Addition in H&M

For the first time in many years I have recently added to my position in H&M, and therefore it was encouraging to read that Mr. Stefan Persson recently added B-shares for about 911 MSEK at an average price of about 278 kr (my own estimate).

2014 - a year of very poor performance

Last year's investment decision have cost us (at least in the short term) minimum 0,5 MSEK. It turned out to probably be one of the worst years for me during the last twelve years. I sold a couple of quality companies (such as H&M, Industrivärden and AstraZeneca) as I deemed them overvalued, and instead bought three Norwegian oil-services related companies that I thought seemed undervalued. I have not been so wrong in a long time...

The two main mistakes I made was to
a) go outside my 'circle of competence' and
b) not do my homework properly (at least in two out of the three companies)
Both are really noob mistakes (to write in your language kids). The fall in oil price I just did not see coming... With hindsight, I would still not able to predict it when investing, but I should have been aware of the risk and therefor not have invested in those kind of companies. Now, I still hold on to all those three companies as I believe there should be an upswing in the prices within 5-10 years (and I have no better investment ideas). We'll have to wait and see if I continue to make the same mistake a third time.

Fortunately, I made a few very good investments as well, but the still total performance was very poor. I am extremely disappointed with myself for making such bad investment decisions, bordering on the line of speculation.

Page 2

One of the main reasons I dare to have a such large share of our net worth invested in one company is the following sentence on page 2 in the latest quarterly report (it has been a similar wording for quite many quarters now): "Betsson co-operates with a state-owned Chinese company for the Internet-based lottery and sports betting business. The expected regulation for Internet-based lotteries in China has not yet been introduced. Betsson has a continued positive outlook on the market’s future potential."

Why are not the analysts asking questions about this in any of the conf calls? It just eludes me. "Everybody" can calculate roughly the effect of the Europe-bet acquisition, but judging when (or if) China might materialise is much harder, even more so without any further information than the sentence above. The closest they came today was Brazil, interesting, but still not China and where Betsson clearly have done much more and for much longer.

This is where one example where I just feel that the analysts are fairly short-sighted, whereas if you have the guts to have your own sound reasoning and hypothesis-making, then one can do quite well in a long-term perspective.

 

Missed opportunity

Today the portfolio increased significantly again, which I would have never guessed. On Friday I sold a small portion of my largest holding Betsson, that "cost" me a couple of thousand SEK as the stock rallied (again) today. Just to highlight that investing is hard.

I will now account for a "theoretical" case, one which I actually could have made in practice. In December 2006 I made a large (600 kSEK) investment (I thought so at least...) in two companies that are no more listed. I was quite bold (or I would rather say today to myself 'stupid' as I did not know what I was investing in, even though I had done a proper valuation of the companies) as I basically put all of my financial assets into those two companies. I was lucky and was able to exit both positions at roughly +/- 0 about two years later amidst severe market havoc.

Now, had I instead at the dates when the cash became available invested in a company called Betsson (it would have been possible, trading volumes on those dates well exceed the 600 kSEK I had at that time) and kept that investment intact until today, we would have had more than 35 MSEK (pretax), with about equal amounts in Betsson and Net Entertainment. That amount is without dividends reinvested... This year's dividends would have been over 750 000 SEK (pretax).

All my other savings and dividends during the years until now would also have made a substantial sum, with dividends most likely amounting today to between 200 - 300 kSEK.

Fortunately, I started to invest in Betsson about three to four years later, and have still got a very nice IRR on that investment with well over 30% annually at today's valuation.

Now, the case above is "theoretical" for two reasons (at least when it comes to myself);
A) I would not in 2006 nor today have dared to invest in a company with that short track record that Betsson had at that time
B) I would not during all the years have kept the full position as I during many times over the last years have deemed the company overvalued AND that the position would have had a too (by extreme measures) large weight in my total portfolio. (I am actually still scaling down this position from time to time as it is such a large share of my current portfolio)

I think the key lesson is that I would truly like to focus my investments for the future around "wonderful companies". But they are really hard to first understand and second to value properly and then thirdly to find at some kind of 'margin of safety' price or at least fair price. But in the long run, this is absolutely what you should try to learn.

"Investing" is hard

Since the last post I have further increased the cash position to close to 25%. I am daily struggling with my own thinking on how to act in this market (that has now gone up since March 2009 or maybe even not fallen in any major way since late October 2008). I have had a really hard time to find anything to buy in the last 12 months, so instead I have started to be very careful. My two largest positions that I initiated in 2008 and 2010 respectively, I have taken "off the table", in the meaning that all the money in to those two investments I have got back in cash (either through dividend or through selling some of my shares). However, they are still my two largest holdings because of the significant value increases in the two respective stocks over the last five to seven years.

The cash and short-term interest bearing funds now make up over 2 MSEK, or well over three years of savings (at the current savings ratio). Kids, I just want to write to you that despite having been through two severe market crashes and three bull markets, I am not sure how to act now. Hence I am trying to cover both scenarios, (crash or continued bull market), and I have landed in this asset allocation (25% cash, 75% stocks). Had the interest rates been "normal" (according to pre 2005 standards) I would have most likely left the market completely by now. But now, what is the alternative (besides keeping cash), I do not know.

I still want to act according to the principle "investor-like" and I do not like to sell businesses that I fundamentally think will do well in a 10-15 year perspective. On the other hand, valuations are 'mind-boggling' and I cannot find anything to buy. New companies are put to the stock market every week (a clear sign of the end of a bull market).

I'm nearly every day considering to sell everything in my ISK account (which I told myself was one of the absolutely most interesting benefits of the structure of the account, due to no tax incurred due to sell-off), but now I hesitate to act.

"Investing" is hard...

Increasing cash position

Time flies and it has now gone nearly nine months since I wrote something. A new opportunity appeared during this time which has taken nearly all my focus for some time. Meanwhile, the stock market and the dollar have both rallied like crazy. The dollar rallied to the extent that I lost my HNWI status for many months (as I predicted would happen). Only now in the last few days/weeks has it again come to the point where I once again could qualify to be an HNWI.

As the stock market has increased so much I have chosen to increase my share of cash and short-term bond funds to slightly above 20% of the total portfolio value. It actually feels quite nice as I know I can support our family with that kind of money for about four to five years and still receiving dividend covering some 9-10 months of living expenses. I figured this is a balanced strategy where I could buy stocks again if the market drops (and reach 12+ months of living expenses covered), and if not, I still get to take part of the valuation increase to a large extent.

The savings ratio is about 87% currently. The 13% remaining cover expenses I have for working and the rent payments related to the loan on the house. All the savings are going into a separate investment account where I am building up a stock portfolio to match the remaining debt on our house. I figured this is the best long term solution to "pay off" the loan on the house. Instead of monthly instalments in these times of extremely low interest rates, I rather build a stock portfolio of the same size as the remaining loan. When that amount is reached, the stock portfolio should most likely cover interest expenses through dividends, while still increasing in value. Thereby, in the next 15-20 years (after having accumulated a stock portfolio of an equivalent value to the loan) I will be able to pay off all of the loan, while still keeping the stock portfolio.

Targeting 100%+ savings ratio in a couple of years

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%.