Value Investment Fund – Status on April 30, 2021: Gaining Altitude

Value Investment Fund

Your attitude, not your aptitude, will determine your altitude. – Zig Ziglar

The Club’s Value Investment Fund continued to grow during April 2021. The Fund grew 7.6% driven by increases across the board for all investments. Total actual gain during April was $10,703 as illustrated in the report below.

As stated multiple times throughout the lessons and tutorials, high quality stocks have less risk and thus, resist 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 less than intrinsic value and sold upon market price recovery. Here is the Value Investment Fund’s status report for the end of April 2021.

Value Investment Fund – End of Month Report

                                                                                                         April 30, 2021                April 30, 2021           March 31, 2021
REIT Pool                                          # of Shares     Cost Basis     Market Price*         Fair Market Value*     Fair Market Value*
    – Equity Residential                            574.459           $30,000             $73.23                      $42,067.63                    $41,142.75

    – Essex Property Trust (Tranche #1)        48.9644             10,000              289.52                        14,176.17                      13,501.44
    – Essex Property Trust (Tranche #2)        43.2994             10,000              289.52                        12,536.04                      11,939.38

    – UDR                                               606.9803             20,000               45.45                         27,587.25                      26,324.74      
       Sub-Totals                                                                $70,000                                               $96,367.09                    $92,908.31
Railways Pool
– No Stock Holdings (All six railroads are at or near their all-time highs)
Banking Pool

     – Bank of New York                        232.9373             10,000                 48.88                        11,385.98                      10,819.94
.    – Wells Fargo (Tranche #1)                    292.0560             10,000                 44.05                        12,865.07                      11,276.28
.    – Wells Fargo  (Tranche #2)                   558.9715             20,000                 44.05                        24,622.69                     21,581.89
.       Sub-Totals                                                                 40,000                                                  48,873.74                      43,678.11
Dividend Receivables (UDR)                                                                                                           220.33                           539.23
Cash on Hand (Gains, Dividends, PUTS)                                                                                     6,490.84                        5,931.61
Totals (Starting Cost Basis = $100,000)                    $110,000                                              $151,952.00                  $143,077.26

*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 per share.

On March 31, 2020, the Value Investment Fund’s balance was $143,077. During the month of April 2021, the DOW Jones Industrial Average increased 2.71% from 32,982 to 33,875. This club’s fund, grew 7.6%. Thus, the Value Investment Fund grew at a 2.8 times the factor of the DOW. The difference is directly associated with gains from both the REITs and Banking Pool of investments. The DOW is an index based on 30 of the largest companies in the world. This site’s value investment fund is narrowly defined; and as such, requires extensive research to reduce risk customarily associated with a limited pool of potential investments. Investors in index based funds do not have to do any research work nor analysis for their investments. The difference is far superior returns. 

During April, all of the investments of the REITs pool reported their 1st quarter results. The net profits reported were in line or less than anticipated. The market has depressed the stock prices for REITs due to a perceived non-payment of rents. All three REITs were able to minimize this impact; credit is given to the professional management of the companies. With the banking pool, Wells Fargo’s 1st quarter report was better than expected. The removal of the cap, possibly before year’s end, but most likely the restriction will be lifted in the first half of 2022 will continue to propel the market price higher for Wells Fargo over the next nine months. If Wells Fargo’s second quarter results are in line with the first quarter, Wells Fargo’s stock price will easily break the $50 per share zone. In the interim, Wells Fargo’s stock price will slowly gain momentum as it heads towards a target sell price of $58 per share. 

Value Investment Fund – Activity

During the month of April, the following transactions occurred. 

Dividends were recorded for United Dominion Trust (UDR) – $220.33.

To date, the fund has realized earnings as follows:

Gain on sale of Norfolk Southern after all fees                                     $2,678.26
Gain on sale of Union Pacific Railroad                                                   4,620.06
Gain on sale of Comerica Bank                                                               3,677.40
Sub-Total Gains                                                                                    $10,975.72
Norfolk Southern (Nov)                                                                                92.39
Union Pacific (Dec)                                                                                     111.50
Equity Residential (Dec)                                                                             346.40
Essex Property Trust  (Dec)                                                                        101.75
Comerica Bank (Dec)                                                                                  251.57
UDR (Jan)                                                                                                    218.51
Bank of New York Mellon (Jan)                                                                    72.21
Wells Fargo                                                                                                    85.10
Equity Residential (March 2021)                                                                 346.40
Essex Property Trust (March 2021)                                                             192.83
UDR, Inc. (April 2021)                                                                                220.33
Sub-Total Dividends                                                                               $2,038.99
Sale of PUTs 
Union Pacific Puts (Nov @$170/Sh) Expires Feb 19, 2021                        330.40
Norfolk Southern Puts (Dec @$210/Sh) Expires March 19, 2021              426.54
Union Pacific (Jan @$175/Sh) Expires May 21, 2021                                595.45
Union Pacific (Feb @$170/Sh) Expires June 18, 2021                               239.77
Union Pacific (Feb @$155/Sh) Expires January 20, 2023                       1,769.23
Norfolk Southern (March @$190/Sh) Expires January 21, 2022                335.07
Sub-Total PUTS                                                                                       $3,696.46
Total Realized Earnings                                                                       $16,711.17

