Value Investment Fund – Status on February 28, 2021

Value Investment Fund

There is no such thing as a quantum leap. There is only dogged persistence – and in the end you make it look like a quantum leap. – James Dyson

The Club’s Value Investment Fund leaped higher during February 2021. The Fund grew 11.31% driven by increases across the board for all investments. Total actual gain during February 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 at less than intrinsic value and sold upon market price recovery. Here is the Value Investment Fund’s status report for the end of February 2021.

                                                                                                       February 28, 2021      February 28, 2021        January 31, 2021
REIT Pool                                          # of Shares     Cost Basis     Market Price*          Fair Market Value      Fair Market Value
    – Equity Residential                            574.459           $30,000             $64.41                      $37,000.90                    $34,835.19

    – Essex Property Trust (Tranche #1)        48.9644             10,000              253.79                        12,426.68                      11,883.40
    – Essex Property Trust (Tranche #2)        43.2994             10,000              253.79                        10,988.95                      10,331.67

    – UDR                                               606.9803             20,000               40.17                         24,382.40                      22,731.41      
       Sub-Totals                                                                $70,000                                               $84,798.93                   $79,581.67
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                 41.16                          9,587.70                       9,044.96
.    – Wells Fargo (Tranche #1)                    292.0560             10,000                 35.17                        10,271.61                       8,434.58
.    – Wells Fargo  (Tranche #2)                   558.9715             20,000                 35.17                        19,659.03                     16,143.09
.       Sub-Totals                                                                 40,000                                                  39,518.34                     33,622.63
Dividend Receivables (Wells Fargo/Feb; UDR & NY Mellon/Jan)                                                   85.10                          290.72
Cash on Hand (Gains, Dividends, PUTS)                                                                                     5,531.44                       3,231.72
Totals (Starting Cost Basis = $100,000)                    $110,000                                              $129,933.81                 $116,726.74

*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 January 31, 2020, the Investment Fund’s balance was $116,727. During the month of February 2021, the DOW Jones Industrial Average increased 3.17% from 29,983 to 30,932. This club’s fund, leaped 11.31% higher. The difference is directly associated with gains from both the REITs and Banking Pool of investments. 

During February, all of the investments of the REITs pool reported their 4th quarter results. The net profits reported were in line or slightly better than anticipated. The market has depressed the stock prices for REITs due to 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 4th quarter report was less than expected; however, there was some good news related to the Federal Reserve cap placed on Wells Fargo. The Federal Reserve accepted their plan for proper internal controls to monitor and address the public trust aspect of business operations. The removal of the cap could possibly happen before year’s end; but most likely the restriction will be lifted in the first half of 2022. In the interim, Wells Fargo’s stock price will slowly gain momentum as it heads towards a target sell price of $53 per share. 

During the month of January, the following transactions occurred. 

  1. Dividends were recorded for the following:
    • Wells Fargo – $85.10
  2. Sold PUTs on Union Pacific maturing June 18, 2021 earning $239.77 after transaction fees of $1/PUT.
  3. Sold PUTs on Union Pacific maturing January 20, 2023 earning $1,769.23 after transaction fees of $1/PUT sold.

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
Sub-Total Dividends                                                                               $1,279.43
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
Sub-Total PUTS                                                                                      $3,361.39
Total Realized Earnings                                                                      $15,616.54

Total dividends earned in Year Two year-to-date equals $1,246.43. 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 February 2021 equals $2,094.10 on a $100,000 investment basis. 

This means the fund has realized a 15.6% return in 132 days for a realized annual return of approximately 43.7%. The unrealized portion is the difference between the fund’s increase since the start date which stands at $29,934 and the realized amount of $15,617. Thus, the unrealized amount is $14,317. If the fund had sold the entire portfolio on February 28th, it would realize after fees the entire $29,934 which would equate to a return of 29.9% in 132 days. On an annualized basis this equals an 82.6% 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 seven to eight 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 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 $175 per share;
    • Sell Point – 102% of prior peak or $216 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 better than satisfactory and tending towards the initial calculated return anticipated. The banking pool is finally beginning to improve bringing up the overall Fund. It is just a matter of time for the respective stocks to recover.

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.

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

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