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%.

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

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.

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.