Did you anticipate a strong performance out of stock market in the first quarter of 2023? If you are like most investors, your answer would probably be no. Despite several alarming developments that could have foreshadowed impending doom, markets continued their steady climb throughout the quarter.
Let’s review a few of the big ticket items from the past quarter that could have caused a market downtown. The most significant event of the quarter was the collapse of Silicon Valley Bank. It has been written about endlessly, you can find a much better synopsis of the situation elsewhere. The rapidity with which the bank failed was staggering and highlighted the fragility of the current economic system. While the banking system managed to avoid calamity, the event underscored how quickly things can unravel.
Meanwhile, the Federal Reserve maintained its commitment to raising interest rates in an effort to curb inflation. These changes may not be immediately apparent, but they will have a significant impact. In my opinion, the Fed is acting a bit recklessly. Such a sudden increase in rates could throw the entire economy into a deep recession, with untold ramifications. A more gradual rise in rates which would would be preferable to avoid any catastrophic shocks. This could result in a bit more inflation, but that is preferable when compared to the destruction of the economy.
Moreover, there were numerous tech layoffs during the quarter. Seems like everyone’s favorite tech company has decided to do some spring cleaning this year. Alphabet, Meta, Amazon, Microsoft, Salesforce, Dell, Uber, Twitter… the list goes on and on. Tech companies have made a major commitment to cutting costs, which will leave hundreds of thousands left without high-paying jobs. This will subsequently lead to a drop in their consumption habits that will ripple through the rest of the economy.
Despite all of this upheaval, the market somehow managed to keep chugging along. These events serve as a reminder of the intricacy and unpredictability of the market. As a result, I choose to remain invested for the long term and avoid making unforced errors. I let my companies do the work and continue to compound.
Anyway, let’s take a look at my first quarter results investing results:
Q1 Performance
As of 4/1/2023, my 10K portfolio was worth $16,521.79. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 1/1/2023 the SPY had a price of $409.39. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021
38.55
28.43
10.12
2022
(27.25)
(18.65)
(8.60)
2023(1/1-3/31)
14.58
7.04
7.54
Since Inception(8/19/18)
65.22
55.37
9.85
CAGR
11.50
10.03
1.47
My investment portfolio experienced a robust start to 2023, exceeding the S&P’s returns by over 7.5% thus far. While it would be fantastic to replicate such a feat every quarter, I don’t think I can count on it. I remain pragmatic, but appreciate the strong performance. In particular, I saw a resurgence in some of the Mega Cap tech names such as Alphabet, Amazon, and Microsoft. However, my best performer was Meta. After a never ending stream of bad news, Meta’s stock fell to $120.34 at the end of 2022. By the conclusion of Q1, Meta had risen back up to $211.94. That’s a 76.11% jump in only a quarter. Congratulations to anyone who called the bottom and made a purchase, I unfortunately was not smart enough to have doubled down at a basement price.
Transactions
I only made two transactions of note during the quarter. First, I bought an extra share of InMode in early January with a tiny bit of cash I had leftover. I continue to be amazed by the company’s impressive performance. The stock currently trades at just about the same price, so it is too early to determine whether this was a wise decision.
More interesting however was the spinoff of Lumine Group, the newly formed company spun off from Constellation Software. Constellation enacted their second spinout, following in the footsteps of Topicus. I received three shares in the new company for every one share of Constellation. This now gives me six shares in the newly formed company. Too early for me to judge the company, but I consider it a bit of a lottery ticket. This comprises a tiny portion of my portfolio, so will be interesting to follow over the years.
Finally, I continued to DRIP into my dividend paying stocks. These are tiny transactions, but every little bit counts. I’m only scooping up thousandths of a share at a time, but one day these DRIPS will be significant. They will play a big part in the overall returns of the portfolio.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.
Happy new year everyone! The start of the new year is a time to reflect on the past and look ahead to the future. 2022 was a tumultuous year for investing, with markets experiencing volatility and interest rates climbing rapidly. These factors contributed to a decline in asset prices. While the Federal Reserve’s efforts to curb inflation seem to be having some effect, there is no guarantee that the situation will improve. In fact, it is possible that interest rates may continue to rise, putting even more strain on the economy.
It is worth noting that while prices have fallen, there has not yet been a corresponding decrease in earnings. In times of uncertainty, investors and companies tend to become more conservative, focusing on cost-cutting and efficiency rather than growth. This can have a ripple effect on individuals and businesses throughout the economy, as people reduce their spending on non-essential items and industries that rely on consumer spending struggle.
For example, the housing market has been hit hard by the recent increase in interest rates. With monthly mortgage payments now much higher than they were a year ago, potential homebuyers are hesitant to make a purchase. This has led to a significant drop in home sales, which has had a knock-on effect on industries such as real estate, mortgage brokering, and home inspection. As those who work in these fields see their incomes decline, they may be forced to cut back on their own spending, which can then impact other businesses.
It is important to be aware of these potential impacts and to be prepared for any scenario. Building up your savings and making smart investment decisions are always good ideas, and the new year is a great time to review your financial goals and assess whether you are on track to achieve them.
Let’s take a look at my 2022 investing results:
Q4 Performance
As of 1/1/2023, my 10K portfolio is worth $14,419.07. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 1/1/2023 the SPY had a price of $382.43. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021
38.55
28.43
10.12
2022(1/1-12/31)
(27.25)
(18.65)
(8.60)
Since Inception(8/19/18)
44.19
44.58
(.39)
CAGR
8.72
8.82
(.1)
While my portfolio underperformed the S&P 500 in 2022, I am happy to see that it has remained relatively close to the index since its inception. Despite the challenges of investing, I am confident in the composition of my portfolio and believe that it will perform well over time. It’s important to remember that investing can be tough, and it’s important to stay humble and cautious. As Warren Buffett has pointed out, as long-term investors, we should actually be hoping for stock prices to go down so that we can buy more shares at lower prices and increase our ownership stakes in the long run.
Transactions
MCO- I sold my shares of Moody’s in early October. This has little to do with the long term prospects of the business, they are still top notch. They will continue dominating their corner of the market, I just thought shares were too expensive and there were better opportunities elsewhere.
ETSY- I also trimmed my Etsy position, selling off 3 of my 7 shares. I still like the company, but will admit to losing some faith. I think they operate a great business and could have robust growth in their future, but I question management capital allocation. They spent an exorbitant amount buying smaller companies like Depop and Elo7. Maybe these will be good businesses, but they paid ludicrous multiples to buy. Now that the market has tumbled, these acquisitions just look awful. I want to see management commentary after this upcoming quarter, but if I don’t feel confident, I will be selling off the rest of my shares.
