholding tax. After tax, the $1 would be worth $2.23. But this $2.23 is assuming 1) you reinvested 100% of the dividend, 2) it does not cost you a single dime in commission to reinvest the dividend.

An alternative to a market etf is by investing in Berkshire which is likely to get you a similar result (from the perspective of a Singaporean investor where you have to pay withholding tax for dividends).

If one has invested $1 in Berkshire Hathaway which does not pay a single dime of dividend, the $1 would be worth $2.22.

First decade portfolio performance

My portfolio delivered a cumulative performance of 345.7% versus S&P500 of 222.7% in my first decade. Annualized return was 13.2% versus S&P500 of 8.3%. Details are in the table and chart.




Core Holdings

DBS

I first bought at around $16 during January 2016 as the market began to worry on the oil and gas loan portfolio of the bank. I added most of it at below $15 in the subsequent months as the worry exacerbated. We added to our position for as low as $13.9. At that time, price is secondary to any kind of worries that investors had in mind. Analyst after analyst's views were the potential loan losses would likely drive the stock lower. Price target were all revised downwards. The view from the analysts perspective were all screaming “sell.” Good for me though. When others sell, you try to buy if it makes sense. The pre-tax preprovision income of DBS would likely cover the potential loan losses. For the next two years, none of the dire prediction by the analyst community comes to pass. DBS stock price marched upwards without much volatility from below $14 to almost $30 now. For us, in terms of return, we are up 124% with reinvested dividend over a period of 2 years. I think Piyush Gupta, the CEO, is the best CEO that DBS had for a long time. Do I have a price that I would sell at? Sure I do. If DBS sells for 15x this year eps, about $36, I would gradly reduce or eliminate my holdings.

Haw Par (the See's Candies of South East Asia)

I have been invested in Haw Par since 2011. It has been a steady workhorse that I would gladly hold “forever” if the price is sensible. There are mainly two parts to its business – 1) the investment portfolio that mostly comprises of UOB shares, and 2) the consumer healthcare business.

  • Investment portfolio – In 2011, Haw Par owns about 63m UOB shares. UOB price at that time was in the range of $18s. Today, HP owns over 73m shares for about $30 per share. The increase in shares is due to dividend reinvestment.
  • Consumer healthcare business – Haw Par owns Tiger Balm which is a ubiquitous consumer brand in analgesic products in South East Asia region. The growth in the last 7 years is nothing short of spectacular, although growth has slowly tremendously in the past two quarters. Revenue was up from $81m to $202m in 7 years. Operating income before tax is up from $16m to $69m. There is minimal requirement for capital reinvestment. Total assets deployed in this business grew from $57m to $108m. It only needs about $50m of additional assets to generate an additional $53m of operating earnings with return on assets going from 28% to 63%. This is how attractive it is. If there is business similar to this I could think of, it is probably See's Candies.

Mastercard and Visa

Majority of what I hold for both Mastercard and Visa originated from 2012. But over the years, when price was attractive relative to alternatives, I have no qualms adding to my stake even if the price is almost tripled from what I paid in 2012 in these payment companies. For example, the earliest batch of Visa were purchased back in 2012 or 2013 at around $27 (split adjusted) while MA at $35 (split adjusted). I added to Visa in 2016 at about $77. It is important not to let price to anchor logic. I understand it is hard to overcome the emotion involved when you compare the original price from 2012 in order to add at 3 times the original cost from one's initial investment. It takes a lot to overcome the emotion. But once you look at it from the value perspective, it is not a difficult decision. In 2012, Mastercard and Visa were basically available at a bargain of a lifetime. You could get a business with a long growth runway that is likely to grow profits at mid-teens for years, at-a-then almost-equal-to-market multiple of less than 16x earnings. If one had bought at $27 at 16x earnings back in 2012, it is worth $127 today – a return of 4.7 folds. Anyone who likes multi-bagger, this is one of the rare chances at that time. Same goes for Mastercard.

Today, I still think both have a good decent run way to growth given the advances in technology capability in the past few years. More and more consumers are taking to paying cashless – for example, I find myself using “Paypass” or “Paywave” almost exclusively at places where it is allowed. And more and more places are equipped with the capability to accept both. Whether you are holding a credit or debit card, you could use it. But of course, the valuation today isn't 16x, but almost 25x.

Visa and Mastercard could potentially be my first 10-bagger stocks if it can double from today. If it double by 2022, it will also be my first 10-bagger stock in a 10 year holding period – most importantly, by sitting on my butt and not trying to catch each and every wave up and down.

Berkshire Hathaway

I do not expect much from my investment from BRK. It is basically more of a hedge for defensive purpose. But I still expect it to produce 7 to 9% annual compounded growth over the medium to long term. If I manage to find a better alternative, I will be swopping positions.

Over the past 10 years, there is really nothing to crow about on BRK's performance. But it still manage to beat S&P500 if I had otherwise invested 100% either in BRK or S&P etf. On paper, S&P 500 would have returned 238% over the last 10 years while BRK 222%. But as an overseas investor, I would have to pay 30% withholding tax on dividend and the broker would again take a cut on the dividend too, and if I am to reinvest the dividend, I would have to pay additional commission. So after accounting for such costs over the past 10 years, S&P500 & BRK performance are about similar.

Google

The first batch were bought in 2014 or 2015 in the low $500s. Subsequently, I added in the mid $700s in 2016. Today, though it isn't as cheap as when I first invested. But it is still available at a reasonable price that is not much above market multiple but with growth that is way above market growth rate. Will I be adding? Absolutely not. I will just keep it and let it run. It should do a decent job over the medium to long term.

Discovery Inc

This is the worst of all of my core holdings. I first bought it in 2013 or 2014 when it was in the $40s. It went down to as low as $16. When it was $16, I added quite substantially to the bet. My average cost is about $27. Discovery is a cash flow machine. I think over time, I should be able to recoup the investment and have a decent return. It is my mea-culpa to pay $40 in 2013. There is totally no reason why a reasonable investor would want to pay 13 or 14x ebitda at that point in time for a business that is at the onset to be disrupted by Netflix, Youtube and generally how consumers are going to consume their video shows. But I was not one of the reasonable investor at that time.

Madison Square Garden (not a core holding though)


MSG is not a core holding but I wish it is when the price was so attractive at $170. MSG is not a typical value investing type of stock. It is more like a “art” piece where it is more likely to go up in value as time passes. The primary thesis is there is only a limited number of sports franchise available in the U.S. In MSG case, there are only 30 NBA teams. There were 29 NBA teams in 1995 and 129 billionares in the US. Today, there is 30 NBA teams and there are 585 billionaires in the United States. And the billionaires of today have more wealth than their counterparts in 1995. At $170, it was selling for about 20 to 30% discount to what market valuations were at that time generally. That was about less than 2 years ago. I think New York knicks was valued at $3b in 2016 and in $2018, I think it is $3.6b.  

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