Investing & Maybe Fantasy Baseball

Nothing discussed/written should be considered as investment advice. Please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. In other words, if you buy something I bought, you deserve to lose your money.

The only reason why I am making my portfolio public because it provides accountability to me. Some or all the analysis I provide could be from the top of my head and should not be considered accurate.

My investing goal is simple; to try to manage risk while being fully invested without market timing. Howard Marks said it best, “even though we can’t predict, we can prepare.”

All my references to the Market are only for the US Market.

Performance

In Q1 my stock portfolio was down 2.76% compared to a negative 4.63% for the S&P 500.

“At certain speculative junctures, prudence itself becomes unprofitable, and this juncture – say, the five or six years starting in approximately 2015 – has been the showcase of that paradox. Reaching for yield and chasing after performance were once what a conscientious fiduciary would never stoop to do. In the age of ZIRP (and the full heat of indexation), those offenses against good practice became almost compulsory.” ~The Nov. 26 edition of Grant’s Interest Rate Observer

Portfolio Activity

In Q1 my stock portfolio was down 2.76% compared to a negative 4.63% for the S&P 500.

There was much more activity in my account that I anticipated. At the start of the year I sold ZIG because the fund no longer had a short book; I wanted to tax loss harvest losses so I sold GLRE. On the day Russia invaded Ukraine I sold out of all my UK and Russian exposure. I also punched out of Schmitt Industries.

(Quick aside to Russia and its war with Ukraine. I read everything I could about what was happening at the border of Ukraine. I concluded Russia was posturing and there was a small percentage a shot would be fired. Obviously that was wrong. When Russia invaded Ukraine I immediately sold all my Gazprom and Russia ETF shares. It wasn’t difficult to sell; rather, I was extremely annoyed that my 100% return became a 10% return. The learning I took from this experience is I immediately acted when my thesis changed; I didn’t hesitate. I think two years ago I wouldn’t have sold and waited it out. Lastly, the Russian assets are incredibly cheap but I no longer wanted to profit from the war.)

I made new positions to Intel, Crescent Point Energy, ConocoPhillips, EOG Resources, Prosus, Citigroup, British American Tobacco, Petroleo Brasileiro and a basket of international and emerging market ETFs. I added to my existing positions in Schwab, Aimia and PLx Pharma.

Company Commentary

Intel

My thesis for Intel is the company is they are essentially a defense company and Intel’s industry has tremendous headwinds (two images below) in the long term.

Global sales, for the industry, in December 2021 were $50.9 billion, an increase of 28.3% compared to the December 2020 total and 1.5% more than the total from November 2021. Fourth-quarter sales of $152.6 billion were 28.3% more than the total from the fourth quarter of 2020 and 4.9% higher than the total from third quarter of 2021.

The industry had a violent cyclical nature in the 1980s and 1990s but now there are fewer players and the players that exist are better capitalized. Also, chip demand today is being driven by the need for innovation because competition for the end users (i.e. the companies that are receiving the chips) is much greater.

Semiconductors is one of the most important hard assets in the world because the hardware is used in everything we do. In my opinion, for national security reasons the United States is not going to allow Intel to fail. The government will give them tax breaks and subsidies to ensure Americans can control supply of semiconductors. Recently the Senate voted 68-28 for the plan, which includes $52 billion in grants and incentives to bolster chip manufacturing as well as provisions aiming to jump-start innovation and bring key industries back to the U.S. amid a global supply chain crunch.

The biggest headwind for Intel is its going to take a few years for their strategy to become a reality but with so many tailwinds behind Intel I see a heads I win and if tails I don’t lose very much.

Energy

When oil was $120 a barrel I sold 15% of my Exxon and Chevron stock. My rationale at the time was oil companies and prices are cyclical and I thought we were getting somewhat close to the point where demand would decrease (image below) because in the past when America had an oil shock (the oil embargo of 1973, 1979, 1989-90) demand decreased.

The energy companies I added occurred after my sale of Exxon and Chevron in late March when oil was at $110 a barrel because I no longer believed demand would decrease. In fact local governments and foreign governments are thinking of providing subsidies and removing taxes on oil.