POOL- I bought a single share of Pool Corp in mid December. Pool is the leading distributor of swimming pool supplies and parts. They sell to contractors, pool retailers and pool owners amongst a myriad of others. Distribution is a fantastic business and Pool is second to none. They have fantastic returns on capital and have a lengthy record of consistent success. Simple but immensely profitable business model.
AMZN- I presume Amazon needs no introduction, but until recently,I had never held any shares. The stock saw a sharp drawdown in 2022, down almost 50% from the start of the year, presenting myself and others with a potentially great opportunity. I think the market is being shortsighted and Amazon is a business unlike any other. They are simply the most dominant business in the world and the one I would least like to compete against. They invest heavily into their business, spending $66B in R&D and $66B in CapEx in 2022. That is a wild amount of money spent in order to widen their moat. Just imagine how dominant they will be 10 years from now. I think they know exactly what they are doing, time will tell.
AMAT- I decided to pick up another share of Applied Materials in mid December after the stock had fallen 10% in a single day on the back of no real news. I’ve held shares in the company for a bit of time now, so picking up an additional share was a no brainer. Great business with fantastic execution and discipline.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.
“Investing wise, 2021 couldn’t have gone much better, at least for me. The bull market rages on and markets closed at or near all time highs.” I actually wrote these exact words just nine short months ago. When you put your thoughts out in public, you have to be able to laugh at yourself. I could not have gotten the anticipatory pulse of the situation more wrong. In the time it takes to grow a baby, the investing world has flipped completely on its head. The bear has struck and it looks particularly grizzly. Market sentiment appears to be on the brink of collapse and investor confidence is holding on by a thread.
I am no market prognosticator, if I was, my results would surely be much better. I have no idea which way the market will move from here. Inflation could dampen and markets could come roaring back, wouldn’t that be nice. Just as likely however is that inflation continues to soar, forcing the Fed to continue raising interest rates, which will further compress asset values. I don’t like to sit around forecasting doom and gloom, but it is pretty easy to come up with some spine tingling scenarios we must all be prepared for.
Most probably do not know this, but in my spare time I enjoy reading fantasy books. My favorite author is Brandon Sanderson, a man well known for writing incredibly long stories with intricate well thought out magic systems. His tome of a novel Rhythm of War, book four of his magnum opus, The Stormlight Archive, contained a scene that helps illuminate the feelings that help me deal with these kinds of periods.
The protagonist, Kaladin, suffers from a long bitter battle with depression. After suffering yet another crushing blow, Kaladin finds himself on the brink of giving in to his hate. At his lowest moment, a character named Wit comes to him in a vision. Wit is a mysterious character, known for mocking all those around him, but occasionally he lets his callous façade drop and shares his otherworldly wisdom. Kaladin, unsure whether he has the strength to deal with the immense challenges placed upon his shoulders, asks Wit for a story.
Wit shares the parable of The Dog and The Dragon. It is the tale of a small farm dog who wishes to become a mighty dragon after seeing one soar overhead. Of course in his various attempts to do so, he comes up woefully short. One day however a young child falls into a well. The dog springs into action and as the only one able to fit into the well, he is able to bring a bucket and rope to the child, thereby saving the child’s life.
Wit stood and stepped over, then put his hand on Kaladin’s back and leaned in. “That night,” he said, “the little dog snuggled into a warm bed beside the fire, hugged by the farmer’s children, his belly full. And as he did, the dog thought to himself “I doubt any dragon ever had it so good anyway.”
He smiled and met Kaldin’s eyes.
‘It won’t be like that for me,’ Kaladin said. ‘You told me it would get worse.’
‘It will,’ Wit said, ‘but then it will get better. Then it will get worse again. Then better. This is life, and I will not lie by saying every day will be sunshine. But there will be sunshine again, and that is a very different thing to say. That is truth. I promise you, Kaladin: You will be warm again.’
Rhythm of War pages 920-921
Q3 Performance
As of 10/1/2022, my 10K portfolio is worth $13,431.85. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 10/1/2022 the SPY had a price of $357.18. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021
38.55
28.43
11.52
2022(1/1-9/30)
(32.32)
(23.93)
(8.39)
Since Inception(8/19/18)
34.32
34.42
(.10)
CAGR
7.43
7.46
(.03)
Somehow after running this portfolio for a bit over four years now, my performance almost matches the S&P 500 exactly. We are neck and neck, with one leading the other depending on the day you check. Of course on the day I make the tabulation, I am down by .1%. Yes, I’m salty about it. Statistically I’m not even sure this should be possible, but here we are.
Transactions
During the third quarter, I actually didn’t make a single transaction. I kept up my DRIP, so picked up some more tiny fractional shares, but made zero changes to the portfolio. Given how great the market selloff has been, I am starting to see some real opportunities. Don’t be surprised to see a few changes in the 4th quarter update.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.
First off, I’d like to apologize that this update is coming out quite a bit later than I would normally prefer. I was away on a vacation, then had to catch up on work at my business. It has been a particularly stressful period at work and I simply didn’t have the time or mental energy to type up this update.
It is also difficult to write a financial update after a quarter such as this past one. Losing money in investments is heart wrenching. There is no getting around that. It is especially difficult for me, because I have chosen to post my investments publicly and open myself up to ridicule.
I find myself questioning if I really know what I am doing. Am I an imposter posing as a credible investor? Did I do enough investment research or act impulsively? Are the companies I’ve chosen strong enough to withstand an economic recession? Are my investments too correlated and therefore subject to the same risks?
Well, only time will tell us the answers to these questions. In the face of adversity, there is of course only one proper course of action and that is to carry on. Wallowing in sorrow does nothing to improve the situation. Make use of market volatility and kick your research process into high gear and start turning over every stone. Fortunes are won and lost during tumultuous times. Do your best to find yourself sitting on the winning side of the equation. Blood in the streets breeds opportunity. There are high quality companies out there trading at multiples not seen in a decade.
Q2 Performance
As of 7/1/2022, my 10K portfolio is worth $13,971.17. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 7/1/2022 the SPY had a price of $381.24. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021
38.55
28.43
11.52
2022(1/1-6/30)
(29.60)
(19.61)
(9.99)
Since Inception(8/19/18)
39.71
42.88
(3.17)
CAGR
9.12
9.68
(.56)
2022 has proven to be an incredibly difficult investing period. My portfolio has gotten crushed, down just a hair under 30% this year. Even worse, I have lost to the market by a rather significant margin. Going into the year I was outpacing the market by a healthy amount, but after a 9.99% loss in 2022, I find myself trailing the S&P since inception. I don’t care so much that my portfolio has gone down, but I do care about losing to the market. Why spend the time and effort if I am unable to beat the index? Let’s hope in the long term this trend reverses and I can get back out on top.
