Before fully retiring, I plan to have a few years when I will be very close to a 100% savings ratio (as defined by total net cash amount invested in new stocks / net after-tax salary). After that I think I will have a few years (about two or so) of buying various stuff I would like to have in order to have a lot of fun when fully retired, and hence having a 0% savings ratio. Then it would be good to have one final 100%+ savings ratio year to get the really, really proper margin of safety for the rest of my and my kids' lives. 100%+ should be possible to reach by having my dividends pay for all living costs (incl. those incurred by having to work) and a slight margin (I.e. having some additional cash from dividends reinvested) while investing 100% of my salary. With this approach I hopefully never will come into a situation where I will become stressed due to a severe downturn in the stock market, as the dividends (in general) should keep rolling in, at least if I have selected good stocks for the long run.
Within 6-12 months I expect to reach a savings ratio of about 80-85%.
Saturday, August 30, 2014
Tuesday, August 12, 2014
How to measure portfolio return
At the blog AnotherValueInvestor there is currently a miniseries on how to calculate your own portfolio return. I would therefore like to give my view on how to calculate the annual compounded return for your portfolio. This is fairly easy to do with a spreadsheet program like Excel, Numbers or Google Docs Spreadsheet. For my own tracking I have used Excel since late 2000.
First start with identifying the exact dates and amounts for all your deposits and withdrawals from your stock accounts. Then do the following in your spreadsheet program:
Create two input fields (orange fields at the top first column in the figure below):
[A] today's date. If using Excel, use the TODAY() function
[B] the estimated portfolio return (denoted as 'CAGR to reach current value of portfolio'). Start e.g. with 10% as a reasonable starting value
Create at least four columns (six if you want to compare yourself with any index) with the following contents:
[1] Date (enter the date for the deposit or withdrawal to your account)
[2] Amount of deposit or withdrawal
[3] Calculate the number of years since the deposit or withdrawal (there are several simple functions in e.g. Excel to calculate this) using the input [A] above and column [1]
[4] Calculate the compounded value of your deposit or withdrawal [2] today given the estimated portfolio return [B] and time [3] since this deposit or withdrawal. The formula is = [2] * ( ( 1 + [B] ) ^ [3] ). "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." Albert Einstein
Create also at least one output field (grey fields at the top first column in the figure below):
[C] Current value of portfolio. In this field you summarize the whole [4] column. With everything now set, the output figure [C] should become equal to your current portfolio value (check in your stock account what it is on the [A] date) once you have the right [B] value input. Either test yourself (5-10 tries will normally make you come very close), or use a built in function like 'Goal Seek' in Excel.
Kids, I would like you to remember that my primary target regarding portfolio return is to measure that the compounded return over time is at least 10%* (read this previous post regarding having an absolute return target). However, it can still be relevant to compare to the most relevant practical alternative that I could entrust our capital to. That would most likely be an index fund that would try to closely follow the SIXRX index (such as Handelsbanken Sverigefond Index or SEB Sverige Indexfond).
Hence, for comparison, I have added in the SIXRX index. Find the index value for each relevant date and add them into a fifth column [5]. Then calculate in the sixth column [6] the current value of the deposit or withdrawal by dividing today's closing SIXRX index [D] (see the top right orange input field) with [5] and multiply with the deposit or withdrawal value [2]. Sum up all values in column [6] to calculate the value of the portfolio if you had invested in SIXRX [E]. Then use the [B] input again to match the [C] output with [E] and you will find the annual compounded interest that the SIXRX would have given you.
This model is simple to update every time you make a new deposit or withdrawal, just add a line and make sure the sums are correct in the 'grey output fields'. Using this model I can see that currently my portfolio have had an annual compounded return of 11,85% which is above my 10% absolute return target and 2,01%-points better than SIXRX.
Figure. Excerpt of simple model to calculate annual compounded return on your investment portfolio.
Using this model it is also very easy to see how much a withdrawal a long time ago have cost me. For instance, the withdrawal in May 2001 of 146 kSEK would have been worth 646 kSEK today in nominal terms before tax (while inflation has been about 17% during the same period). These things are always good to reflect upon...
Anyway kids, your portfolio is growing at a slightly higher pace (17,25%) mainly due to the fact that it is still more concentrated to fewer large (and so far successful) investments. So far it has also well outperformed SIXRX with about 5%-points.
