Time for another update on the railroad fund. For those of you not aware, this is a test that began on October 21, 2019 for one year to validate value investing principles. The fund started with $10,000 and is strictly limited to the six publicly traded railroad investments (Class I Railways only). There are seven Class I Railways, but Berkshire Hathaway bought an entire railway (Burlington Northern Santa Fe) several years ago thus leaving six for the remainder of the market. I selected this particular pool of investments because all six have similar operations and are closely aligned and monitored by the National Highway Safety Transportation Board. In my last article in this series, the fund status on December 31, 2019 stood at $10,392.74 (fair market value) with an annualized return of 20.19%. My cost basis was $10,270.32. Value investing has a goal of between 30 and 40% annually with reduced risk in comparison to traditional stock investment principles.
This report is for January 31, 2020.
During the last 30 days, the fund held 13.52375 shares (original investment of $2,500) and sold them on 01/17/2020 at 9:40 AM when the price in the market hit the target under the value investment principle at $207.17. The value investing principle (simply stated) required the share price to hit the prior peak price which was $206.46. However, on that morning, the share price instantly jumped past $206.46 to $207.17 triggering the sale of the stock. The gain on the sale net of costs of $1.00 per share to buy and $1.00 per share to sell was $288.19. The stock was purchased on 10/23/19 at $183.86.
Thus the portfolio’s basis is as follows on 01/31/2020:
CSX – 103.607743 shares purchased (2 transactions) $7,500.00
Cash – Original basis from NSC 2,500.00
Cash – Gain from 2 sales and dividends received 558.51
Total Fund Basis $10,558.51
The fair market value on January 31, 2020 is as follows:
CSX – 103.607743 shares at $75.34 $7,805.81
Total FMV Railroad Fund $10,864.32
Since inception (102 days earlier), the fund is earning $8.47 per day with an initial investment of $10,000.00. This equates to an annual return on the investment of 30.93% (approximation).
For those of you just starting in on this series, I did not invest actual dollars. This is merely a test pool and it is acting as if there are actual dollars. I personally do not have any money invested in railroad stocks, nor am I advocating for you to invest in railroad stocks; I am merely testing a theory (you must read the prior articles in this series to understand the parameters and the corresponding buy/sell points which are clearly identified).
Lessons Learned to Date
It appears on the face of my decisions to date that the fund is performing in accordance to my original plan. I actually only partially agree to any credit so far. There are several indicators that my theory may not hold.
First, is the market as a whole. During this 102 day period, the DOW Jones Industrial Average increased 19% from 26,827 to 28,256. Thus, two thirds of the fund’s change could be related to the market change as a whole. Furthermore, every one of the six investments showed significant share price increases during this 102 day period. Under my value investing principles, there should be more volatility among the six investments and I’m simply not getting this. Thus, I need to watch this and determine its impact on the fund in the future. For now, there are not enough data points to mathematical determine the impact of the market on the fund.
One interesting note is that the second most desired reason to use the value investing principles is tied to reduced risk. The risk reduction comes from comparing a very homogenous group of stock selections. The railroad industry provides this as their operation models are very similar. This tells me that the open available cash needs to be invested, but what do I buy when all six companies are at or above their respective prior peaks? Thus my second less is that I need another pool of homogeneous investments to laterally transfer available cash. This will allow me to maximize return on my overall portfolio. Now I must spend additional time to develop another fund. My third lesson is that value investing is going to take more time commitment than I anticipated.
The financial results from all six are now reporting (from the 3rd week of January through the 2nd week of February for 2019 results). When Norfolk Southern reported, the stock price jumped to $216.15 on the 29th of January. Imagine if I had held out for the annual report. A fourth lesson – I need to consider additional variables in order to maximize the fund’s return on the investment. One of the variables is timing of the quarterly report. I need interim information to lead me to an educated forecast of the financial results for pending quarterly reports. I am working on this. Each of the railroads report their weekly loads using an industry term ‘revenue ton miles’. Therefore, I need to generate a key performance indicator as an interim evaluation of financial results at the end of the current quarter. My article about this is pending right now (I expect it out in about three weeks, it is more detailed than I initially thought).
Current Fund Status 02/14/2020
As of last night, the railroad fund status is as follows (fair market value as basis has not changed):
CSX – 103.607743 shares at $78.54 $8,137.35 *Net of the $1 cost per share, i.e. as if I sold last night)
Total FMV Railroad Fund $11,195.86
Annualized return on the investment: 34.93%
DOW Jones Industrial Average return since 10/21/19 (start date of this fund): 29.99%
CSX’s sell point is $80.52. I’m pretty sure I will hit that mark sometime this coming week which means I’ll end up selling and have nothing but cash in my fund which will earn 0%. I need to find another pool of investments to laterally transfer my cash while I wait on declines from one of the six railroads. ACT ON KNOWLEDGE.
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
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