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.

"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...

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

Kvaerner - additional investment

On Friday I did a small add-on investment in Kvaerner of 5000 shares at 10,70 NOK. This company will most likely not be part of a long-term portfolio as I have very hard to judge its short-, medium- and long-term business prospects. The operating cash-flow recently has been wildly negative with 274 MNOK in the first half-year of 2014. The management claims that the cash flow is fluctating in this business and that is even illustrated separately on p13 in the latest Q2 2014 presentation.

However, at the current price it is yielding very close to 12,0%. This company I value mainly on the valuation metric of EV / EBIT of 3,24 (at the purchase price of 10,7 NOK). The company has a negative NIB (Net Interest-Bearing debt) of about 489 MNOK (cash of 972 MNOK and interest-bearing debt of 483 MNOK). TTM EBIT I have calculated to 738 MNOK. With the negative NIB, it gives me some comfort to invest in this company, more with the approach of a 'cigar-butt' investment that gives me some cash back short-term.

Hence it gives me a decent return without having to risk too much money while building the dividend portfolio. The company itself states its dividend policy as follows: "The ambition is to pay semi-annual dividends with increases, in order to give a stable and predictable dividend growth, balancing out the underlying volatility of earnings". The next declared semi-annual dividend of 0,64 NOK will be paid out on October 24th. 

With this investment I expect some 270 kSEK in dividends (after tax) during 2015.

Betsson - my largest holding

My largest holding (measured as current value) is currently Betsson. I have owned the company during the more than three years (measured as weighted average) and the first investment was done about 4,5 years ago. On a few occasions the last 1,5 years I have sold smaller parts of my investment, but also added positions. Net divestment during the last 1,5 years is 850 shares.

During the time that I have now owned the company my CAGR (pretax, but incl. received dividends after-tax) is above 25%, which is far above my long-term investment return target of 10% p.a.

In the chart below I have plotted the EPS TTM (last twelve months) for Betsson as red bars and then the closing price as the blue line and the corresponding P/E TTM in the green line. The flat red line is the average P/E TTM (14,0) during the period (since Oct 8th 2007). The black arrows indicate when I have bought (upward-pointing arrow) and when I have sold (downward-pointing arrow). The length of the arrow correspond to the size of the transaction in number of shares. In the chart it is a hard to see that the EPS TTM is now close to 14 (13,88 to be exact, based on the recently released Q2 report).

As you can see from the chart above the first investment was made at a fairly high P/E (of about 15,5) in early 2010. One of the good things about following a company for a longer time, is that you start to get a better understanding for when it is cheap and when it is expensive. In mid 2011 I was even more confident that the company was attractively priced and added a fair position. Over the last 18 months I have started to take some money 'off the table' through a number of divestments. The main reason for this is that due to fairly high valuation at several points in time (P/E well above 14), I have judged it a good time to take some money 'off the table'.

What I like about this company is
- strong (although diminishing) ownership by physical persons
- consistent management; Pontus Lindwall (former CEO) now holds the Chairman position in the Board and works actively with strategic tasks
- fantastic ability to generate and distribute cash (through redemption of shares) to shareholders while growing the business
- market leading position (no 1 or no 2) in key markets
- seem to be able to acquire other smaller companies at interestingly low multiples to EBIT
- seem to (here I would, however, still not draw too far-reaching conclusions) learn how to integrate those acquired companies into existing operations to extract synergies
- seem to build in-house capabilities in many key areas (IT platform, payment solutions, data mining, proprietary games, marketing etc) to be successful in this business, while continuously pouring money into marketing
- 'pricing power' in the sense that this business should always - all else equal (i.e. mainly given a stable competitive situation) - be able to offset impact from inflation
- the option of successfully entering the Chinese market, which could potentially allow for massive growth over many years

There are also a number of key issues with the business, the main being that I do not see any clear moat (competitors popping up left and right as limited capital is needed to start up a business). If I had seen a clear moat, I would probably have poured all my money into this single company as it otherwise have nearly all characteristics that I like for a company that I want to own.

Today, I would most likely not add to the position unless P/E comes down to 14 or below before year-end this year. However, I do not believe I will sell either (at current price levels) as I think the company will be able to continue to grow its earnings in a pace that will give me some 8-9% total investment return over the next 10-20 years (given that they can hold an RoE at 32% or more and continue to reinvest the same share of their earnings into the business as they have done the last couple of years)