For example, with Maryland, Connecticut and Georgia are among the states temporarily cutting their gasoline taxes and Ohio, West Virginia and New York weighing similar measures along with state governors advocating for gas stimulus checks its only a matter of time these policies become mainstream especially in Democrat led states.

In other words, if the government is going to prop-up/sustain demand then oil can increase significantly. Also, this phenomenon is happening throughout the world. Germany has reduced its taxes on oil. Quebec is giving everyone $500 (right before an election). All these policies are going to sustain oil demand.

I have no idea what will happen to Russian oil. Its very possible that most or some of that oil doesn’t end up in the world economy because refiners do not want to take it for fear of bad PR. If the war ended today I still don’t think Russian oil comes back to the world economy instantly; I think it would require a regime change and months of assurances that Russia won’t attack anyone any time soon.

American producers, especially the public traded ones, aren’t going to produce a lot more oil in the future. And its very possible OPEC doesn’t have enough reserves to increase the amount of oil too. Maybe we get a little more oil from Venezuela? Canada won’t increase production because their prime minister made a deal that allows his party to keep its anti-oil policies in place until 2025. In sum, there won’t be any meaningful supply added to the world economy for at least 12 months and maybe more. If the price of oil dips I will add to my oil exposure.

A headwind for the American energy companies is if President Biden invokes an export ban on oil and natural gas. I think an export is highly unlikely but since this is an election year it’s possible the Biden uses his powers and doesn’t allow America’s oil and natural gas to be sent to Europe.

Prosus

The Dutch-listed technology investor Prosus NV—a subsidiary of the South African tech giant  Naspers —owns 28.9% of Tencent. It was 30% but Prosus sold 2% of its shares for $14.7 billion in April. In its September 2021 filing, management has said they will not sell any Tencent stock for three years.

I made 3.25% position in Prosus because I wanted exposure to one of the best companies in China (image below). If this company was domiciled in America instead of China it could possibly have the largest market cap.

Prosus owns about $140 billion of Tencent stock, plus another $10 billion of cash and shares of Delivery Hero, a food delivery company, plus a collection of private-company investments marked at a valuation well over $30 billion (image below). Prosus’ market cap is $113 billion so I’m getting Tencent at a 20% discount and I get all the other companies for free.

The latest quarter was not very good for Tencent. “The October-to-December period rose 7.9% to 144.19 billion yuan, equivalent to $22.65 billion. That missed expectations of analysts polled by FactSet and marked the company’s worst top-line growth since it went public in 2004.”

This comes after a myriad of regulations from the Chinese government. The first was a halt of new game approvals. Then it was the government’s broader, more recent crackdown on a range of subjects, including youth gaming activity, online lending, after-school tutoring and the use of personal information. It is possible their economy is too heavily reliant on housing and as we saw in America what happens when there is an inflated housing bubble. Lastly, its also very possible Tencent’s accounting is fraudulent.

All that said, you don’t have the opportunity to buy the stock at its current price unless there are headwinds. My thesis is either this investment is a zero or I get tremendous compounder. To be honest I originally sized the position to be 5% but I had to reduce my exposure because China-specific headwinds. However, Tencent’s core gaming, advertising, fintech and cloud software franchises are some of the world’s best and its trading at 16 times earnings. I’m okay with losing 3.25% of my money on this bet.

Schwab

This is a company I wish bought more of when it was cheap. When I made my initial investment in April 2020 my thesis was Schwab was a call option on rates eventually increasing that came with a 2% dividend. Since my initial investment I never added to it until this quarter. The reason why I never added to my position was I had no idea Schwab was an exceptional business. They’ve been growing brokerage accounts 5-7% per year for many years and the growth rate has been increasing. They now have their own robo-advisors and expanded their RIA penetration with the acquisition of TD Ameritrade.

Schwab earns most of its profit on the spread on interest rates via the cash deposits held in brokerage and bank accounts of its customers. They approximately have $7.5 trillion in assets. It currently has a market cap of $168 billion, which is pretty cheap if interest rates increase meaningfully. If the Federal Reserve panics after a couple of rate increases like in 2018 and rates come back down then Schwab is expensive in the short term, but if they continually grow the busines will still grow in single low-to-mid single digits.

