Monday, June 30, 2014

Theoretical dividend - some examples

The post from Ägamintid about his theoretical dividend inspired me to write this regarding my own situation at the moment. I could today probably shift all my investable assets into one stock only. At my disposable I would have about 6,5 MSEK (after paying off deferred tax). So then I could for instance go for the following extreme allocations of capital (many more examples exist):

Alternative A:
100% in Awilco Drilling. I would be able to buy about 42000 shares, and expecting about 28-30 SEK/share in dividend during the upcoming 12 months, totalling some 1,175 - 1,26 MSEK in annual dividend (and then one should deduct about 41 kSEK for tax assuming the new investment has been done in an ISK account). That would more than well cover our expected total living costs. ;-)
But there is a problem; I can with a high probability expect that the dividend will be lowered or even suspended for some time due to various reasons (e.g. one of the rigs run into unexpected problems or more likely there will be periods of maintenance which will drive the dividend down or hopefully the company finds productive ways to use their cash in order to expand their operations), which would pose a cash problem if this would happen in the short-term.

Alternative B:
100% in Telia. I would be able to buy some 132 000 shares. I should be able to expect some 3 SEK / share in dividend totalling some 355 kSEK per year after tax. This is unfortunately somewhat too little to comfortably (with a decent margin of safety) cover all our long term living expenses. This paired with - in my view - somewhat unclear long term development for Telia (although most likely much more stable than Awilco in the upcoming 5-10 year period) does not make this alternative too interesting. However, if I could buy Telia shares at say 42 SEK/share, then this could be a really interesting option.

Alternative C:
100% in HM. I would be able to buy some 22 300 shares and expect some 10 SEK / share in dividend next year, totalling some 182 kSEK after tax. This would be nowhere close to cover our living expenses, but I would feel fairly safe with the level of dividend for a long time going forward.

Alternative D:
100% in ROST. I would be able to buy some 14 600 shares and expect (at 0,8 USD / share) some 55 kSEK in dividend in upcoming 12 months (keeping the stock in a normal VP-account). Well, this wouldn't work for too long... But I could be close too 100% sure that this amount would increase substantially (10-20%) every year for a long time.

So, what to do? If I had some more guts, I should probably go for alternative A (had I done it when I found out about the company I would have already had about 2 years of living expenses covered AND a much higher value of my total portfolio). But in that case there is a clear risk of a complete or near-complete wipe-out of all my capital, so it is not an option for me. Rather, I am pursuing a portfolio where I mix all of these alternatives to balance the risk of capital and/or dividend loss, with the opportunity for continuing growth of capital and dividend. I am also having a substantial sum of money on the sideline to be able to capture opportunities, such as if Telia would fall to 40-42 SEK and I would still judge the dividend to be maintained.

Saturday, June 28, 2014

A lot of stocks move 50% in one year

One of the more interesting observations that I have made and read about is that a large proportion of all stocks can move in price about 50% (from lowest point) in one year.

Some examples as per yesterday (first figure is lowest price paid over the last 12 months, all %-figures correspond to the highest price paid compared to the lowest)
Apple             55,58 USD, up 70,9%
Atlas Copco   140,4 SEK, up 32,7%
Betsson          167 SEK, up 49,7%
Clas Ohlson    87,25 SEK, up 74,8%
H&M             220,3 SEK, up 36,5%
Oriflame        145,3 SEK, up 51,8%

Kids, in my experience there are few cases where a company's real value ('intrinsic value') move that much in one year. Rather I would say that a well-run company in rough terms increase somewhere between 10 and 20% in value during a year. The key take-away is that even in the short-term (<one year) the price of a stock-listed company will be wildly different during times. The conclusion should, however, not be that you should try to make 30-50% a year on each respective investment. As a corollary to my observation above, there is a fair risk of the stock going down by 33% in one year's time from today. So, rather the conclusion is that with even a fairly modest amount of patience (waiting one year or less), one can find reasonable buying opportunities in specific stocks across the market in many (but not all) instances.

One 'practical' example of how one can use the above described 'fact';
The other day I bought a smaller amount of ROST when it was close to a one-year low. Unfortunately it is still some 5-10% too expensive for me to be fully comfortable with the investment from a risk perspective in a 3-5 year perspective; on the other hand it has not been this cheap for some time.

