Value Investment Fund – Status on March 31, 2021

Value Investment Fund

The Club’s Value Investment Fund grew dramatically during March 2021. The Fund grew 10.1% driven by increases across the board for all investments. Total actual gain during March was $13,143 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 March 2021.

Value Investment Fund – End of Month Report

                                                                                                       March 31, 2021           February 28, 2021        March 31, 2021
REIT Pool                                          # of Shares     Cost Basis     Market Price*          Fair Market Value      Fair Market Value
    – Equity Residential                            574.459           $30,000             $71.62                      $37,000.90                    $41,142.75

    – Essex Property Trust (Tranche #1)        48.9644             10,000              275.74                        12,426.68                      13,501.44
    – Essex Property Trust (Tranche #2)        43.2994             10,000              275.74                        10,988.95                      11,939.38

    – UDR                                               606.9803             20,000               43.37                         24,382.40                      26,324.74      
       Sub-Totals                                                                $70,000                                               $84,798.93                    $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                 46.45                          9,587.70                      10,819.94
.    – Wells Fargo (Tranche #1)                    292.0560             10,000                 38.61                        10,271.61                      11,276.28
.    – Wells Fargo  (Tranche #2)                   558.9715             20,000                 38.61                        19,659.03                     21,581.89
.       Sub-Totals                                                                 40,000                                                  39,518.34                      43,678.11
Dividend Receivables (Equity & Essex REITs)                                                                                 85.10                           539.23
Cash on Hand (Gains, Dividends, PUTS)                                                                                     5,531.44                        5,931.61
Totals (Starting Cost Basis = $100,000)                    $110,000                                              $129,933.81                  $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.

On February 28, 2020, the Value Investment Fund’s balance was $129,934. During the month of March 2021, the DOW Jones Industrial Average increased 6.6% from 30,932 to 32,982. This club’s fund, grew 10.1%. Thus, the Value Investment Fund grew at a 1.5 times factor of the DOW. 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 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 4th quarter report was less than expected; however, there was some good news during March 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 $58 per share. 

Value Investment Fund – Activity

During the month of March, the following transactions occurred. 

  1. Dividends were recorded for the following:
    • Essex Property Trust – $192.83
    • Equity Residential – $346.40
  2. Sold PUTs on Norfolk Southern with a strike price of $190 expiring January 21, 2022 – $335.37

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
Sub-Total Dividends                                                                               $1,818.66
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                                                                       $16,490.84

Total dividends earned in Year Two year-to-date equals $1,818.66. 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 March 2021 equals $874.30 on a $100,000 investment basis. 

This means the fund has realized a 16.5% return in 163 days for a realized annual return of approximately 36.9%. The unrealized portion is the difference between the fund’s increase since the start date which stands at $43,077 and the realized amount of $16,491. Thus, the unrealized amount is $26,586. If the fund had sold the entire portfolio on March 31st 2021, it would realize after fees the entire $43,077 which would equate to a return of 43.1% in 163 days. On an annualized basis this equals an 96.46% 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 six to seven months is continuous improvement in value; albeit, slower growth than the first five full months in this fiscal year. Current indications for the respective investments are:

  • Equity Residential – first quarter 2021 financial results will report in April 2021. If tenant default rates remain stable, this security should experience a three to four percent increase in value immediately following the release of results. Current target market recovery price is $83 per share.
  • Essex Property Trust – similar to Equity Residential, first quarter results will come out in April. If tenant default rates remain stable or improve, this stock will clear $300 per share. Its current intrinsic value calculation is $256 with an increase of around $5 per share for the first half of 2021. Prior peak price was $330 per share. It is expected this stock will surpass this value in the 3rd quarter of 2021. The Fund will exercise a stop-loss at $301 once the stock market price exceeds $315 per share.
  • UDR – this stock should follow the patter of both Equity and Essex. 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 mid-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 fourth principle of patience comes 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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