Total dividends earned in Year Two year-to-date equals $2,040. Cash and dividends receivable plus a $10,000 investment basis in Bank of New York equals the total amount realized to date. Realized earnings during April 2021 equals $220.33 on a $100,000 investment basis. 

This means the fund has realized a 16.7% return in 192 days for a realized annual return of approximately 31.75%. The unrealized portion is the difference between the fund’s increase since the start date which stands at $51,952 and the realized amount of $16,711. Thus, the unrealized amount is $35,241. If the fund had sold the entire portfolio on April 30th, 2021, it would realize after fees the entire $51,952 which would equate to a return of 51.9% in 192 days. On an annualized basis this equals an 98.66% return. 

The key for value investors is time. The risk of the respective holdings going down dramatically is extremely low as the intrinsic value tied to those respective holdings indicate an excellent margin of safety. Thus, the most likely outcome over the next five to six months is continuous improvement in value; albeit, slower growth than the first six full months in this fiscal year. Current indications for the respective investments are:

  • Equity Residential – Current target market recovery price is $83 per share.
  • Essex Property Trust – Prior peak price was $330 per share. It is expected this stock will surpass this value in the 3rd quarter of 2021 after the release of the 2nd quarter results. The Fund will exercise a stop-loss at $301 once the stock market price exceeds $315 per share. The stop-loss will lock in the respective initial gains desired.
  • UDR – Current target recovery point is $52 per share and it is anticipated that this will occur during the summer of 2021.
  • Bank of New York – this investment is in the banking pool. The current target market price is $55. The Fund may continue to hold this respective stock once it surpasses $55 as there are no other options for investment currently. A stop-loss order may be used to protect the downside risk.
  • Wells Fargo – the historical high for Wells Fargo is $58 per share. The current value is a direct reflection of the inability to grow due to the cap penalty imposed by the Federal Reserve. It is expected that this cap will be released by the end of the first quarter of 2022. In the interim, the stock will continue to grow slowly into the upper-40’s. Once this cap is released, the facilitator of this pool firmly believes the stock price will surpass the $58 per share prior peak price. The overall quality of Wells loan pool along with the offsetting liability pool has improved significantly over the last three years while the bank makes improvements to its internal controls. This is a stock posed to explode once that cap is removed.

This is where the four principles of value investing come into play for value investors. 

Value Investment Fund – Application of Principles of Value Investing

Go back to the principles of value investing, it has the following core tenet and principles:

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 three pools, REIT’s,Railways and
Banks. 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.


A) Risk Reduction – the best risk reduction tool available to value investors is understanding the business valuation principle of stability of earnings. Only high quality stocks can provide long-term positive earnings for extended periods of time. This means, there are only two sets of stock groups to use – DOW and Large-Caps. High quality, stable companies practically eliminate downside risks related to investments. Value investors embrace these two groups of stocks; in effect, a value investor only looks at the top 2,000 companies for potential investments.

B) Intrinsic Value – purchasing stock at or below the true value of the company is the best opportunity to reduce risk and maximize gains for an investment. Understanding intrinsic value is essential with the buy low element of the primary tenet of business.

C) Financial Analysis – 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 year). 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 –  a minimum 21% market price decrease from prior peak or share price of $188 per share;
    • Sell Point – 102% of prior peak or $229 per share whichever is lower.

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. Longer recoveries effectively reduce the overall return on investment.

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.

D) 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 reasonable market recovery value or 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.

Overall, the current status of the fund is performing at a better than satisfactory rate and tending towards the initial calculated return anticipated. The banking pool is finally beginning to improve bringing up the overall Value Investment Fund. It is just a matter of time for the respective stocks to recover to their historical peak prices.

The standard for transaction fees is $1 per share, which is actually well above actual trading costs. Thus, the reported position above is very conservative and it is now a matter of waiting for results to happen (patience). Act on Knowledge.

Value Investing Episode 1 – Introduction and Membership Program

© 2021 – 2022, David J Hoare MSA. All rights reserved.

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