Aimia

In early February it was announced Aimia would divest its stake in the PLM Loyalty Program with Aeromexico for $517 million. The company has a current market cap of $476 million. Since the announcement the stock is down 6.4%. On their latest earnings release the CEO said, “We also intend to allocate up to $75 million of the net proceeds towards a combination of

opportunistic share buybacks and/or a special dividend to common shareholders.” In other words they may buy back 10% of the shares outstanding.

Aimia has been restricted to buy back its shares because of its current Normal Course Issuer Bid (NCIB). However, they filed a new NCIB and in mid-June they’ll be authorized to buy back its shares.

Is there something I’m missing? I feel like this is a one foot hurdle?

Market Commentary

Global inflows into equities have surpassed $1 trillion in 2021, exceeding the combined total from the past 19 years (source: Holger Zschaepitz). The Shiller Cape, at the end of March, is 36, which is really historically. After reading these two metrics its easy to conclude the Market is in a bubble. However, how predictive is the Shiller Cape? The image below is from the 2022 Outlook from Goldman Sachs. The document was released in January.

“The statistical significance over the full sample is 26%. This means that there is only 26% confidence that the Shiller CAPE is mean-reverting, and 74% confidence that it is not. The traditional threshold to consider a relationship statistically significant is 95%. We want to emphasize that valuations alone are not sufficient measures for underweighting equities. High valuations do not reach some magical target and then revert to some stable mean; furthermore, the time period for valuations to reach some long-term average is highly variable and therefore uncertain.”

Another quote from the paper. “There have been 15 Federal Reserve tightening cycles in the post-WWII period. Contrary to received wisdom, not all tightening cycles have led to a recession. Only nine, or 60%, of the cycles did so. Of the last four cycles, only one resulted in a recession: the tightening cycle between June 2004 and September 2006.”

I highly suggest reading it. Its one of the rare papers where I read the entire document; its that good.

I have no idea what’s going to happen with the American economy. I think there are three scenarios:

1. Inflation comes down towards the end of the year but it stays in the 4-6% range for the next 1-4 years. Despite the inflation Americans continue to spend.
2. We get a gnarly recession that becomes stagflation.
3. We get a deflationary bust due to the massive amount of debt.

I think Europe is getting #2 and America will get a mix between #1 and #2. However, I’m not confident in my prediction which is why I’m still mostly invested. Other than my 401k I’m not adding new money to equities and I’m holding cash.

Like most people I’m risk averse and the fact I’ve read a lot of financial history and the boom and bust cycles that occurred regularly only enhances my risk aversion.

At the end of 2021 I read The Great Depression: A Diary by Benjamin Roth and the two biggest takeaways I took was A) make sure you have enough money to survive the downturn and B) the people who did survive didn’t participate in the financial mania.

It’s very possible the Market compounds at 7-plus percent per year for the next couple of years but having the cash makes it extremely easy for me to sleep at night.

The table below is a breakdown of my portfolio at the end of Q1. What you see below where my entire net worth, excluding my home, is allocated. Lastly, my 401k is 100% invested in a Small Cap Value Fund.

Company	%
BRK.B	12.1%
MU	9.5%
BAC	4.8%
MKL	4.6%
PLXP	3.9%
SCHW	3.7%
MO	3.5%
AIMFF	3.5%
MMP	3.2%
EPD	2.5%
NEM	2.0%
HII	1.8%
GD	1.7%
NOC	1.7%
PROSY	1.4%
GVAL	1.3%
LMT	1.2%
C	1.2%
INTC	1.2%
KGC	1.1%
XOM	1.1%
EQC	1.0%
CVX	0.9%
PREKF	0.7%
BHF	0.6%
DFIV	0.5%
AVDV	0.5%
AVES	0.5%
AVIV	0.5%
AVDE	0.5%
BTI	0.2%
EOG	0.2%
COP	0.2%
PBR	0.2%
CPG	0.2%
LAND	0.1%
FPI	0.0%
Gold (Physical)	2.9%
Platinum (Physical)	0.7%
Farmland	3.7%
I Bonds	6.1%
Cash	7.8%
401k	5.2%

Below is a breakdown by category:

Category	%
Bonds	6.1%
Cash	7.8%
Conglomerate	12.1%
Defense	6.4%
Financials	10.3%
Insurance	4.6%
International	3.8%
Manager	3.5%
Oil/Gas	9.0%
Other	5.1%
Pharma	3.9%
Precious Metals	6.8%
Real Estate	4.7%
Semiconductor	10.7%
Small Value	5.2%

Nothing discussed/written should be considered as investment advice. Please do your own research or speak to a financial advisor before putting a dime of your money into these crazy markets. In other words, if you buy something I bought, you deserve to lose your money.