The economy appears to be on the brink of a recession, with few positives to rely on.. I don’t like to make market predictions, but all indicators are pointing downwards. Is this already priced in? I have no idea. The market could rebound and turn positive in the back half of 2022 or just as easily fall another 20-30%. Rather than try and time market movements, I believe the right course of action is to focus on picking quality companies with high returns on invested capital trading at reasonable prices.
Transactions
NTDOY- In mid June, I decided to make a couple of changes within my portfolio after seeing some particularly attractive opportunities. My portfolio was already fully invested, so I needed a way to raise money. After examining my companies, I determined that Nintendo was the one that had to go.
I sat on a slight loss, so there were no tax burdens to take into account. Actually I will be able to use that loss to offset the gains from selling shares of Dollar General which I will talk about below. I still really like Nintendo and think they have a great future in front of them. They are incredibly profitable with strong margins and boast what is probably the best IP in the entire video game universe. I have just begun to worry about the growth prospects and what the next phase will bring. Growth has gone in the wrong direction and the company has not laid out a roadmap of what exactly to expect in the future. A lot of variables are on the table that have to be taken into account. Don’t misunderstand however, I am still a believer in the company. I continue to own shares in accounts outside of this blog,
DG- I also decided to trim my position in Dollar General. No real problem here, I just needed to raise more cash. Dollar General stock had gone up quite a bit and was trading at a hefty premium to the overall market. I still love the company and want to remain a shareholder, but rebalancing and taking some off the table isn’t the worst outcome.
ULTA- I have long admired Ulta, but never saw a good opportunity to pick up some shares. Ulta is a very high quality retail chain selling affordable beauty products. This market downturn finally opened up an opportunity to buy Ulta at a reasonable price. As long as I’ve followed them, the company traded for over 30 times free cash flow. Ulta came roaring out of the pandemic, as women could finally go back out in public and beauty products flew off the shelves. I bought Ulta for roughly 18 times free cash flow. They are a remarkably consistent company, growing revenue, net income and free cash flow virtually every year. They operate a simple business model, open high return stores each year and use the free cash flow to repurchase shares. Share count has fallen from 64.65 million in 2015 to 53.94 million today, a 16.57% reduction.
There is also a longstanding psychological trend called the lipstick effect. In times of recession, women are found to spend money on small indulgences like lipstick and other beauty products, as they forego large expenses like foreign travel or a kitchen redesign. A splurge on a premium beauty product is unlikely to break the wallet, while providing a quick dopamine hit. Given the murky future our economy seems to be heading towards, I feel comfortable holding such a high quality steady company.
INMD- In mid June I decided I couldn’t wait any longer and pounced on some shares of InMode. On financials alone, I personally cannot find a single company that provides a better opportunity. They check every single box I look for and do so with flying colors. High and growing margins? You bet. Low capital intensity? Only $1 million of CapEx on $170 million in operating cash flow. Strong balance sheet? $400 million in cash against only $61 million in total liabilities, not just debt. Ex-cash, the company trades for about 10 times trailing twelve months free cash flow.
Where’s the rub? Well, InMode sells minimally invasive medical products. If you are an astute reader of mine, you will know that I am not a medical doctor. In fact, I have absolutely no medical training at all whatsoever. I can’t really tell you what their products do, or how they compare to their competitors in the market. Could their products become outdated and replaced in the future? Sure. Could a competitor create a superior product and replace them as a market leader? Definitely. All I know is that the market can’t seem to get enough and sales are exploding. If I had to pick one company that I think has a good chance of becoming a 10 bagger, InMode is the one. Perhaps I am foolish for betting on a company with these kinds of unknowns, but I’m willing to risk it.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.
Well, that was an interesting quarter to say the least. The Omicron variant of the coronavirus quickly ran its course and the pandemic finally looked to be coming to a close, giving us all a glimmer of hope. Vladimir Putin however decided the world hadn’t seen enough turmoil. The war in Ukraine has thrown the entire globe into a state of disorder. I don’t want to opine on current events politically, but from an investment perspective this war has had a number of impacts.
Given the sanctions placed on Russia, we have seen a rapid rise in the price of oil. We all see it at the gas pump, but maybe more importantly this has put a further strain on the already tight global supply chain. The price of shipping has skyrocketed and the cost of moving product is now astronomical. As an American, it calls into question our reliance on foreign imports. The Biden administration has put an emphasis on American made products to reduce this reliance. Combined with rising interest rates and general inflationary pressures, markets look murky at best.
We saw a quick drop in all markets at the beginning of the quarter followed by a small recovery towards the end of March. Should the war escalate and more countries join the fray, expect continued volatility throughout global markets. My portfolio of course did not escape the quarter unscathed. Things could have gone a whole lot worse, but it is never fun losing money. I take solace knowing my portfolio is filled with strong companies. They make use of market downturns by buying back lower priced shares and eating up market share from weaker competitors.
Q1 Performance
As of 4/1/2022, my 10K portfolio is worth $16,801.98. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 4/1/2022 the SPY had a price of $451.64. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021
38.55
28.43
11.52
2022(1/1-3/31)
(15.34)
(4.63)
(10.71)
Since Inception(8/19/18)
68.02
68.54
(.52)
CAGR
15.53
15.55
(.02)
As we can see, I had a rather abysmal first quarter, particularly as compared to the S&P index. I lost by more than 10% in the quarter to SPY. Not great, but it happens. A little disheartening to see that I’m now losing overall since inception. If I cannot outperform the index, why even put all the time into investing. I could just buy the S&P, sit at home playing video games all day and get better results. Ultimately in the long term, I don’t think that will be the case. I’m pretty confident, maybe irrationally so. Over the course of many years and decades, I expect to do meaningfully better than the index. Of course, so too does everyone else. Only results will show the truth.
I had three main losers in the quarter, Facebook, Etsy, and my group of semicap equipment manufacturers(Lam Research, KLA and Applied Materials). All had valid reasons to have fallen, but perhaps the drops are overblown. I personally would buy more of each at these lower prices if I had available cash, but I am fully invested so cannot. I actually have acquired quite a few more shares in other accounts I manage, particularly of the semicap companies which I believe offer very favorable risk/reward ratios.
Transactions
I actually made zero real transactions this past quarter. Correct me if I am wrong, but I believe this is the first quarter since I started this portfolio that I have not made any changes. I like the companies I invest in and at this point I think just sitting back is the right course of action.
Due to my portfolio DRIP, I did however make a number of very minor transactions. As we can see, my portfolio now makes a handful of purchases automatically due to dividend reinvestment every quarter. These are very tiny purchases, but over time they will add up.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.
2021… What a year. Just when we thought the pandemic was finally coming to an end, the Omicron variant popped up and threw the whole world right back into chaos. I hope the trends of this strain appearing less deadly continue, but nothing would really surprise me at this point. While 2021 clearly ended on a sour note, I’m hopeful going into 2022. The world has looked so bleak the last couple of years, we could all use a return back to normal.
