One Year Down

I have now officially been running this blog for a full year now. I’ve had my ups and my downs, but I think I’ve grown considerably as an investor. I truly think I am better than when I started and I am now even more committed to GARP investing. Putting my thoughts out in public has forced me to focus on my core beliefs and has held me accountable. I expect my growth in year 2 to be even greater than in year 1. Just like wealth, knowledge is always compounding.

Year One performance

I started this journey exactly one year ago. I put $10,000.00 of my own money into my 10K Portfolio. I put that money into companies I believed in and let them do the work for me. Thankfully, I didn’t fall flat on my face and I’ve been able to make some money. My portfolio now stands at $10,843.11. As I often state, making a positive return isn’t all that difficult. You can buy government bonds and make a virtually risk free return, it just won’t be very good. I choose to compare my portfolio to the S&P 500. If you can’t outperform the general American index in the long run, you don’t have much business in picking individual stocks. When I started on 8/19/18, the SPY stood at $285.06. As of 8/19/19 the SPY closed at $292.33.

Return(1)          SPY Return(2)         Difference(1-2)

Portfolio value $10,843.11:             8.43                      2.55                         5.88

Simply looking at the SPY ticker isn’t quite fair to the index. My portfolio value accounts for all dividends I have collected over the last year. The SPY does not automatically reinvest dividends. They currently give out a yield of 1.86%. Without knowing the exact days of distribution and all that jazz, I think it is easiest if I just add in 1.86% to the SPY return in order to give a more accurate picture. Therefore a more realistic result would be as follows:

Return(1)          SPY Return(2)         Difference(1-2)

Portfolio value $10,843.11:             8.43                      4.41                         4.02

Overall, I am pretty satisfied with my results in year one. I outperformed the SPY by a hair over 4%. Take this with a grain of salt, one year is not nearly enough time to get an accurate picture. It will likely take at least 3 years to really tell whether this out performance is for real. That being said, I certainly prefer to have this head start.

Mistakes Made

I have learned a number of lessons since starting this blog. Some were completely new to me, while other things I knew but needed to be reinforced. My first punch to the gut came shortly after beginning. I rushed into some companies, rather than waiting for an appropriate entry price. Soon after I bought into my first companies, the market took a precipitous fall. Had I just bought in a couple of months later, my returns would likely be higher by a good 10%. The biggest lesson I learned was not to fight against a large macroeconomic situation. I grossly underestimated both how much effect the trade war could impact my companies and how long such a situation could last. I thought we were looking at a blip on the radar and my companies would return to form in just a couple of months. I was wrong. This trade war has lasted far longer than I had anticipated and has greatly lowered the earning power of some of my companies. I don’t think the end is in sight and for that reason I have chosen to make some changes to my portfolio. I still believe in these companies, in the long run I would bet that all will end up fine. However, I must stick to my principles as a GARP investor and therefore I choose to invest in the path of growth, not turnaround situations.

Portfolio Changes

Within the last month, I have cut out my positions in HII, IPGP, and LEA. As I stated, all are fine companies. They simply haven’t been able to whether this trade war without suffering. Each has seen their earning power eroded greatly and the stocks have followed suit. Unfortunately, I lost money on all three of these investments. Thankfully, some of my winners have more than made up for it. In fact, my investment into FND alone has made up all losses in these three companies. With the money from selling, I bought one additional share of FB for $180.17. I now sit on a cash balance of $1,688.44. I have a number of companies on my watch list that I am following and I will be waiting for a good time to enter into two or three new positions. I’ll be sure to let you know when that happens.

As always, thank you for reading. I have appreciated your support over the last year and look forward to seeing where this journey takes me. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

 

 

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The Double Dip!

I’ve gone ahead and hitched my wagon to Mark Zuckerberg. I bought 5 shares of FB on Friday for $878.90 and another share on Tuesday for $168.94 after seeing the company fall another 3.5% for a grand total of $1,047.84. I broke one of my original rules, never go above 10% in one company. Rules however are meant to be broken, I saw an opportunity and jumped on it. Besides I only stuck a toe over that 10% line.

