Value Investment Fund – Status on December 31, 2020

Value Investment Fund

December 31, 2020 fell on a Friday, thus the values below also includes the weekly update. The following is the status of the Value Investment Fund on 12/31/2020:

REIT Pool                               # of Shares     Cost Basis     Market Price*         Fair Market Value
    – Equity Residential               574.459           $30,000             $58.28                      $33,479.47

    – Essex Property Trust             48.9644           10,000             236.42                         11,576.16
    – UDR                                    606.9803           20,000               37.43                        22,719.27      
       Sub-Totals                                                  $60,000                                               $67,774.90
Railways Pool
– Union Pacific                     114.9557           20,000              207.22                         23,821.12
Banking Pool

     – Comerica Bank                 369.9593          20,000                 54.86                         20,295.97
Dividend Receivables (Comerica Bank, Equity Residential & Essex)                              699.72
Cash on Hand (Sale of Norfolk Southern, Options & Dividend Receipts)                     3,639.09
Totals                                                             $100,000                                              $116,230.80

*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.

On November 30, 2020, the Value Investment Fund’s balance was $114,576.76. During the month of December, the DOW Jones Industrial Average increased 3.28% from 29,603 to 30,606. This club’s fund, increased 1.44%. The difference is directly associated with the REIT pool. That pool’s balance on November 30th was $68,019, therefore it decreased .4%; thus it performed significantly poorly in comparison to the market as a whole. This is due to the long-term concern tied to real estate directly associated with the outcome of rents collectable due to COVID. Until there is greater confidence in the market for employment, REITs will most likely not perform well in the interim. Once that confidence comes back, REITs will soar in the market. For now, patience is required. Patience is an essential characteristic for value investors. The intrinsic value of the stock is such that there is sufficient safety of margin related to the respective investments. Look at the cost basis; the pool is still way ahead of the cost basis.

During the month of December, three transactions occurred. 

  1. The fund purchased Comerica Bank shares to exercise the excess cash position. Comerica Bank is a suggested investment with the Bank Pool of investments; please read the documentation associated with the bank pool on this site (access requires membership).
  2. Dividends were recorded for the following:
    • Comerica Bank – $251.57
    • Essex Property Trust – $2.078/Share for $101.75
    • Equity Residential – $.603/Share for $346.40
  3. Sold Puts on Norfolk Southern netting $426.54 after transaction fees of $1/Share.

Take note, one of the benefits of holding high quality stocks is that dividends are often additional value for value investors. Thus, to date, the fund has realized earnings as follows:

  • Gain on sale of Norfolk Southern after all fees                                     $2,678.26 *Does not include dividends.
  • Sale of Union Pacific Puts (net of fees)                                                      330.40
  • Norfolk Southern Dividends                                                                         92.39
  • Union Pacific Dividends                                                                             111.50
  • Sale of Norfolk Souther Puts (net of fees)                                                  426.54
  • Comerica Bank Dividends                                                                           251.57
  • Essex Property Trust Dividends                                                                   101.75
  • Equity Residential Dividends                                                                      346.40
  • Total Realized Earnings                                                                          $4,338.81

Total dividends earn in Year Two year-to-date equals $903.61. Cash and dividends receivable equals the total amount realized to date.

This means the fund has realized a 4.34% return in 73 days for a realized annual return of approximately 21.69%. The unrealized portion is the difference between the fund’s increase since the start date which stands at $16,231 and the realized amount of $4,339. Thus, the unrealized amount is $10,892. If the fund were to sell on December 31st the entire portfolio, it would realize after fees the entire $16,231 which would equate to a return of 16.23% in 73 days. On an annualized basis this equals an 81% return. This includes the negative results for the REIT pool during the month of December 2020.

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 safety margin. Thus, the most likely outcome over the next eight to nine months is continuous improvement in value. This is where the fourth principle of patience comes into play for value investors. 

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 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.


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

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 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 satisfactory and tending towards the initial calculated return anticipated. The banking pool will add additional options allowing for more activity which will improve the realized portion of the portfolio’s return.

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). In the meantime, it is wise to continue evaluating the respective companies within each pool. Act on Knowledge.

Value Investing Episode 1 – Introduction and Membership Program

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

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