Value Investment Fund

This site’s value investment fund is composed of three separate industry pools with at least 18 separate potential investments. In 2020, the value investment fund had a 35% return on its core basis. During the second year, it is currently tracking for a return of more than 40%.

Value Investment Fund – Status on February 28, 2021

Value Investment Fund

The Club’s Value Investment Fund leaped forward during February 2021. The Fund grew 11.31% driven by increases across the board for all investments. Total actual gain was $13,207.07 as illustrated in report below.

As stated multiple times throughout the lessons and tutorials, high quality stocks have less risk and thus react remarkably well when the market goes down and recover quickly upon market rebound. Furthermore, high quality stocks provide many opportunities to earn good rewards if properly purchased less than intrinsic value and sold upon market price recovery.

Value Investment Fund Status Week 16 – Another Good Week

Value Investing

Another good week, the REIT pool of investments improved another $4,094 driven by Equity Residential and UDR’s actual results from the 4th quarter of 2020. Although the market responded positively to the results, the facilitator believes that UDR didn’t perform as well as Equity or Essex during the last quarter. This requires an in-depth review of UDR once their full annual report is released later this month. It might be time to dispose of this investment as the author feels that its growth to a higher value will be too slow to justify a continued hold with this investment. That report will be posted to this website prior to month’s end. For now, all three holdings are doing well with an $18,266 unrealized gain in just over three months off a $70,000 investment. This is a 26% actual gain, an approximate annual return of around 82%. 

Value Investment Fund Status Week 15 – Amazing Movement Forward

What a great week! Essex Property Trust reported their 4th quarter results and as expected, the stock’s market priced jumped almost $20 higher per share. The interesting part is that it wasn’t as if Essex reported great results; actually, their financial profits were in line with the third quarter profit. The market was holding back on amping this stock because it doesn’t know how to evaluate pricing equity based apartment complex real estate investment trusts. Per the article written several weeks ago, ‘Intrinsic Value of Essex Property Trust’, Essex’s intrinsic value is approximately $255 and a reasonable market value for this stock is around $285 to $290 per share. 

On Friday the 5th of February, 2021, the stock closed at $258.10. Thus, the market price is approximately the intrinsic value of the company on a per share basis. If the first quarter results mirror the 4th quarter performance, the stock price will surpass $270 and well on its way towards the target sell price. It may take two more quarters to acheive this reasonable market recovery price. In the interim, this single stock with several thousand dollars of unrealized value will keep the investment fund on target for the fiscal year goal of more than 30% return. The other two REITs report this week; if their results are similar to Essex’s, then the Fund’s balance will have a solid foundation for the next six months.

The historical high for Essex Property Trust is $331.30 back in October of 2019.

Calculating Intrinsic Value for Bank Stocks

Intrinsic Value of Bank Stocks

Financial institutions, including banks, are highly regulated, extremely leveraged, and susceptible to interest rate fluctuations. Due to this unique exposure, calculating intrinsic value for bank stocks requires modification of the most popular valuation models. There are about five widely accepted intrinsic valuation models used with determining the core price for stock of most companies. Novice or lazy investors rely heavily on these so-called textbook models to calculate intrinsic value as the baseline for buying stock. Sophisticated investors will modify popular models to create a customized formula for each respective industry. It requires some reasoning and reasonable assumptions to design and implement a model for any industry. This article goes into detail about designing and executing an intrinsic valuation model for banks.

To cover the thought process of creating this banking model, it is first explained how banks are in their own corner of the business world. These certain business attributes are unusual and therefore demand modification to any intrinsic calculation model. Secondly, compliance regulation further complicates calculating value. In some situations, the government penalizes banks by restricting their ability to conduct business which then impacts earnings. Since most valuation models are oriented around earnings, compliance in banking demands changes to the intrinsic formula. A third dynamic with banks is the leverage issue. Most stock price valuation models assume the respective company is at least mildly leveraged. Banks are not not mildly leveraged in comparison to other industries. A bank’s asset side of the balance sheet is customarily more than 85% weighted with loans and other earning assets. Therefore, the respective intrinsic value formulas must take this into consideration. Finally, banks and other financial institutions are susceptible to net interest margins which is tied to the portfolio’s risk factors (types of loans) and the sourcing of capital to finance these earning assets. Thus, the formula for intrinsic value must adapt to this interest spread between what is earned and what is paid out for use of money.