* measured pre tax regarding capital gains tax in normal VP-account, after tax for ISK-account and after all transaction costs
First start with identifying the exact dates and amounts for all your deposits and withdrawals from your stock accounts. Then do the following in your spreadsheet program:
Create two input fields (orange fields at the top first column in the figure below):
[A] today's date. If using Excel, use the TODAY() function
[B] the estimated portfolio return (denoted as 'CAGR to reach current value of portfolio'). Start e.g. with 10% as a reasonable starting value
Create at least four columns (six if you want to compare yourself with any index) with the following contents:
[1] Date (enter the date for the deposit or withdrawal to your account)
[2] Amount of deposit or withdrawal
[3] Calculate the number of years since the deposit or withdrawal (there are several simple functions in e.g. Excel to calculate this) using the input [A] above and column [1]
[4] Calculate the compounded value of your deposit or withdrawal [2] today given the estimated portfolio return [B] and time [3] since this deposit or withdrawal. The formula is = [2] * ( ( 1 + [B] ) ^ [3] ). "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." Albert Einstein
Create also at least one output field (grey fields at the top first column in the figure below):
[C] Current value of portfolio. In this field you summarize the whole [4] column. With everything now set, the output figure [C] should become equal to your current portfolio value (check in your stock account what it is on the [A] date) once you have the right [B] value input. Either test yourself (5-10 tries will normally make you come very close), or use a built in function like 'Goal Seek' in Excel.
Kids, I would like you to remember that my primary target regarding portfolio return is to measure that the compounded return over time is at least 10%* (read this previous post regarding having an absolute return target). However, it can still be relevant to compare to the most relevant practical alternative that I could entrust our capital to. That would most likely be an index fund that would try to closely follow the SIXRX index (such as Handelsbanken Sverigefond Index or SEB Sverige Indexfond).
Hence, for comparison, I have added in the SIXRX index. Find the index value for each relevant date and add them into a fifth column [5]. Then calculate in the sixth column [6] the current value of the deposit or withdrawal by dividing today's closing SIXRX index [D] (see the top right orange input field) with [5] and multiply with the deposit or withdrawal value [2]. Sum up all values in column [6] to calculate the value of the portfolio if you had invested in SIXRX [E]. Then use the [B] input again to match the [C] output with [E] and you will find the annual compounded interest that the SIXRX would have given you.
This model is simple to update every time you make a new deposit or withdrawal, just add a line and make sure the sums are correct in the 'grey output fields'. Using this model I can see that currently my portfolio have had an annual compounded return of 11,85% which is above my 10% absolute return target and 2,01%-points better than SIXRX.
Figure. Excerpt of simple model to calculate annual compounded return on your investment portfolio.
Anyway kids, your portfolio is growing at a slightly higher pace (17,25%) mainly due to the fact that it is still more concentrated to fewer large (and so far successful) investments. So far it has also well outperformed SIXRX with about 5%-points.
* measured pre tax regarding capital gains tax in normal VP-account, after tax for ISK-account and after all transaction costs
Friday, August 8, 2014
Neurosearch - a different 'investment' case
There is a company Neurosearch listed on the Danish stock exchange that is now potentially very interesting to invest in. This is normally not the type of company that I invest in as this is clearly a 'cigar-butt' type of investment with the feature that this cigar either has no fire in it at all (and it will only cause me to feel ill for having picked it up) or that the last puff will be very rewarding.
In summary, this company is in practice under 'liquidation' and have come very far in that process. The number of employees were two at end of 2013. The asset side is now (for all practical purposes) only compromised by cash and cash equivalent (of 87 MDKK) and the liabilities side (for all practical purposes) of equity only in the corresponding value. All other assets have been written down to a zero value. The company has 24,554 million shares.
With a annual burn rate of 10 MDKK (as announced by management) during the ongoing 'liquidation' and litigation process, the share price at end of July should be about 3,30 DKK if just valuing the company by its cash assets.
The key issue until now has been the trial regarding share manipulation in 2010. Today the verdict came and the ruling was that the company was found guilty of share price manipulation contrary to the rules of the Danish Securities Trading Act. The company was ordered to pay a fine of 5 MDKK.
The company now has two weeks to decide whether to appeal the District Court judgment to the Danish High Court. Hence the current asset value of the company at the moment after this verdict should be (in my opinion) somewhere around 3,10 DKK / share (excluding 'option value' described below).
The interesting thing is that there is a big upside in this company as all other assets have been written down to zero value in the books during the 'liquidation' process. Without going into details on the minor items (e.g. potential milestone payments of 55 MDKK relating to the development of Huntexil®), the large item remaining is the deferred tax asset that could potentially be sold (most likely through selling the whole company). Some of the details regarding the deferred tax assets are as follows:
In the latest financial update (April 30th, 2014) the following is mentioned:
"In addition, NeuroSearch calculated the value as of 31 December 2013 of its unrecognised tax losses carried forward at approximately DKK 1.8 billion, and deductible temporary differences at approximately DKK 0.5 billion, or a total of DKK 2.3 billion. Under certain conditions, the unrecognised tax assets may be exploited in full or in part by a potential buyer of NeuroSearch."
