Value Investment Fund Status Week 28 – Steady As She Goes

Value Investment Fund

The course set by the Value Investment Fund is achieving its initial goal. The Fund continues to grow, not as fast as it did during the first few months of the new fiscal year. This is because when the respective investments are purchased at low values, and driven by their inherent quality, recover quickly to intrinsic value and typically increase in market value faster than the market as a whole. As the market prices tend towards higher total market capitalization for the respective investment, the growth in the price per share begins to slow. This past week, the Value Investment Fund grew 1.004% reaching a new all time high of $153,477 off a $100,000 investment 28 weeks ago. The average weekly growth rate through the first 20 weeks approximated 1.77%. Thus, the growth rate is slowing down because the core recovery of the respective securities has been achieved. 

The only way to maintain a continuous high growth rate is to have more options available. The current Fund is limited with selections and the facilitator is currently developing two more pools of potential investments to use in Fiscal Year 2022. 

The fund is well ahead of schedule and is on track to surpass 56% return for fiscal year 2021. One of the pools of investments are banks. This table reflects the Fund’s current position with banking securities.

Name                                 Purchase Price    Intrinsic Value    Current Market Price*   Historical Peak Price
Wells Fargo (Tranche #1)           $34.24                  $40                          $45.54                                $64.19
Wells Fargo (Tranche #2)           $35.78                  $40                          $45.54                                $64.19
Bank of New York Mellon         $42.93                  $45                           $50.82                               $57.71

Currently, Bank of New York Mellon is preset to sell at $53 market price and it is anticipated this will happen this upcoming week. On 01/12/2018 (three years ago) the stock was selling in the market at $58.42 per share. On 01/22/2021, the stock was selling at $41.93 and the fourth quarter preliminary report was just issued. This past weekend the market price for Bank of New York surpassed the $50/Sh value point driven by economic wide factors even though the bank’s financial position is not as impressive as reported for year-end 2020 (see data dated 01/22/2021). Here are the comparatives.

                     Market             Annual                     Per Share                                                             Book                                            Common Equity
Date             Price      Revenue   Expenses   Earnings  Dividends    Loans   Securities   Value/SH  Tangible/SH    Employees      Tier 1 Ratio        Deposits 
01/18/2017   $58.42    $15.5 B      $11.0 B        $3.72         $.96          $57.9 B   $120.3 B        $37.21          $18.24           52,500               10.7%              $244.3 B
01/22/2021   $41.93    $15.8 B      $11.0 B        $3.83       $1.24          $56.5 B   $156.4 B        $46.53          $25.44           48,500               13.1%               $341.5 B
05/09/2021   $50.82    $15.6 B¹     $11.2 B¹       $3.75       $1.24          $60.4 B   $155.8 B        $46.16          $24.88           48,000               12.6%               $336.8 B           

  1. Trailing twelve months

Every single one of the measurement metrics are in a much superior position against the market high price three years ago. The bank is in a position to perform very well over the next year; however, the most recent quarterly results did not maintain the bank’s balance sheet position nor earnings as compared against all of 2020. Thus, the facilitator is going to stick to selling the stock once the share price hits $53 per share as initially quantified back in January 2021.

During the past week, both banks locked in their respective quarterly dividends. Thus, the Fund earned another $157 in dividends to date.

Value Investment Fund – Portfolio Status

Here is the current status of the Value Investment Fund:

REIT Pool                                          # of Shares     Cost Basis     Market Price*         Fair Market Value
    – Equity Residential                            574.459           $30,000             $73.05                      $41,964.23

    – Essex Property Trust (Tranche #1)        48.9644             10,000              287.88                        14,095.87
    – Essex Property Trust (Tranche #2)        43.2994             10,000              287.88                        12,465.03

    – UDR                                               606.9803             20,000               45.29                         27,490.14      
       Sub-Totals                                                                $70,000                                               $96,015.27
Railways Pool
– No Stock Holdings
Banking Pool

     – Bank of New York                        232.9373             10,000                 50.82                       11,837.87
.    – Wells Fargo (Tranche #1)                   292.0560             10,000                 45.54                       13,300.23
.    – Wells Fargo  (Tranche #2)                   558.9715             20,000                 45.54                       25,455.56
.       Sub-Totals                                                                 40,000                                                 50,593.66
Dividend Receivables (Wells Fargo & Bank of New York)                                                             157.31
Cash on Hand (Gains, Dividends, PUTS)                                                                                    6,711.17
Totals (Starting Cost Basis = $100,000)                    $110,000                                              $153,477.41

*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.

This new peak value for the value investment fund illustrates well the return when an investor exercises the four principles of value investing. The four principles are:

  1. Adhere to risk reduction by only purchasing securities from top performing companies such as DOW members, S&P 500, S&P Composite 1,500 and large-cap companies.
  2. Purchase the investments at or below intrinsic value; use a safety of margin in order to buy low.
  3. Sell high by developing good models for each industry pool which allows the investor to have a high level of confidence that the securities market price will recover quickly back to a prior peak or higher.
  4. Be patient. 

This new peak value position (through 28 weeks) breaks out as follows:

Realized Gains to Date                             $10,976 (3 Full Transactions)
Dividends Earned to Date                            2,196
Sales of PUTs (Options)                              3,696
Unrealized Gains:
   –  REITS                                                  26,015
   – Banks                                                    10,594
Sub-Total Realized & Unrealized             $53,477
Initial Investment                                      100,000
Value Investment Fund                           $153,477

As stated multiple times in prior posts, the facilitator expects the total return of the value investment fund to be more than 34% once the fiscal year-end is reached in mid-October. It has already surpassed this point and it is now expected to hit 56% by fiscal year-end.  The lower growth rate over the next six months is due to an expected slowing of the values for all the existing investments. There are currently no alternative investments to switch monies into at this time. This is an identified flaw with this fund’s investment pool, not value investing as an investment method. As explained in Security Analysis, written by Benjamin Graham and David Dodd, they advocated for more than 40 separate investments in an investor’s portfolio. They state it reduces risk significantly related to opportunity. They are correct. Right now, the Value Investment Fund has 18 separate potential investments. All of them are performing well. This means there are no opportunities to invest (buy low) which will affect the return on investments in the future. In order for this portfolio to have long-term stability and good returns year after year, the fund must develop two more sets of pools of investments. This is a lot of work. But it has to get done in order for next year to have a reasonable return (at least 20%) on the portfolio. The facilitator is currently working on a fast food industry pool of potential investments. It is expected to be available to all members around September 1, 2021. Act on Knowledge.

Value Investing Episode 1 – Introduction and Membership Program

© 2021 – 2022, David J Hoare MSA. All rights reserved.

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