Investing wise, 2021 couldn’t have gone much better, at least for me. The bull market rages on and markets closed at or near all time highs. We have however seen some downright strange patterns. While the markets as a whole keep climbing higher buoyed by megacap tech, many names find themselves in deep bear territory. The back half of 2021 was a bloodbath for many names, particularly those that had risen quickly in the beginning of the pandemic. You don’t have to look very hard to find companies trading 50% below where they were trading just a few months ago. Even after a precipitous fall, I don’t find much value in most of these companies, but always good to be on the lookout.
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Let’s have a look at my results:
Q4 Performance
As of 1/1/2022, my 10K portfolio is worth $19,846.55. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 1/1/2022 the SPY had a price of $474.96. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021(1/1-12/31)
38.55
28.43
11.52
Since Inception(8/19/18)
98.47
72.80
25.67
CAGR
22.83
17.84
4.99
While I am a bit disappointed that I didn’t end the year at $20,000, 2021 was an incredibly successful year for my portfolio. I put up a 38.55% return, an amount far beyond even my wildest predictions. This was mostly due to the market rocketing upwards, but I still beat the SPY by 11.52% on the year and now 25.67% since inception. 2021 was by bar my best investment year both in terms of overall return and when compared to the S&P. Some reversion to the mean is likely, I don’t expect to beat the market by nearly that much going forward. Some of my company valuations have also become stretched, meaning the stocks could take a tumble while still producing fantastic business results.
As usual, the Nasdaq continued to trounce me. I did however make up some ground in 2021, as the QQQ’s were “only” up 21.4%. Since inception of the portfolio, the QQQ’s still beat me by just a hair over 20%, so there is still work to be done. Maybe I’ll keep up the momentum and even pass the Nasdaq, but I for one doubt that will happen anytime soon. Stranger things have happened, but I certainly wouldn’t bet on it.
Transactions ETSY- By mid November, Etsy stock had run up quite a bit, peaking around $300. I decided that it began to represent too large a portion of my portfolio, good problem to have I suppose. I had roughly $3,000 invested in the company, meaning it was approximately 15% of the account. While I generally recommend sticking to your winner’s and letting them run, occasionally the gap between estimation of fair value and total market cap becomes too wide. The stock had gotten out in front of their skis.
For this reason, I decided to trim my holdings. I sold half of my Etsy shares, still leaving me with a significant investment. So far this has proven to be the right decision, as I sold those shares at $297.14 and as of the new year the stock traded at $218.94. Granted, the shares I held on to have obviously fallen by that amount. I remain a big believer in the company and plan on holding onto the rest of these shares indefinitely, but I feel much more comfortable at a 7.5% position than a 15% position.
AMAT, LRCX, KLAC- Part of my reason for selling Etsy actually had to do with a need to raise cash. I was fully invested and saw an opportunity that I couldn’t pass up. I have been following the semicap equipment manufacturers for quite some time and after seeing their most recent quarterly reports, I could no longer sit idly by. I had to be a part owner of their success. Quarter after quarter I would watch this group produce spectacular financial results and I determined that it was time to pull the trigger.
I would be foolish to believe that I could ever fully understand the minutiae of the semiconductor industry. The technology involved is incredibly complicated and I am by no means an expert, far from it. I also can’t tell you exactly who will win on the consumer side. Will Nvidia and AMD continue to steal market share from Intel? Will Intel bounce back and regain their market dominance? Will TSMC continue their fab supremacy(almost assuredly)? I don’t have the definitive answer to any of these questions, but I don’t think I need to. What I can tell you, is that overall semiconductor demand will continue to grow significantly decades into the future. We live in an increasingly digital world, one where the reliance on semiconductors grows every year. This doesn’t mean the industry is without cyclicality, categorized by innovation followed by years of stagnation. There will be down years, but on average growth will be immense.
In my opinion, the semicap manufacturers are a far safer play than the consumer facing side of the industry. To protect myself even further, I’ve decided not to even try and pick the winner amongst them. I have invested in a basket of the top 3 American equipment manufacturers. Together I am considering them to be a single investment, roughly the same size as any of my other bets. They all produce fantastic financials, significant revenue growth with high levels of free cash flow. None require large capital investments, meaning they can allocate capital to buybacks and other shareholder friendly endeavors. All should continue to do well years into the future. If one should falter, it will likely be due to one of the others winning their business. I’m betting on the category, rather than a single company. Time will show if this is wise. I won’t be breaking down the numbers here, but at some point I’d like to post a deep dive showing why I like all three and what each brings to the table.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.
I can’t believe how fast this year has blown by, but alas here we are at the beginning of Q4. I suppose life always feels like it is moving along at a blistering pace, but maybe due to turning 30 this year, I have started seeing things a bit differently. If the the first week of the 4th quarter is any indication, we may be in for a bumpy ride. Volatility is up and the news feels rather incendiary lately. Time will tell how things shake out.
Bitcoin is nearing an all time high, NFT’s are all the rage, yet I continue to invest in “boring” companies like Google and Facebook. Imagine saying that a decade ago, things sure do change. I continue to root against Bitcoin and other cryptocurrencies, but this is mostly just a personal vendetta. I dislike watching anyone get rich in what I consider to be the easy way. Of course for many, that path was anything but easy. Investing in an incredibly volatile asset class is taxing on the soul.
I have come around to believing that Bitcoin has become a digital replacement for gold. A store of value that doesn’t come with the burden of being heavy to carry and expensive to house. Given that the market cap of gold is now over $10 trillion, I can understand why there is such a desire. The total crypto market cap hovers around $2 trillion, with Bitcoin comprising about half of that. Should Bitcoin supplant gold, we could see that gap close or Bitcoin could one day even eclipse gold . Will that happen? I have no idea, but it wouldn’t shock me. For that reason however, Bitcoin makes for an absolutely horrendous currency. Why would you ever want to spend a Bitcoin if you anticipate the price to rise in the future? This is a classic example of deflation. Deflation encourages hoarding, as each unit will become worth more in the future. Inflation however does the opposite, it encourages spending, which is what makes our economy go. This is the reason the fed targets a 2-3% annual inflation rate.
That all being said, I’ve never been a big proponent for investing in gold. Gold is pretty to look at, but comes with virtually no utility. It produces no cash flow and provides society with very little benefit. Call me old fashioned, but I like to invest in profitable cash flowing assets. Maybe I’m a man of a previous age, but I’m going to continue down the GARP path. I’m trying to temper down my biases and just applaud those who have made great fortunes in crypto or gold for that matter. They can make money in their way and I can make it in mine, the two need not be in competition.
