Value Investment Fund – Status on December 31, 2020
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
– Union Pacific 114.9557 20,000 207.22 23,821.12
– 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 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.
- 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).
- 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
- 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.
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.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.