This post will contain a number of comments and reflections on the previous post 'Quarterly update 2014 Q2'. Please refer to it to easier understand my comments.
First I would like to go through some important events and give some additional key information on how certain asset values are estimated. Starting with the asset side, ease of valuation is inversely proportional to the the liquidity of the asset. For instance, the property we hold is traded very infrequently (e.g. once every ten years or so) and there is no exact copy of it. Valuation of it is therefore quite tricky. I will revert to it in a moment. The car we have is easier to value, as there are fairly many cars with similar specification and mileage as ours sold (it is one of the ten most common models in our country) and price intervals are stated in various public sources. An estimate with a ca. +/-10% margin is reasonable to make at all times. Shares (which make up the absolute majority of our financial assets) traded on stock exchanges are again very much easier to get a 'price quote' on (normally during some eight hours every working day), and during that time the 'price quote' often changes many times during a minute. The value of the share I do not however think changes that rapidly and as volatile as the 'price quote' mechanism ("Mr. Market") seem to imply. Hence, valuation of the shares is also not so easy... However, in the quarterly summary update I use the 'price quotes' given by the market for 'valuing' the shares that I have acquired in a number of businesses. Cash on a bank account is 'traded' extremely frequently in the financial system, so it is easy to value in the short term. What you have to consider if you plan to hold cash for some longer time is the effect of inflation (which normally diminishes the value of your cash unless you get an interest on your cash of at least the inflation rate).
The value that I use for the current property we hold is based on two independent valuations made late last year. I have taken the lower end of each respective valuation and taken the average of that.
From that amount I have deducted the broker fee that we would have to pay when selling the property and after that I have deducted the capital gains tax. I believe that that is a conservative estimate of the price that we would be able to get today. As a note I can also mention that I would be very reluctant today to sell the property at the price used in the summary (but I want to have a margin of safety).
For the liabilities side there is a loan where the security is the property we hold. Without going into details, the debt is well below 50% of the latest valuation accepted by the lender. Deferred tax liabilities are related to unrealised gains on shares that have appreciated in value since purchase.
Some key ratios that are important in judging the risk we are exposed to:
Net debt (loans less cash and short-term interest bearing bond funds): About 1,4 MSEK (my definition of net debt can be discussed if correct, but I find it to be the practical one)
Equity ratio (equity as share of total liabilities): About 74%
Interest coverage should also be measured, but for various reasons I do not want to disclose it. However, dividends and interest on cash alone today give an interest coverage ratio well over 600%.
In general I think the debt situation in relative terms is very manageable (we can e.g. pay off our debt about two and a half times only with our financial assets). I sleep well at night. However, I would still like to improve the situation further. In case of an extremely severe crisis, we are still 'swimming with our pants down' and that is always making our manoeuvre room in such situation more or very limited. Currently, my overall thinking to mitigate that risk is that from early next year starting to build a specific equity portfolio with the purpose to
a) specifically generate dividend to pay interest on the loans we have (interest rates today are extremely low, so having debt is extremely cheap. E.g. I today risk-free have a positive spread of 0,46%-points between the interest I get on my cash deposits and the loans we have on our property)
b) build the size of the portfolio (in value terms) to match the loans, thereby creating a 'virtual' zero net debt position
c) over the long-term use additional capital appreciation of the equity portfolio over the current loan amount to pay down the loan
So, in total kids, I deem it necessary to further improve the balance sheet with the ultimate goal to become debt-free. Then no one (in our current legal and political system) can take our assets and it is much easier to remain cool-headed in times of severe crisis.
I also realise that there needs to be at least one more follow-up post on the quarterly update to cover some history.
No comments:
Post a Comment