I have partnered with the great group at 7 Investing and become an affiliate. They offer monthly stock recommendations and so far they have absolutely crushed the market. The team chooses their 7 best picks each and every month, one from each of their 7 lead advisors. Follow this link and use coupon code GARP to save $10 off your first month. I highly recommend their service!
Q3 Performance
As of 10/1/2021, my 10K portfolio climbed to $17,550.72. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 10/1/2021 the SPY had a price of $429.14. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021(1/1-9/30)
22.52
17.53
4.99
Since Inception(8/19/18)
75.50
59.08
16.42
Thankfully, my outperformance has continued. Q3 was particularly strong, as I was only beating the SPY by 1.76% at the midyear. This improved to a 4.99% delta by the end of September. I’m now beating the S&P index by 16.42% since inception. While no year had a huge outperformance, the gains have been steady. This has translated into more than satisfactory results .
As usual, this wouldn’t be complete without mentioning what has happened with the Nasdaq, that damned tough competitor. I might need to call up Tonya Harding to get some advice on taking out the competition. Beating the S&P is great, but if you lose out to the other big index are your returns all that great? I’d say no. In the same time frame I’ve been investing this account, I could have put my money in QQQ and done a hell of a lot better. Since inception, QQQ with dividends reinvested is up 103.96%, a whopping 28.46% above me. Just know if the tide ever turns and I start beating the Nasdaq, perhaps start building your ark because we know the world must be coming to an end.
We can see my cash value has dropped to $33.35 meaning I am now almost fully invested.
Transactions
NTDOY– Nintnedo is a company most of you probably know. As for myself, they have literally been a part of my entire life. My brother’s NES was located in my bedroom from the day I was born(we used to share a room.) I grew up playing their games and never really stopped. They are probably the best known and most storied video game company in the world. The created iconic IP like Super Mario, Zelda, Donkey Kong and Kirby amongst a host of so many others. Maybe most importantly, they own a significant percentage of The Pokemon Company. Pokemon is an entity with near limitless possibilities. 2019 brought us the movie Detective Pikachu, which I believe to be just the beginning of Pokemon’s world dominance in all entertainment facets. I think without a doubt, Nintendo owns the best collection of video game IP in the entire world.
This is not my first foray into video game industry investment, if you have been following me for some time, you will know I was previously an owner of EA. I didn’t like the trajectory I saw EA going, but I think the industry as a whole has never had a brighter future. According to USA Today, the global video game market is now bigger than the global movie and music industries put together and growth remains strong. Video games are so profitable and it makes sense when you think about it. A hit game can be produced one time for a relatively low fixed amount of money. Particularly when downloaded digitally, every new game sold has virtually no variable cost. If you can sell tens of millions of copies of a game at $50-60 a pop, you can’t help but make a ton of money. Animal Crossing: New Horizons for instance sold 31.8 million copies in 2020, netting Nintendo over $1 billion in sales on a single game. I can’t find how much it cost them to produce, but I promise you it is a whole lot less than it costs to produce a big budget superhero movie like Avengers: Endgame. Endgame cost Disney around $356 Million to produce(still very well worth it on Disney’s end.)
Nintendo’s stock has fallen a fair amount this past year due to fears over the console cycle. The switch has undoubtedly been a spectacular performer, but the question is how do you follow that up? In a previous cycle, the Wii sold incredibly, but the next generation Wii U was a disaster. It sold terribly and Nintendo struggled for an entire cycle. Could that happen again? Yes, but I think the strategy is slightly different today and the company has learned from previous mistakes. I believe Nintendo has taken a page out of the Apple playbook and has focused on continuous improvement and iteration, rather than replacement. They just released an OLED model, which is the exact same console, but with a better screen and longer battery life. Next year I expect them to release a Pro model, with all kinds of enhancements, but keeping the core setup and infrastructure in place. If it ain’t broke, don’t fix it. No need to reinvent the wheel, just keep making it better and faster. I didn’t touch on the numbers today and why I love Nintendo, but I hope to post a Twitter thread soon showing why they are such a great company.
SSNC
While everyone knows Nintendo, unless you are in the investment world, nobody knows SS&C. SS&C provides the backend technology platform to financial and healthcare firms. Customers such as wealth management firms and hedge funds will buy their software and subscribe on a yearly basis. Much like why I love Constellation Software, switching costs in technology providers are high. A firm’s entire staff is trained on that platform and the platform has all the proprietary data. Switching becomes difficult because you would need to transfer all that data over and it very well may not be compatible with the new system. You would also need to retrain the entire staff on a completely new setup. As long as you aren’t being gouged on price, it is a whole lot easier to just keep the status quo. A new software would need to be much better to make a switch worth it, not just a little. Should that technology really be better, SS&C is the gorilla in the room. They are more likely to buy you out than let you supplant them.
Much like all companies I choose to invest in, SS&C is a cash flow monster. In the trailing 12 months, SS&C did over $1.3 billion in FCF. Capital expenditures were only $36 million. In 2016, that FCF number was roughly $350 million, meaning the company has nearly quadrupled in the last five years. It also costs virtually nothing to run the business. No expensive property or machinery to invest in. This allows them to funnel all that cash into other areas such as acquisitions. Management is always key and SS&C has a great manager. CEO and Founder Bill Stone started the company in 1986 out of his basement. He has been running the company longer than I’ve been alive. He has made himself a fortune in the process, but been a diligent steward of shareholder capital. I do not expect to see growth anywhere near the level we’ve seen this past five years, but that’s not necessary to make this a great investment. The stock currently trades at under 15x FCF. A fantastic company trading at a reasonable price, sounds pretty GARPy to me.
DRIP
This quarter, I decided to turn on the dividend reinvestment plan. For those unaware, the plan automatically reinvests all dividends back into the giving company at current market prices. I previously believed it to be better to receive the cash and allocate it in the future as I best saw fit. Over time though, I noticed this to be a drag on my performance. I might hold onto cash too long and miss opportune entry points. By turning on the DRIP, it automates the process and removes my human foibles. Due to the small size of this account, the tiny purchases are a bit comical, but over time they will add up. For instance, on 9/16 I got a dividend of $6.64 from Home Depot. This was reinvested, so I am now the proud owner of an additional .02 shares of HD.
As always, I would like to thank you for taking the time to give this a read I know this was a long one! Feel free to leave some comments or questions. Best way to reach me is on Twitter, follow me @TheGarpInvestor.
Summer is here and I hope you all are making the most of it. Much of the United States is vaccinated and life finally feels like it is returning back to normal. We are not completely out of the pandemic woods yet, but we are certainly heading in the right direction. Markets continue to boom and the economy sure feels like it is heating up. The government stimulated the economy with trillions of dollars and all that money flowing around needs somewhere to go. Inflationary pressures are pushing prices up, seen particularly in areas such as lumber and other building materials.
