Value Investment Fund – Status on January 31, 2021

Value Investment Fund

To improve is to change, so to be perfect is to have changed often. Winston Churchill

The symbolism of the stock market are the bull and the bear. There is a third, the sloth for slow change. January is best stated as a sloth month. The stock market as a whole retracted 2%; but, the Value Investment Fund grew a meager .4% from $116,231 on December 31, 2020 to $116,727 on January 31, 2021.

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 intrinsic value and sold upon market price recovery. Here is the Value Investment Fund’s status report for the end of January 2021.

REIT Pool                                          # of Shares     Cost Basis     Market Price*         Fair Market Value
    – Equity Residential                            574.459           $30,000             $60.64                      $34,835.19

    – Essex Property Trust (Tranche #1)        48.9644             10,000              238.61                        11,883.40
    – Essex Property Trust (Tranche #2)        43.2994             10,000              238.61                        10,331.67

    – UDR                                               606.9803             20,000               37.45                         22,731.41      
       Sub-Totals                                                                $70,000                                               $79,581.67
Railways Pool
– No Stock Holdings
Banking Pool

     – Bank of New York                        232.9373             10,000                 38.83                         9,044.96
.    – Wells Fargo (Tranche #1)                    292.0560             10,000                 28.88                         8,434.58
.    – Wells Fargo  (Tranche #2)                   558.9715             20,000                 28.88                       16,143.09
.       Sub-Totals                                                                 40,000                                                  33,622.63
Dividend Receivables (UDR & New York Mellon)                                                                         290.72
Cash on Hand (Gains, Dividends, PUTS)                                                                                     3,231.72
Totals (Starting Cost Basis = $100,000)                    $110,000                                               $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 December 31, 2020, the Investment Fund’s balance was $116,231. During the month of January 2021, the DOW Jones Industrial Average decreased 2.04% from 30,606 to 29,983. This club’s fund, increased a meager .4%. The difference is directly associated with the REIT’s pool. That pool’s balance on December 31st was $67,775 and it now stands at $79,582 including an additional $10,000 of basis tied to a second tranche purchase of Essex Property Trust (see the article for Essex’s intrinsic value calcultion).

The Fund continues to develop the banking pool of investments. During January, the Fund sold Comerica Bank for a $3,929 return including dividends in 35 days. That is a whopping 19.64% return and if annualized it would equal well over 200%. During the month, the Fund purchased two separate tranches of Wells Fargo and 233 shares of Bank of New York. Currently, this banking pool sits with an unrealized loss of $6,377. Once the Federal Reserve removes the asset cap (temporary penalty imposed on Wells Fargo for the fake accounts fiasco in 2017), Wells Fargo will be allowed to increase its assets (more loans) and generate a lot more net interest income. For now, patience is required. Patience is an essential characteristic for value investors. The intrinsic value of Wells Fargo stock is approximately $34 per share and the expected market price recovery will most likely hit $54 by this time next year. There is sufficient safety of margin related to the respective investments. 

During the month of January, the following transactions occurred. 

  1. The fund sold Comerica Bank shares to earn a 19.6% return in 35 days.
  2. The fund sold Union Pacific Railroad earning $4,620 off a $20,000 investment in 72 days.
  3. Purchased two separate tranches of Wells Fargo Bank; this 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).
  4. Purchased a second tranche of Essex Property Trust.
  5. Purchased Bank of New York Mellon in the banking pool.
  6. Dividends were recorded for the following:
    • UDR (United Dominion Realty) – $218.51
    • Bank of New York Mellon – $72.21
  7. Sold Puts on Union Pacific earning $595.45 after transaction fees of $1/Share.

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
Sub-Total Dividends                                                                                $1,194.33
Sale of PUTS 
Union Pacific Puts (Nov) Expires Feb 19, 2021                                          330.40
Norfolk Southern Puts (Dec) Expires March 19, 2021                                426.54
Union Pacific (Jan) Expires May 21, 2021                                                  595.45
Sub-Total PUTS                                                                                      $1,352.39
Total Realized Earnings                                                                      $13,522.44

Total dividends earned in Year Two year-to-date equals $1,194.33. 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 January 2021 equals $9,183.63 on a $100,000 basis. 

This means the fund has realized a 13.5% return in 103 days for a realized annual return of approximately 47.92%. The unrealized portion is the difference between the fund’s increase since the start date which stands at $16,727 and the realized amount of $13,522. Thus, the unrealized amount is $3,205. If the fund had sold the entire portfolio on January 31st, it would realize after fees the entire $16,727 which would equate to a return of 16.73% in 103 days. On an annualized basis this equals an 59.2% return. This includes the negative results for the banking pool during the month of January 2021.

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 satisfactory and tending towards the initial calculated return anticipated. The banking pool is currently weighting down the overall Fund; but, all purchases of bank stocks have been at lower than intrinsic value calculations. 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). In the meantime, it is wise to continue evaluating the respective companies within each pool. Act on Knowledge.

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

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