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.
Showing posts with label risk. Show all posts
Showing posts with label risk. Show all posts
Saturday, July 18, 2015
Sunday, July 12, 2015
"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...
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...
Friday, July 4, 2014
Quarterly update - some historical notes
This post will contain a number of historical reflections on the post 'Quarterly update 2014 Q2'. Please refer to it to easier understand my comments.
The current level of debt vs. property value is the lowest that we have ever had since starting to pour cash into our living premises, but in absolute terms it is still higher than at most times, however it is down from the top levels two to six years ago. We have switched property several times and the first two quarters in the summary show the actual price appreciation between a purchase (which was a couple of years before Q2 2004) and sale in Q3 2004. At that time we did something very uncommon in the market in the city we lived in, we sold our property BEFORE we bought a new one (this practice became much more common after the crisis in 2008). We were also very diligent when looking for new property and probably looked at about 100 different properties before we finally were able to acquire one where I actually thought there was an inaccurate price (in relation to value) in the market; we were at that time in a strongly rising market able to buy the property at a seven percent lower price than the seller had paid several years before (the broker clearly told me a couple of days before closing that he did not think the seller would accept our offer). Three years later we were able to sell the property at a price well above 40% more than we had paid. In the summary I have spread out the appreciation equally per quarter over the holding period. Furthermore, the last few years we have chosen to drive down debt in two larger one-off 'amortisations'. I did this in order to take down the risk to a level that I am more comfortable with, and to counter the effect from increasing interest rates (boy have I been wrong there so far...). At a debt level below well below 50% and interest rate at all-time low we are currently not doing any regular monthly amortisation.
So while fairly diligent on the property side already early on, I today with hindsight would really like to give you kids some advice on cars. Today we own a really basic car, bought used while still not being too old or having too much mileage to (hopefully) incur too much issues (and costs) with repairs. More than ten years ago I went 'all-in' buying a brand new car (in cash). Don't do that when you are young (unless you already have made all the money you will ever need)! The alternative cost for that cash has proven to be fairly high, so I would today have been able to drive a used Porsche Panamera instead ;-) or better, already laid the first part of the equity fund to pay off the remaining debt.
Kids, it is also always very important to remember that these assets (property and cars) are cash-consuming, so I do not view them as keys to building wealth, rather the opposite. They just cost you. You can (or if you run into trouble have to...), however, dispose of them to improve your debt situation. The less of these type of assets (cash-consuming) you acquire (especially early on in your lives) the more you can invest in the cash-generating assets.
So, now to the really funny part, the financial assets. They GENERATE cash. Every year we get a CASH amount as dividend or interest (on cash). This year alone, the cash amount generated by the financial assets will be higher than total financial savings were ten years ago. It is quite amazing when I think about that now.
In general I have put nearly all surplus cash (except the two larger amortizations mentioned above) into financial assets over the last twelve to thirteen years plus reinvested dividends. The CAGR value growth since late 2000 is currently somewhere above 12%, probably close to 13%. This will probably fall down to 9-10% when the next major correction will come. Still, this is a number I am OK with, even though my ambition would be to increase it somewhat when retiring fully and being able to spend more time following potential investments.
As you see from the asset figures, (easiest seen in figure 2), I was lucky to hold a fair share of my financial assets in cash by end of Q32008, and then going 'all-in' in the beginning of Q42008 when the world was in turmoil. Since then it has basically been a soon six-year very positive development in the stock markets. As you can also see I have nearly all the time since more than three years operated with a fairly high amount of cash, having the 'gun' ready for shooting. As you can also see, the last quarters I have shifted over even more of the financial assets to cash, basically just loading the gun with more bullets as I cannot find any big elephants to shoot. My cash amount is today higher than my total financial assets were less than six years ago, so there is now some firepower if/when needed.
The current level of debt vs. property value is the lowest that we have ever had since starting to pour cash into our living premises, but in absolute terms it is still higher than at most times, however it is down from the top levels two to six years ago. We have switched property several times and the first two quarters in the summary show the actual price appreciation between a purchase (which was a couple of years before Q2 2004) and sale in Q3 2004. At that time we did something very uncommon in the market in the city we lived in, we sold our property BEFORE we bought a new one (this practice became much more common after the crisis in 2008). We were also very diligent when looking for new property and probably looked at about 100 different properties before we finally were able to acquire one where I actually thought there was an inaccurate price (in relation to value) in the market; we were at that time in a strongly rising market able to buy the property at a seven percent lower price than the seller had paid several years before (the broker clearly told me a couple of days before closing that he did not think the seller would accept our offer). Three years later we were able to sell the property at a price well above 40% more than we had paid. In the summary I have spread out the appreciation equally per quarter over the holding period. Furthermore, the last few years we have chosen to drive down debt in two larger one-off 'amortisations'. I did this in order to take down the risk to a level that I am more comfortable with, and to counter the effect from increasing interest rates (boy have I been wrong there so far...). At a debt level below well below 50% and interest rate at all-time low we are currently not doing any regular monthly amortisation.
So while fairly diligent on the property side already early on, I today with hindsight would really like to give you kids some advice on cars. Today we own a really basic car, bought used while still not being too old or having too much mileage to (hopefully) incur too much issues (and costs) with repairs. More than ten years ago I went 'all-in' buying a brand new car (in cash). Don't do that when you are young (unless you already have made all the money you will ever need)! The alternative cost for that cash has proven to be fairly high, so I would today have been able to drive a used Porsche Panamera instead ;-) or better, already laid the first part of the equity fund to pay off the remaining debt.
Kids, it is also always very important to remember that these assets (property and cars) are cash-consuming, so I do not view them as keys to building wealth, rather the opposite. They just cost you. You can (or if you run into trouble have to...), however, dispose of them to improve your debt situation. The less of these type of assets (cash-consuming) you acquire (especially early on in your lives) the more you can invest in the cash-generating assets.
So, now to the really funny part, the financial assets. They GENERATE cash. Every year we get a CASH amount as dividend or interest (on cash). This year alone, the cash amount generated by the financial assets will be higher than total financial savings were ten years ago. It is quite amazing when I think about that now.
In general I have put nearly all surplus cash (except the two larger amortizations mentioned above) into financial assets over the last twelve to thirteen years plus reinvested dividends. The CAGR value growth since late 2000 is currently somewhere above 12%, probably close to 13%. This will probably fall down to 9-10% when the next major correction will come. Still, this is a number I am OK with, even though my ambition would be to increase it somewhat when retiring fully and being able to spend more time following potential investments.
As you see from the asset figures, (easiest seen in figure 2), I was lucky to hold a fair share of my financial assets in cash by end of Q32008, and then going 'all-in' in the beginning of Q42008 when the world was in turmoil. Since then it has basically been a soon six-year very positive development in the stock markets. As you can also see I have nearly all the time since more than three years operated with a fairly high amount of cash, having the 'gun' ready for shooting. As you can also see, the last quarters I have shifted over even more of the financial assets to cash, basically just loading the gun with more bullets as I cannot find any big elephants to shoot. My cash amount is today higher than my total financial assets were less than six years ago, so there is now some firepower if/when needed.
Thursday, July 3, 2014
Quarterly update - additional comments and reflections
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.
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.
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.
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.
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