While some of these price changes will be temporary, they are important to take note. How will they impact our companies and what price fluctuations are set to last into the future? I don’t necessarily have the answers to these questions, but it is our job as investors to sit around and ponder. I can postulate over various outcomes, but as usual I come to a similar conclusion; invest in great companies that can weather any economic environment. These companies are able to pass rising costs onto their customers while maintaining strong margins.
I have partnered with the great group at 7 Investing and become an affiliate. They offer monthly stock recommendations and so far they have absolutely crushed the market. For only $17 a month, you get access to their 7 best picks each and every month, one from each of their 7 lead advisors. Follow this link and use coupon code GARP to save $10 off your first month. I highly recommend their service!
Q2 Performance
As of 7/1/2021, my 10K portfolio climbed to $17,100.01. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 7/1/2021 the SPY had a price of $430.43. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021(1/1-6/30)
19.38
17.5
1.76
Since Inception(8/19/18)
71
59.05
11.95
2021 continues to deliver more than satisfactory returns, both for myself and the S&P 500. After a strong 2019 and 2020, I did not expect another 20% gain in the first half of the 2021, but I’m not going to complain. I have maintained my outperformance over the S&P, with the delta now growing to just under 12% since inception. This isn’t exceptional, but I’ll take it. I will never add a dime to this portfolio, but I am constantly adding new money to my personal portfolios and I hope you do the same. If you can just outperform the markets by a small amount, over the course of decades it can compound into vast fortunes. Time in the market is the most important variable.
As I have noted before, while good, my performance is not all that great thus far. While I have beaten the S&P, I have lost handily to the Nasdaq. I would have been better off just buying the QQQ’s and learning to play golf. Since I started, investing in the QQQ’s would have provided returns of 101.72% beating me by 30.72%. I’m hoping that over time I can close the gap, but the Nasdaq is a tough competitor. Time will tell.
As we can see, my cash allocation has risen to $1,354. This comes out to around an 8% cash position. This is higher than I generally like to carry, so do not be surprised if I make a transaction somewhat soon. I have my eye on a few companies and a buy could be coming up.
Transactions
MCO- At the end of April, I bought 2 shares of Moody’s. Moody’s is a company I had long followed, but had never owned any shares of. As a company Berkshire Hathaway invested heavily into, Moody’s is well known to the investment world. Berkshire owns roughly 13% of the company and Warren Buffett has often talked about how much he admires the company and why their economics are so strong.
Primarily, Moody’s is a rating agency. They rank the creditworthiness of companies that intend to issue bonds to the public market. Before a company can go to the market with a bond issuance, they must get a credit rating from one of the licensed major credit rating firms. Moody’s along with S&P Global and Fitch Ratings, form an oligopoly in the industry. The three of them providing over 90% of all credit ratings. Many have tried to enter the space and unseat the legacy businesses, but all have failed. The three companies are utterly entrenched within the financial world.
Moody’s has a long and storied history, as they were founded by John Moody over a century ago. The company has gone through many iterations with different ownership structures over the years, coming to be owned by Dun and Bradstreet for decades. In 2000 they were spun off back into their own independent company, if only I had been smart enough as a 9 year old to buy in. Since 2000, the company would have returned over 53 times the initial investment with dividends reinvested.
Financially, the company is a rockstar. They support gross margins over 70% and those margins follow down to the bottom line at over 35%. As is a trend with companies I like to invest in, the business takes almost no additional capital to run. In 2020, they cash flowed around 2 billion, while only needing to spend 103 million on capital expenditures. This leaves a lot of money with which to reward shareholders. In 2020 they paid out 420 million in dividends, bought back 556 million worth of shares, and made acquisitions that added up to just under 900 million. They followed suit this past quarter doing more of the same while adding cash to their strong balance sheet.
Speaking of this past quarter, they divulged a particularly strong report and I saw an opportunity to buy into such a well built growing business. In Q1, Moody’s saw revenue growth of 24% and adjusted EPS growth of 49%. Not too shabby for a company that’s been around since before WW1. So far I have been rewarded, my shares are up 13.65% after only a couple of months. Let’s hope they keep up the momentum!
EGHSF- At the end of June, I sold my shares of Enghouse Systems. I have long admired the company, but their most recent quarterly report made me question some of their decisions. Once you lose a little conviction, it is hard to remain invested in the company. I don’t do half measures, I’m either in or out.
Revenue this past quarter fell 16% as compared to the previous year. I call myself the GARP investor for a reason. I am looking for companies with growth, not slipping in the opposite direction. To be fair, Enghouse was running up against comps that were inflated due to how well their Vidyo business performed at the start of the pandemic. That business has since tailed off, returning back to PreCovid numbers. Part of my issue with the company is how reliant they are on Vidyo. In the world of Zoom, I’m just not convinced Vidyo provides a strong enough differentiating platform. They have invested a lot of money into Vidyo’s success and it might turn out to have all been a waste.
Enghouse has also publicly bemoaned their inability to get as many acquisitions done as they would have liked. They cite higher prices and a general slowdown in transaction speed due to the pandemic. I think these are valid claims, but when I compare them to another portfolio company of mine, Constellation Software, Enghouse comes out inferior. Constellation has had no trouble closing deals, I seemingly read about multiple acquisitions they close every single week.
Admittedly, I might look back at this as a foolish decision full of recency bias. They have been a strong performer in the past and their CEO Stephen Sadler is well respected for a reason. Given all the variables placed in front of me however, I think I have better opportunities to invest those dollars. I’ll be sure to revisit this decision in the future.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.
At long last, there finally appears to be a light at the end of the COVID tunnel. As the world works its way through the vaccination cycle, life is slowly returning back to normal. Businesses are reopening and at least here in Baltimore, the sun is starting to shine. I am excited to resume normal life, being able to travel and go as I please without fear of harming myself or others. I will look back on this period as an incredibly strange time in my life, but ultimately one with no real lasting impact. I have been lucky enough to get through this without personally knowing anyone who fell truly ill to the virus. Knock on wood this stays true through the end. Unfortunately for others, they have not been so lucky. Over 550,000 people have lost their lives to the virus in the US alone. That number will continue to creep up until we reach full herd immunity.
I do not take it lightly how lucky I am to be in that position. Along with most others, my investments have continued to do well over this period, but that is truly of secondary importance to being safe and healthy. If this has all taught me one lesson, it is to not take life for granted. Nothing in life is guaranteed, so make the most of it.
I have partnered with the great group at 7 Investing and become an affiliate. They offer monthly stock recommendations and so far they have absolutely crushed the market. For only $17 a month, you get access to their 7 best picks each and every month, one from each of their 7 lead advisors. Follow this link and use coupon code GARP to save $10 off your first month. I highly recommend their service!
