Value Investment Fund – Status at October 31, 2020

October 31, 2020 fell on a Saturday, thus the values are derived from close of market on Friday evening. The following is the status of the Value Investment Fund on 10/31/2020:

REIT Pool                               # of Shares     Cost Basis     Market Price*         FMV
    – Equity Residential               574.459           $30,000             $45.99            $26,419.37

    – Essex Property Trust             48.9644           10,000             204.06                9,991.68
    – UDR                                    606.9803           20,000               30.24              18,355.08      
       Sub-Totals                                                  $60,000                                     $54,766.13
Railways Pool
     –  Norfolk Southern                98.2849           20,000            $208.12            $20,455.05

     – Union Pacific                     114.9557           20,000              174.76              20,089.66
        Sub-Totals                                                  $40,000                                     $40,544.71
        Totals                                                       $100,000                                     $95,310.84

*Net of transaction fees of $1.00 per share; thus the amount in the schedule equals the actual market price per share at closing less $1.00.

In addition, the fund has $330.40 in the cash account for the PUTs sold on Union Pacific for $170 per share. Thus, the total Value Investment Fund market position net of all costs is $95,641.24. The cost basis is $100,000; therefore, the fund’s current position is a loss of $4,358.76 contingent on disposal upon market opening on November 2, 2020.

However, go back to the principles of value investing, it has the following core tenets and principles:

Tenets:
1) Buy Low, Sell High – 
the primary tenet of business is to buy low and sell high and earn the difference as profit. With stocks, value investors are looking for deep discounts from respective businesses within set pools of investment. In this case, the value investing fund has two pools, REIT’s and Railways. During year one of the fund’s existence (Oct 21, 2019 through October 20, 2020) there was only one pool within the fund. During this time period, the fund’s actual return on investment was 23.52%, but it crushed the Dow Jones Industrial Average by a whopping 353% during the same time period.
2) Patience – the key to success is to have faith in the underlying financial and performance values of the respective stock purchases. Utilizing business ratios and the details from the respective annual and quarterly reports of the respective purchases, an owner of stock simply waits for the stock price to recover to a prior peak and then disposes of the stock for outstanding gains. In order to reduce volatility and broaden the available pool of investments, value investors need additional pools of investments to maximize returns on excess cash available. Review Lessons Learned for additional understanding.

Principles:
A) Each investment within each pool is evaluated based on business ratios and current financial performance including the use of key performance indicators. A set of buy/sell triggers are calculated and used indefinitely (they are updated about every five years). As an example, for the Railways pool:

It turns out that all six of the railways have the same financial characteristics:

    • All generate a profit, the lowest net profit within the group is 22.8% (prior to Oct 2019),
    • All have positive operational cash flow and good free cash flow,
    • All issue dividends to their shareholders,
    • All have gross profit margins > 34.5% with the average over 37%,
    • All have low administrative overhead generating high operational profit margins,
    • All have similar 10 year growth lines related to share price.

Within this pool, each company is evaluated separately, and the buy/sell triggers are set for the upcoming few years. With Union Pacific, the buy/sell triggers are:

  • Buy Point – 18% market price decrease from prior peak
  • Sell Point – 102% of prior peak

B) Review the quarterly and annual reports in detail and determine overall financial performance and the approximate time to recover from a low. Although time is on a value investor’s side, time is also an enemy. Faster recovery periods, accelerate returns on investments exponentially. 

C) Adhere to the core principles of investing and do not behave with “Irrational Exuberance” (Alan Greenspan). All purchases and sales are based on preset values and automatically performed using computer orders.

Overall, I’m satisfied with the current status of the fund. Although the fund is currently $4,400 less than my cost basis; it includes all transaction fees to date plus the transaction fees to cash out. My standard for transaction fees is $1 per share, which is actually well above actual trading costs. Thus, my reported position above is very conservative and I now just wait for results to happen (patience). In the meantime, I will continue to evaluate the respective companies within each pool and develop a third pool to add to the investment funds opportunities. Act on Knowledge.

© 2020 – 2021, David J Hoare MSA. All rights reserved.

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