This article goes into great detail about how banks make a profit. The intrinsic value formula is designed around this unique business model. The final section goes through an eight step procedure to determine intrinsic value of bank stock. This article is for members only of this site’s Value Investment Club. It uses Wells Fargo as its sample and sets Wells Fargo’s intrinsic value point as of February 2021. For those of you desiring to read the entire article, you must join as a member; click on the Value Investing tab above and select Membership to read about the program and join the Club.

Value Investment Fund – Status on January 31, 2021

Value Investment Fund

The symbolism of the stock market are the bear and the bull. There is a third, the sloth for slow change. January is best stated as a sloth month. The stock market as a whole retracted 2%; but, the Value Investment Fund grew a meager .4% from $116,231 on December 31, 2020 to $116,727 on January 31, 2021.

As stated multiple times throughout the lessons and tutorials, high quality stocks have less risk and thus react remarkably well when the market goes down and recover quickly upon market rebound. Furthermore, high quality stocks provide many opportunities to earn good rewards if properly purchased at intrinsic value and sold upon market price recovery.

On December 31, 2020, the Investment Fund’s balance was $116,231. During the month of January 2021, the DOW Jones Industrial Average decreased 2.04% from 30,606 to 29,983. This club’s fund, increased a meager .4%. The difference is directly associated with the REIT pool. That pool’s balance on December 31st was $67,775 and it now stands at $79,582 including an additional $10,000 of basis tied to a second tranche purchase of Essex Property Trust (see the article for Essex’s intrinsic value calcultion).

Value Investing – Investment Fund (Lesson 15)

Value Investing Investment Fund

An investment fund is a collection of capital from one or more individuals and is used to purchase financial instruments of various companies or other funds. The most common types are brokerage funds that allow incremental purchases from members. These funds are often dedicated to a certain group or type of investment. These groups or types of investments have a set of similar attributes. Some funds are dedicated to stocks from only small-cap companies. Other funds focus on a sector or industry within the economy. For example, there are utility funds, real estate funds and retail based funds.

The primary goal of a fund is to restrict the purchases of financial instruments to a certain investment group or type believing that this group or type is dynamic enough to earn a good return for its members that contribute the capital to buy rights to companies.

There are two forms of investment funds. The first form is an open fund. This means that it continuously allows new investors into the fund and its capital basis can expand over time. Most brokerage funds are open as they are used with many retirement plans. The opposite of this is a closed fund. Here, a preset sum is invested and the fund grows off this limited capital investment. Ownership of the fund may change as a member has the right to sell their respective position in this fund. 

When a value investor creates their fund, they utilize pools of similar investments in their fund to enhance the fund’s overall performance. It is encouraged to have at least three pools of investments in a fund and no more than six pools. A well designed fund uses the attributes of the respective pools to reduce risk, improve overall performance and minimize the holding of cash. The following three sections cover these three pooling benefits and how they achieve the overall goal of value investing.

Value Investment Fund – Fund Status 11/14/2020

This is Week 3 of the 2nd year of the fund’s existence and it has already increased $15,764.75 of the $30,000 goal for the entire year. The $11,913 increase over Week 2’s ending balance reflects the significant change related to both pools tied to the market’s recovery during the same time period. In effect, the announcement of Pfizer’s vaccine for COVID pushed the entire market higher. The DOW Jones Industrial Average increased 4.08% during this past week and the Investment Fund increased 11.47% during the same time period.