Q1 Performance
As of 4/1/2021, my 10K portfolio climbed to 15,700.05. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 4/1/2021 the SPY had a price of $396.33. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
2021(1/1-3/31)
9.60
7.84
1.76
Since Inception(8/19/18)
57
45.96
11.04
My portfolio has started 2021 strong out of the gate. I outperformed the S&P and my returns continue to grow. With congress pumping an additional $1.9 trillion into the economy, I expect spending to remain high. I won’t opine on the impacts of inflation today, but it is certainly a topic to think long and hard about. Inflation will have a profound impact on the economy and therefore our investments in the years to come.
Since inception, I am beating the S&P by over 11%. As I noted last quarter, this is nice, but slightly misleading. The SPY is only one metric to follow, comparing with the Nasdaq leaves my performance looking much worse. Fortunately, I gained ground in Q1. At the new year, I was losing to the QQQ by 34.88%. That delta fell to 24.42% by the end of Q1. I’m still getting trounced, but I’m trending in the right direction!
Here we can see my allocations and that I hold $699.21 in cash, meaning cash is a 4.45% position. I like to have a little firepower left in the tank for opportunities, but I remain almost fully invested.
Transactions
HD– I made the error of never buying shares of Home Depot previously, so this quarter I decided to remedy that mistake. They are a company we all know and I would hazard a guess and say shopped at. Whether you were dragged there as a kid by your parents or are someone who enjoys home improvement projects, Home Depot has a way of drawing people in and getting them to spend their money. As someone who has worked in real estate for the better part of the last decade, I can personally attest that we have spent a lot of money at their stores.
I can’t count the number of times I’ve walked through their aisles, impressed with the level of inventory they keep on hand at all times. Often in construction projects, you need an unexpected part that very day. If you had to wait even two days for the item to be shipped, you could lose out on thousands of dollars of productivity. Therefore it is worth paying a few extra dollars to get what you need immediately. Orders are often quite bulky as well. The price to ship such orders often outweigh the convenience of not leaving the house. Home Depot also provides high quality customer service, employing a knowledgeable staff who can help you answer questions and locate items within the store.
Every quarter I marveled at the results the company reported, but could never justify the price based on valuation. This was a mistake, as Home Depot proceeded to knock it out of the park quarter after quarter and the stock followed suit. I finally saw the stock take a dip after their most recent quarterly earnings release and I pounced at the opportunity. I couldn’t let this slip through my fingers once again.
As for some numbers, let’s take a quick dive in. Home depot is a behemoth, with a market cap now well over $300B. In 2020 they did over $132B in revenue and $12.8B in bottom line profit. They produce gross margins north of 33% and report massive FCF, roughly $13B after subtracting $2.5B in CapEx. They use that FCF to pay out a strong dividend, around 2.5% when I bought in, buy back shares, share count has fallen 11% in the past five years, and every now and then make an acquisition like they did this past year of HD Supply. They have a strong balance sheet with only $67B in total liabilities. They are simply a company you can hold long term without much worry. In bad economic times they will weather the storm and in good times they will thrive.
This past quarter, revenue was up 25% and EPS up over 16%. The record level of home buying has really helped the business, but I don’t expect a let up anytime soon. This investment does not rely on any brilliant insight on my part. Home Depot is a world class operator with economic tailwinds giving a boost. The market presented a rare opportunity to buy at a reasonable price and I took it. I purchased at around 22x FCF which I think is more than fair. The stock has already increased by 25% since my purchase.
TOITF– Next up we have an interesting situation with Topicus. Constellation Software performed a spinoff this past quarter, yielding me with three shares of Topicus. I trust Mark Leonard of Constellation and his decision making, so if he thought it was in the best interest of Constellation shareholders to make this happen that’s good enough for me.
Much like Constellation, the company focuses on VMS business rollups. As the company takes very little capital to operate, they are left with lots of capital with which to deploy into acquisitions. Topicus will focus on the much more fragmented European markets.
I’ll readily admit I am not exactly sure about all of the structural nuances of this spinoff. As this is now a tiny portion of the portfolio, I’ll keep tabs on the company and learn more as times go on. If I like what I see, perhaps I’ll buy more shares. At this present moment I don’t have anything particularly insightful to say, but let’s give this a bit of time.
EA- My ownership of shares in Electronic Arts was short lived. I didn’t particularly like what I saw out of their last quarter and management didn’t give me great hopes for the future. One red flag to me was that another company announced they were producing games in the Star Wars universe. EA lost their exclusive rights, which makes me worry about their competitive position. Will they lose other exclusive rights to long term money making franchises?
They also announced the acquisition of GLU Mobile for $2.4B. This is a lot of money to pay for a company that is hardly earning any money. This could very well pay off, given EA’s game expertise and ability to squeeze profits out of IP, I’m just not sure. Mobile is obviously a big part of the gaming universe and EA desperately wanted to get in on that slice of that pie. I’m skeptical that this acquisition was the right move given none of GLU’s games are truly must have IP. Ultimately, I felt more comfortable holding shares of HD over EA, so I traded out of EA and into HD. So far this has been a very profitable trade, but time will tell if it was the right decision.
As always, I would like to thank you for taking the time to give this a read! Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.
Happy new year everyone! I hope you are staying healthy and able to find some enjoyment during these strange times. How do you even begin to write up a recap for a year such as 2020? If you had told me this time last year that a global pandemic would bring our country to its knees, leave 375,000+ dead and force businesses across the country to close, I would have guessed that the market had fallen precipitously. Little did I know, other than a blip in March, none of this mattered and the market climbed to all time highs.
The economy has been buoyed by the combination of extremely low interest rates and a seemingly limitless level of money printing. Neither of these appear to be changing anytime soon, so the rally could carry on. I however continue to remain cautious. The market cannot go straight up without reprieve. At some point, the bill comes due. When that will be, I have no idea, but I think it is important to be prepared for such an eventuality. I remain steadfast in my decision to hold companies of the highest quality. Their businesses will perform in good economic conditions and in bad. That is my margin of safety.
2020 Performance
As of 1/1/2021, my 10K portfolio stood at $14,324.59. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 1/1/2021 the SPY had a price of $373.88. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculation.
10K Return(1)
SPY Return(2)
Difference(1-2)
2018(8/19-12/31)
(13.95)
(13.71)
(.24)
2019
37.33
32.6
4.73
2020
21.22
17.59
3.63
Since Inception(8/19/18)
43.25
37.25
6.00
As we can see, my investments have continued to beat the SPY. I am up 3.63% on the index in 2020 and 6% since inception. This is a modest outperformance, but nothing exceptional. If I can outperform by a couple of percentage points annually, this outperformance will compound to a large disparity over the course of many years. Time is ultimately your greatest friend. Be that as it may, all is not as great as it appears.