The only reason why I am making my portfolio public because it provides accountability to me. Some or all the analysis I provide could be from the top of my head and should not be considered accurate.

My investing goal is simple; to try to manage risk while being fully invested without market timing. Howard Marks said it best, “even though we can’t predict, we can prepare.”

All my references to the Market are only for the US Market.

Performance

For the year my stock portfolio was up 25% compared to 29% for the S&P 500. If I included the selling of stock to fund the I Bond purchases my total returns were 30%.

Year	Me	SPY	Difference
2020	21.30%	18.37%	2.93%
2021	25.21%	28.79%	-3.58%

Where We Are Now

Below is an excerpt from “Buffett: The Making of an American Capitalist” by Roger Lowenstein.

Oddly, when Warren Buffett graduated, in 1951, both Graham and his father advised him not to go into stocks. Each had the post-Depression mentality of fearing a second visitation. Graham pointed out that the Dow had traded below 200 at some point in every year, save for the present one. Why not postpone going to Wall Street until after the next crash, his heroes counseled, and meanwhile get a safe job with someone like Procter & Gamble?

It was awful advice — violating Graham’s tenet of not trying to forecast markets. The Dow, in fact, never went under 200 again. “I had about ten thousand bucks,” Buffett noted later. “If I’d taken their advice I’d probably still have about ten thousand bucks.”

As of December 30 the US stock market had a CAPE ratio of 40 and the Buffett Indicator is about 215%. These metrics indicate the American stock market is overpriced and possibly in bubble territory. When I see indicators showing a massive overvaluation my tendency is to go to cash and wait for the market to collapse.

Meb Faber posted (image below) a chart of the returns of countries that traded at CAPE’s of over 40 (source: YouTube). The sample size is about 50 and the average real returns is 0%. The red line is a real 6% return per year and none of the countries, over ten years, were able to provide more than 6% return per year. Lastly, you’ll notice that most of the carnage (drawdowns) occur within the first three years.

It’s very possible the market is not overpriced. Fisher Investments argues that on a forward earnings basis the market isn’t a egregiously expensive. Bill Miller also doesn’t think the US stock market is that overpriced as a whole.

I used Buffett’s quote to remind myself that the stock market is one of the best ways to compound money and you shouldn’t be afraid of drawdowns. However, Buffett also said, “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” Its that dichotomy of opinion that’s been weighing on me since my Q3 update.

One of Howard Marks’ mantra’s is to move forward, but with caution. I’m the type of person who focuses much more on what could go wrong than what could go right.

Based on my personal situation I’ve decided to slightly de-risk. Specifically, I took some gains off the table and allocated those funds to safer investments. Primarily, maxing out my contribution to I Bonds in January 2022. (I already maxed out my contribution in 2021.)

The primary reason to de-risk is I will have smaller amounts of additional capital coming in each month. The most important thing I can do is have enough capital to ensure I do not have to sell my investments in the event of a drawdown.

It’s extremely difficult right now to de-risk but it’s important to make these types of decisions when things are well and when I do not have emotional duress. A better way to say is by John Wooden, “When you fail to prepare, you’re preparing to fail.”

A little more detail about my personal finances; I have a home mortgage and about 65% of my monthly salary (including the HOA) goes towards the mortgage. With my cash balance, I Bonds and physical precious metals I have enough liquidity to pay my expenses for at least a year if I lost my job tomorrow. It could be argued I am being overly cautious but that’s why everyone should manage their finances based on their own risk threshold.

Lastly, having more cash means I can play fantasy baseball for higher buy-ins. In the past three seasons (2018-19 and 2021) I’ve played in six leagues and I’ve cashed in five of them (including winning three). At this point I believe my performance is not due to luck and warrants palying for more money.

I Bonds

(I first wrote about I Bonds in my 2021 Q2 Update.)