Thursday, June 26, 2014

Awilco Drilling and Bonheur

One of latest investments that I've made is in Awilco Drilling. I cannot recall how I found out about the company, but I am fairly certain that my thought process started with Lundaluppen's series on Bonheur. To be honest I did not understand much of it, more than that LL had done his homework. Based on a RoE of 6% the company seems fairly valued; if they can increase this a couple of %-points each year going forward, it will be a very good investment. I think my key conclusion from LL's analysis was that you buy FOE and get some other businesses for free. That seems reasonably interesting as long as the rest is not cash-draining. However, I felt that Bonheur was out of my 'circle of competence' and a very complicated structure of companies I just had a hard time to understand. As I started to do some digging on my own I found out about Awilco Drilling. Doing a comparison between Awilco Drilling, FOE, Seadrill, Transocean and Diamond Offshore on multiples I found that Awilco was much cheaper than the rest with FOE as a distant number two on most parameters.

The really interesting part with Awilco is that they are really showing me the money as a stockholder. My first investments have already returned 11,5% cash back in less than five months. However, there is at least one major issue from a risk perspective in the short term; they only have two rigs. Bad things can happen. Therefore I have taken two precautions; firstly I have only invested a smaller part of my portfolio into the stock (<5%), secondly, as I would further like to mitigate the impact of something happening to one of the rigs (while still surpassing the 5% level) I created a 'hedge' by expanding the number of rigs by buying also Bonheur (which owns the more expensive FOE, but also hold some other businesses). So I partially view Awilco (~67% of combined purchase value) and Bonheur (~33%) as 'one' investment at the time being, in the sense that the combined businesses in the short term should be able to generate a cash flow of at least >2% of initial investment even if one of the companies run into severe trouble.

The key point with this post kids, is that you should really think about the risk in each investment. If there is a significant risk, make sure the stake you take is a small part (I would say <5%) of your total asset portfolio. Never risk your well-being for the long run by doing something risky in the short-term. It really kills your long-term investment performance.

Tuesday, June 24, 2014

40percent2years - Possible or not?

Investing for stable stock dividends now and in the future is my main way of creating the positive cash flow that we are going to live off. The blogger 40percent20years is setting a very good and clear long-term goal for his investments (40% dividend yield 20 years after your investment).

So could there be cases where you could be 10 times faster reaching a 40% dividend yield, i.e. to reach it in two years time? Yes, matter of a fact I found out about one case fairly recently!

In the period between March 21st and August 20th 2012 (i.e. during 5 full months) it was possible to buy Awilco Drilling for 53,5 NOK or lower (however most of the time between 46-51 NOK). Total value of stock transactions during this period was over 190 MNOK, however most of this I do not think traded between normal small investors. My understanding is however that at least 23 MNOK did, so it would have been possible to take a significant stake in this company. At this time the company did not pay dividends, but clearly stated the following in its full year 2011 report: "During the course of 2012 Awilco Drilling is scheduled to repay debt to Transocean amounting to approx. USD 46 million. The scheduled debt repayment in 2013 is USD 11 million. This significant decrease in debt repayment will enable a return to investors of a major part of the company’s free cash flow generated in 2013 and beyond. The level of dividend will reflect the underlying financial position of the company, while taking account of opportunities for further value creation through profitable investments. The dividend will normally be distributed on a quarterly basis with expected commencement sometime during the first half of 2013."
The first quarterly dividend was paid on June 20th 2013 and after that quarterly. The first four dividends amounted to 24,9144 NOK, corresponding to a yield of 46,5% on a price of 53,5 NOK. Buying the stock at 49,5 NOK would have yielded 50%... So new target should be 50%2years. ;-). The company also just paid out its fifth dividend, which was the highest so far at 6,8909 NOK.

NB: Closing stock price today June 24th is 145,5 NOK. I have a position in the stock (started much later unfortunately)

Sunday, June 22, 2014

Setting goals - and one recommended book to read

I believe that one important part regarding investing is to set a clear goal for yourself. I did so somewhat more than ten years ago. Then I was in my early 30's, and though fairly successful in my career there was still no way that I would be able to have financial independence in the near future. Still, I made some bold career moves and even more importantly, I set a very clear goal regarding my financial status in the future.

I did this after quite many months of thinking of how to formulate the goal, and inspired by the classical book 'Think and grow rich' by Napoleon Hill. Kids, read it when you get old enough. The rich part is not really important for me, I translate it to free (free in time to do what you want with your most precious and limited resource: time). Today I do not remember much of the book's content, but one thing that it inspired me to do was to think about my goal EVERY day during that time period I set my goal for.
What I did was that I calculated roughly what I would need in assets to live a good (but not fancy according to my own standards) life and not have to work for the rest of my life (i.e. freeing up time for myself). I came (then) to the conclusion and goal that I wanted to have 2 MUSD in assets (in the more traditional accounting-style definition) and being completely debt-free. The assets should be distributed as 2/3 for investable assets (cash-generating assets) and 1/3 for housing (cash-consuming 'asset'). The starting point was around 0,1 MUSD in assets. I set a very clear time-limit on that goal: to reach this by June 30th 2013. I failed.