And in the Annual Report 2013 (p30): "As of 31 December 2013, the Group had tax loss es carried forward totalling approximately DKK 1,800 million which can be carried forward indefinitely. In addition, the Group had deductible temporary differences (net) of approximately DKK 473 million, totalling DKK 2,273 million. The carrying amount of unrecognised deferred tax assets was approximately DKK 500 million for the Group at a tax rate of 22%"
To summarize; these 'hidden assets' have a gross value of about 20 DKK per share. I do not believe that in case of a transaction this full value would come to the benefit of the current shareholders, but rather a smaller but still substantial part of this.
Based on this I see a downside (with very high likelihood) but limited to some 5-10% in the upcoming year. At the same time I see a potential upside (with much more limited likelihood) of 100%++ in the same timeframe. For me, this is the type of 'lottery ticket' I like to buy (intrinsic value is somewhere between 3-23 DKK per share). Therefore I currently hold a smaller position in the stock. The stock closed at 3,25 DKK today.
In summary, this company is in practice under 'liquidation' and have come very far in that process. The number of employees were two at end of 2013. The asset side is now (for all practical purposes) only compromised by cash and cash equivalent (of 87 MDKK) and the liabilities side (for all practical purposes) of equity only in the corresponding value. All other assets have been written down to a zero value. The company has 24,554 million shares.
With a annual burn rate of 10 MDKK (as announced by management) during the ongoing 'liquidation' and litigation process, the share price at end of July should be about 3,30 DKK if just valuing the company by its cash assets.
The key issue until now has been the trial regarding share manipulation in 2010. Today the verdict came and the ruling was that the company was found guilty of share price manipulation contrary to the rules of the Danish Securities Trading Act. The company was ordered to pay a fine of 5 MDKK.
The company now has two weeks to decide whether to appeal the District Court judgment to the Danish High Court. Hence the current asset value of the company at the moment after this verdict should be (in my opinion) somewhere around 3,10 DKK / share (excluding 'option value' described below).
The interesting thing is that there is a big upside in this company as all other assets have been written down to zero value in the books during the 'liquidation' process. Without going into details on the minor items (e.g. potential milestone payments of 55 MDKK relating to the development of Huntexil®), the large item remaining is the deferred tax asset that could potentially be sold (most likely through selling the whole company). Some of the details regarding the deferred tax assets are as follows:
In the latest financial update (April 30th, 2014) the following is mentioned:
"In addition, NeuroSearch calculated the value as of 31 December 2013 of its unrecognised tax losses carried forward at approximately DKK 1.8 billion, and deductible temporary differences at approximately DKK 0.5 billion, or a total of DKK 2.3 billion. Under certain conditions, the unrecognised tax assets may be exploited in full or in part by a potential buyer of NeuroSearch."
And in the Annual Report 2013 (p30): "As of 31 December 2013, the Group had tax loss es carried forward totalling approximately DKK 1,800 million which can be carried forward indefinitely. In addition, the Group had deductible temporary differences (net) of approximately DKK 473 million, totalling DKK 2,273 million. The carrying amount of unrecognised deferred tax assets was approximately DKK 500 million for the Group at a tax rate of 22%"
To summarize; these 'hidden assets' have a gross value of about 20 DKK per share. I do not believe that in case of a transaction this full value would come to the benefit of the current shareholders, but rather a smaller but still substantial part of this.
Based on this I see a downside (with very high likelihood) but limited to some 5-10% in the upcoming year. At the same time I see a potential upside (with much more limited likelihood) of 100%++ in the same timeframe. For me, this is the type of 'lottery ticket' I like to buy (intrinsic value is somewhere between 3-23 DKK per share). Therefore I currently hold a smaller position in the stock. The stock closed at 3,25 DKK today.
Tuesday, August 5, 2014
HNWI status - July 2014
Below is a summary of my best understanding of the investable assets (in SEK) for some bloggers as of end of July 2014. For some of the bloggers the data is a few months old as there has been no update.
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 July 31st, 2014: 6,90 SEK/USD
I was still able to make it above the 1 MUSD mark by having investable assets of over
7 000 000 SEK as per end of July 2014.
I was still able to make it above the 1 MUSD mark by having investable assets of over
7 000 000 SEK as per end of July 2014.
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