A friend of mine stayed with me over the Thanksgiving holiday. She got her Masters degree 12-16 months ago in physical therapy. She currently works at her local hospital, makes good money and will likely have the ability to be employed and make good money for as long she wants to work. She is very intelligent. If we took an IQ test her score would be at least ten points higher than mine.

To me, she represents the typical white collar worker in regards to the understanding of how compounding works in the stock market. Specifically, she understands the teachings of John Bogle.

• That the base rate of the stock market over the past 80-90 years is roughly a 9-10% return per year.
• The best way to accumulate to achieve that rate of return is via low-cost index funds.

Lastly, she has no interest in learning any more about investing, which is totally cool and understandable.

Since most of my free time is spent reading and thinking about finance some of our discussions were about finance.

I talked a lot about why she should look into putting money into inflation-linked savings bonds (I-bonds) because they’re currently yielding 7.12% and with inflation probably continuing to run hot for the next few months the interest rate will probably remain high when the interest rate changes in April 2022.

I told her I was pretty confident the I Bond would probably outperform a market cap weighted S&P 500 index fund in 2022 and possibly for the next five years. She asked, “why?” and I told her based on the two indicators I mentioned previously and at the current valuation the S&P 500 will maybe nominally yield 2-4% with dividends reinvested.

A week after Thanksgiving Vanguard came out with their forecasted 10 year nominal returns by asset class (below):

I think my friend’s hesitation to I Bonds was why should she buy a 7% yielding asset when the base rate of the US stock market is 9-10%?

Since March 2020 the market has essentially doubled and the economy has rebounded. What if she buys I Bonds and the market is up 18% next year? (“The S&P 500 has gained 5% to 10% just six times in the past 94 years. The S&P 500 goes up about two-thirds of the time, and when it does, it gains an average of 18%. It has declined about one-third of the time, with an average drop of 14%.” Source: Barrons.com)

I totally get it. No one likes to be wrong especially with hard earned savings…especially when you’re not in the minutiae of investing. I don’t know anything about cars and one of my friends knows everything about cars. If I had car trouble he could A) diagnose the problem quickly and B) would say it’s a quick fix; all I’d have to do is X. To him it’s a quick fix but for me it probably means I’m spending all of my Saturday trying to fix it. I imagine that’s how she feels when we were talking about finance.

The last thing I will say about I Bonds is if you qualify for a tax refund you can take payments in I Bonds. According to the IRS you can get up to $5k of your refund via I Bonds. To recap, you can buy up to $10k per year from the US Treasury and an additional $5k via your tax refund.

Portfolio Activity

I sold all my shares Alibaba and Tencent at a 11% profit to have additional money to pay for my 2022 contributions to my IRA and I Bonds. In my Q3 update I wasn’t expecting to sell those shares but as I mentioned above, my personal finances changed. I also sold all my Fairfax shares to buy more PLx Pharma and Micron.

Thoughts On Holdings

Briefly on Micron, about 70% of their revenue comes from DRAM. Micron now makes the industry’s smallest feature sized DRAM node which significantly outperforms the competition and at a lower cost. Micron also produced the first 176 layer NAND (this segment is about 25% of revenue) which is the most advanced NAND mode on the market. The biggest headwind for the company is China. When I first made an investment two years I thought it would be at least a decade before China had its own factories online. It appears China, with the help stealing intellectual property from Micron, may have their factories in a few years.

In mid-December the board of Equity Commonwealth approved an additional $150 million dollar buyback. With this additional $150 million authorized, the company now has $170.5 million available for future share repurchases, including $20.5 million remaining under its prior authorization that expires on June 30, 2022. As an owner of the business I am completely on-board with the board’s actions. The company has about $3 billion in cash and their market cap is $3.15 billion. This is a heads I win and I don’t lose very much if it comes tails.

In regards to Kinross Gold’s bid to buy Great Bear Resources, I’m okay with the deal. According to the press release 80% of the property hasn’t been explored yet and Great Bear has not released a resource estimate yet. This indicates there’s a bit of gamble in this purchase but I liked the management prior to the transaction and I’m going back their play.