However, I came a long way. Today (one year late) I have reached more than 2/3 of my goal in terms of assets, and as inflation has been much lower than I anticipated back then, I am in a very favourable position regarding my time. I will write more about this in upcoming posts.

I am now considering a new major goal in my life, but I am not sure yet what it will be. I am starting to lean towards becoming a 'mid-tier millionaire' 20 years from now (i.e. having investable assets of 5 MUSD or more by June 30th 2034) and to be completely debt-free. This is fairly ambitious, so I am still considering how realistic it is, and what it would take for me to be able to achieve it in such a time period. The key thing I am considering is how the plan should look where I balance/optimize between additional definite positive cash-flow (i.e. having a job or similar), spend my time on improving expected return on my investments and having more free time, all while having a financial independence with a fair margin of safety.

Friday, June 20, 2014

Current HNWI status

Our base is currently in northern Europe and that's where you've experienced your first years of your life. Having seen a few places around our globe, mainly in Europe but also in large parts of Asia and some in Africa and the US, I genuinely treasure the ease with which one can get access to the nature in the Nordic countries. I hope you will also treasure that; it is a fantastic combination of a region with high living standard, a society with a fair degree of trust among people (even though I unfortunately believe it is slowly eroding) and a fairly clean and very accessible nature.

A short while ago I surpassed a major milestone in my investing life, I am now able to call myself a HNWI (according to the definition used by Cap Gemini, World Wealth Report). This will most likely change a few times over the next two to three years (i.e., I will fall out of the category), but hopefully after that I will be a stable HNWI.

NB: HNWIs are defined as those having investable assets of US$1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.
Exchange rate as of May 31st, 2014: 6,66 SEK/USD

Below is a summary of my best understanding of the investable assets (in SEK) for some bloggers. The list is not complete and unfortunately lack some bloggers in Scandinavia (such as 40%20år, Riskminimeraren, Fundamentalanalysbloggen, Spartacus, Defensiven, AnotherValueinvestor to mention some of the most interesting) where it would be interesting to know what investable assets they have. For bloggers marked in red, the data is a few months old.

Anyway, a key take-away:
I think investable assets is a good guidance/proxy for how much to take impression from each respective person that you try to learn investing from, i.e. the bigger the sum of investable assets, the more you should weigh in what they write/think.


Glad midsommar to you all!

Introduction

I will write this blog as one way (of several) to carry forward my learnings, knowledge and ideas from within especially the investment area to my kids. Hopefully I will learn additional new insights into investing by also sharing with the rest of the blog community.

It will probably still be a couple of years before you (i.e. my kids) will be interested enough to start to look into this area of life, but my wish is that it will be (much) earlier than for me. The reason for this is the enormous power of compound interest. I basically started something really called investing (in stocks) around 2002/2003 and then on a fairly small scale. Before that I was only speculating for a few years (even though I thought I was investing), and before that I did not think I could earn any money by investing. I most likely lost some 10-12 years of investing experience by simply not having been aware of the possibility. With some guidance early on in my life, I would most likely have been even (very) much better off today than I currently am.

Anyway, a key take-away:
Make sure you make compound interest work for you for as long time as is ever possible. So every day, month and year earlier that you start, the better. Simply put, reinvest the interest and next year you will earn more (given the same interest). Initially the effect is fairly small in nominal terms, but (depending on the interest rate) the nominal effect after several years can be very large.

One practical example from your own life: I have on your behalf invested an amount similar to your full 'barnbidrag' in stocks since you were born. Assuming
- a 9% compound interest (before taxes)
- that we continue to invest the full 'barnbidrag' until you are 18 years and
- that you do not touch the money until you are 50
then it will be worth more than 8 MSEK in nominal terms (and before taxes). Meanwhile, we have only set aside 226 800 SEK until you're 18. When I write this post, your combined CAGR (term I will use for compound interest) is about 17,7% (before taxes and during a timespan of give or take a decade). This I will NOT be able to continue to replicate due to several factors. However, I believe it could be possible to reach 12-15% with a lot of hard work spent on investing over a timespan of another about 40 years. That could mean in rough terms between 25 to 80 MSEK when you're 50 years old (and that's quite much money, even 40 years from now).

So think hard about the power of compound interest and start investing as early as possible.