While my investment record looks more than satisfactory, this is really just due to the benchmark I have chosen to compare myself against. Had I instead chosen the Nasdaq as my benchmark, my results would look rather awful. Over the same time period, investing in the QQQ with dividends reinvested would have provided a 78.13% return. This beats me by a whopping 34.88%. Sure much of this is due to valuations on some tech companies becoming stretched to levels not seen since the dot com bubble, but it is still disheartening to lose.
I could have simply put my money into the Nasdaq, done absolutely nothing and obtained returns that far exceed my own. It is frustrating to see, but this is the sandbox we play in. You can work diligently, remain disciplined and still lose. Investing is hard. Sometimes your approach will get a tailwind, driving you to superior results. At other times it will feel as if you are pushing a boulder up a hill. The only solution is to just keep going. Hone your strategy, keep putting in the work and fall asleep each night smarter than when you woke up.
My stocks are now worth $13,947.72 with an additional $376.87 in cash. Let’s look at what changes I made.
Buys
EA– Electronic Arts is a company I have long followed, but only did a deep dive into in recent months. Gaming as a sector is going through a renaissance during the pandemic. People are spending more time than ever in their homes and video games are a great way to kill time. Video games might seem like an expensive hobby at first glance as you are really just buying a bunch of digital code, but actually video games can provide some great bang for your buck. A new Playstation or XBOX game will typically cost $60. Some games deliver a 10 hour experience, which boils down to $6 per hour, but I and many others have been known to sink hundreds if not thousands of hours into certain games. For those games, you are paying only pennies on a per hour basis. Few if any forms of entertainment can yield that kind of value. A good deal for the buyer and an even better deal for those making and selling the games.
EA for instance can expect to cash flow $1.5 Billion+ each and ever year. They sit on over $6 Billion in cash with trivial levels of debt. They are able to do so by owning some incredible IP that more or less generates annual recurring income. Franchises like FIFA, Madden and NHL are virtually assured to sell hundreds of thousands if not millions of copies a year. As a personal anecdote, I have bought the new FIFA each and every year for roughly the last decade. I am predictable in this action and there are millions just like me. This is great for EA, as it costs them little to reproduce. EA updates the rosters, makes some slight game play and graphic modifications and ships the new game to coincide with the new soccer season. The company has locked in long term contracts with sports leagues to be the exclusive provider of simulation games, such as the NFL whose contract was recently extended through the end of 2026. With these long term contracts in hand, cash flows are predictable and provide the company with strong margins. Gross margins typically fall in the 75% range, with net margins over 25% even given the large amount spent on R&D.
Additionally, EA has locked down the contract to produce non mobile games within the Star Wars universe. Jedi: Fallen Order was a top seller and Star Wars: Squadrons was a strong follow up. With the success of The Mandalorian on Disney+, you can bet more games are to follow. As you would expect, video gaming is a capital light industry. No need to buy all new equipment or real estate. Therefore the company is able to generate a lot of cash that management is then able to allocate as they see fit. Thus far, acquisitions and share buybacks are the primary uses of this cash. Most recently, EA announced the purchase of Codemasters, the developers behind racing games such as Dirt and Formula One, for $1.2 Billion. I expect more acquisitions in the years to come.
Do not be surprised if another name within the gaming world ends up in my portfolio. The industry is extremely profitable, predictable and has a long runway for growth. I own shares of Nintendo in my personal portfolio outside of this account and if I can find some room I might add shares in this one.
ETSY– I also decided to purchase shares of ETSY. I’ve long followed the company and been impressed, but stayed away due to fears over their high valuation. After seeing their most recent quarterly report, I decided the company was too strong to ignore. Etsy sells custom made items, great for gift giving and anything you might want personalized. The company has been bolstered by the pandemic as ecommerce sales have skyrocketed. Mask sales in particular have been a bright spot, constituting 11% of sales. Even if those sales were to fall to 0, the company would still show impressive growth.
Revenue this past quarter was up 128% YoY and adjusted EBITDA was up 259.9%. Yes, you read that correctly. These growth numbers are mind boggling. More buyers and more sellers enter the marketplace every quarter, creating a flywheel effect. Of course they cannot keep up this pace forever, but growth is hastening, not slowing down. The market cap sat at around $20 billion when I bought in. They may never get to the size of Amazon, but they don’t need to in order to make a fantastic investment. The company is already profitable and the rate of growth is on an upward trajectory.
When I saw the stock tumble after reporting a fantastic quarter, I knew it was time to pounce. Turns out, I made a timely purchase, as my Etsy shares are up 43.5% after less than two months of ownership. Can’t say I expected that, but I’ll take it.
Sells
CBOE- While I still really like the company, I had to make room for Etsy. I only held CBOE for a short time, but something had to go. As my only allegiance is to making the best returns, no company is sacred. Every investment is open to turnover should it make economic sense to do so. I lost a few percentage points on the trade, but that was more than made up for with Etsy’s gain. So far, a great move.
MKL- Similar to my sale of CBOE, I sold shares of Markel to open up room for EA. Markel will always be a world class company, run by top notch management. They will steward shareholder capital intelligently and safely. The problem is currently with the insurance business as a whole. Given the low interest rate environment, insurance is a tough business to be in. By law, they are forced to hold a large percentage of capital in bonds that can guarantee the payments on their claims. If much of your capital is tied up in low earning fixed income bonds, it is hard to earn a high return on invested capital. It is no fault of the company and one day the tide will turn, but interest rates don’t look to be rising anytime soon.
INTC- Here is where I have to own up to my misjudgement. It is never easy to admit a mistake, but it is doubly hard when you post your positions publicly and open yourself up to ridicule. I deserve criticism for this and I accept it.
I bought shares of Intel with great hopes. Upon release of their most recent quarterly report, those hopes went right out the window. Intel presented a pretty poor quarter and outlook for the future was grim. I immediately realized I was out of my depth and needed to make a change. In my Q3 update, I wrote “Intel is still an incredible business that spins off loads of cash that can then be reinvested back into the business.” While this mostly remains true, I overestimated current operations. I thought I could predict how the company would perform, turns out I could not. Later on I added “admittedly, I will never be a semicondcutor expert, far from it.” If you ever catch yourself writing something that closely resembles those words, turn back immediately. As Peter Lynch would tell you, stick to what you know.
Much like IBM, Intel appears to be a technology hardware company that is stuck in the past. Given their incredible resources, they have time to right the ship. It wouldn’t surprise me to see them regain their superiority, but as it stands they are not performing up to the standards of their past. The saving grace in all of this is that I recognized my mistake quickly. I took action when I saw the economics not playing out as I expected. If you are wrong about a stock, it is better to admit the error and move on than to dig in your heels and double down. I lost 5.68% on Intel, hardly a disaster.
As always, I would like to thank you for taking the time to give this a read! I know this was a long one, but I guess I had a lot to say. Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.
The GARP Investor 