In regards to The Acquirers ETF ($ZIG) it was recently announced the fund is not going to be shorting stocks in the future. With a current expense ratio of 0.89% I am going to reevaluate this holding in Q1 of 2022. Value is extremely cheap and according to the recent blog (it’s more of a chart than a blog) from Cliff Asness this may be the best time to be invested in Value so perhaps the expense ratio could be offset by the funds outperformance. In my 401k I’m 100% invested in a small cap value fund and the expense is 1.07% (it’s up 23.4% for 2021, which is a little less than the S&P 500) but since my investment options were limited and in my opinion, the value fund provided the most upside I choose the fund despite the costs. However, in my personal account I have vastly more options so the 0.89% expense may be too high.

In regards to PLx Pharma, I haven’t sold any shares and I bought a little more. It’s been a strange two months for the growth stocks I track. Starting in mid-October companies like PLx Pharma and The Joint started their drawdowns from their all-time highs. I started buying the stock at $8 and I saw it rocket up to $20, never selling a share. In hindsight it would have made sense to sell a portion but for all I knew the stock could have been the next Gamestop or AMC. PLx Pharma has a market cap $219.2 million with $82.5 million in cash. The question is would I pay $133.7 million for an FDA approved medication that is substantially better than all the competitiors? Also, I’m getting 58 patents and the company is in clinical trials for different medications with the same delivery system as Vazalore. One headwind is pricing power. If we get a recession and/or inflation stays hot, will people want to pay more for the drug? In my mind, it’s an easy yes but the actions of people confound me every day.

“Having lost ground during the pandemic, military stocks are now at their cheapest valuations in eight years” (source: WSJ.com). I bought a basket of military stocks last year and I think these companies are extremely cheap especially since the government, no matter whose in power, continues to increase military spending. “The House voted Tuesday to approve a $778 billion defense-policy and budget bill that authorizes $25 billion more in defense spending than requested by President Biden” (source: WSJ.com).

Precious metals

I don’t have a predicitive or precise model on how to value any precious metal. The method I use is I divide the price of 1 ounce by the average home value. In other words, how many ounces of gold does it take to buy a house? Using that metic I can see how valuable a precious metal has become.

Homes are similar to precious metals in that, unless someone does Airbnb, homes don’t provide cash flow but they appreciate in value. Gold and silver are fairly valued. However, platinum is extremely cheap; in fact it’s the cheapest its ever been. One caveat, I only have 53 years of data compared to 70 years for gold and silver.

Even though platinum appears to be cheap there are some headwinds for the metal. Specifically the world is still over supplyed with platinum and its primary use is with autocatalysts in diesel engines (image source: Government of Canada). I’m not buying platinum at today’s price because I’m not smart enough to meaningfully know if platinum is really cheap at $980. However, if it gets below $800 I’ll be a buyer because at that price I think that’s a big enough margin of safety that doesn’t require expert knowledge to make a profit.

The table below is a breakdown of my portfolio on January 1, 2022. What you see below where my entire net worth, excluding my home, is allocated. Lastly, my 401k is 100% invested in a Small Cap Value Fund.

Company	%
MU	11.7%
BRK.B	10.3%
PLXP	6.6%
MKL	6.2%
BAC	5.7%
SCHW	3.5%
MO	3.2%
MMP	3.0%
GVAL	2.1%
AIMFF	2.0%
EPD	2.0%
ZIG	1.8%
GLRE	1.7%
HII	1.7%
EQC	1.6%
NEM	1.5%
OGZPY	1.5%
GD	1.5%
NOC	1.4%
KGC	1.1%
ERUS	1.0%
LMT	1.0%
XOM	0.9%
SMIT	0.9%
CVX	0.8%
PREKF	0.5%
FNDC	0.4%
EPOL	0.4%
EWUS	0.1%
LAND	0.0%
FPI	0.0%
ACGBY	0.0%
Gold	2.8%
Platinum	0.7%
Farmland	3.7%
I Bonds	6.0%
Cash	6.1%
401k	4.6%

Below is a breakdown by category:

Bonds	6.0%
Cash	6.1%
Conglomerate	10.3%
Defense	5.6%
Financials	9.2%
Insurance	6.2%
International	4.1%
Manager	6.5%
Oil/Gas	8.6%
Other	3.2%
Pharma	6.6%
Precious Metals	6.1%
Real Estate	5.3%
Semiconductor	11.7%
Small Value	4.6%