I also purchased 5 shares of IPGP, the premier laser company in the world. Shares were down over 4% today, so I used this as a buying opportunity. I got in at $161.74 a piece for a total of $808.70. I continue to love the company and consider this to just be a blip on the radar.

For those keeping track, I now own 4 stocks and still have $6,723 out of my original 10K with which to buy more!

Why Facebook?

Facebook is one of the most phenomenal companies of my investing lifetime. Started in 2004, they are already one of the largest companies in the world. They IPO’d in 2012 at a market cap of 104 Billion. They now sit at 412 Billion meaning they have come close to quadrupling in that time period. Will they quadruple again over the next 6 years? Most likely not, but I wouldn’t completely rule it out. I do however think they have a great chance of outperforming the S&P 500 over the next 5 to 10 years by a considerable margin.

Commonly lumped in to a group called FANG stocks, I actually think they share a lot more in common with Google and Microsoft than they do with Netflix and Amazon. I find Amazon and Netflix to be almost impossible to value. They are great companies that provide incredible products to their consumers. That being said, Netflix continues to be cash flow negative and Amazon is in a world of their own in terms of valuation. I’d rather just stay away. Facebook, Google and Microsoft can all be valued by traditional value investing principles. They create meaningful profits and turn those profits into incredible amounts of free cash flow.

Let’s look at what makes Facebook so compelling. Over the last 5 years, sales have skyrocketed from 7.8 billion to 40.6 billion. This gives us a CAGR of 38.87%. EPS grew from .6 to 6.16 over the same time period, giving us a CAGR of 58.87%. It doesn’t take a rocket scientist to tell this is phenomenal. FB now sits at a P/E of 23.65, a laughably low number considering how fast it has grown in the past. They are sitting on 41 Billion dollars of cash and short term investments without having a single dollar of debt. That is simply incredible.

The past however does not automatically promise future performance. We have to examine what Facebook’s future holds. After their latest quarterly release, the stock plummeted from fears of reduction in future growth. I find these fears unfounded. Of course FB has to slow down. If they continued to compound above 50%, they would be bigger than the entire S&P in a short amount of time.

In the short term, there will be pain. Just today, representatives of the company are testifying before congress about what they can do to stop meddling in the midterm elections. This once again represents short term thinking. Facebook is a platform that is singlehandedly strong enough to affect a US election. That power is only growing stronger. They have daily users that number almost 1.5 billion and monthly users above 2.2 billion. They have barely even started monetizing the platform. Just the talk that FB could get into dating caused dating juggernaut Match Group’s stock to fall 20% in a day. It is a platform of strength never before seen in US history.

Instagram

I have yet to even mention Instagram, one of the most popular social media platforms and one of Facebook’s chief “competitors.” You see, Facebook bought Instagram for 1 Billion in 2012, proving they have their eye on the ball in the acquisition space. Some estimate Instagram alone could be worth upwards of 100 billion, 1/4 FB‘s total market cap. Yesterday rumors abounded that Instagram is developing a new shopping app. This platform is still in its infancy, just figuring out ways to monetize for shareholders.

The truth is we don’t know what the future holds for this company. We can merely look at their past success and determine whether we think the future is bright. In my opinion Facebook will be a trillion dollar company in the not too distant future and who knows how large it could grow. Stop thinking in the short term, but determine whether you want to own a company for the next decade.

Lasers

IPGP holds a particularly soft spot in my heart. You see for a while, it was by far my best investment ever. Within a year of buying it in my personal account, I had gained over 200% more than tripling my initial investment. Of course, nothing is ever as good as it seems. While the business was going gangbusters, the Trump administration laid out tariffs that have caused Chinese companies(IPGP‘s largest customers) to reconsider how much they will spend on capital expenditures. You see, lasers powered technology are large up front capital requirements and given a trade war, companies don’t want to commit to large spending given the uncertainty. That 200% investment within one year has fallen to a 100% gain within two. Still not too shabby!

I’m willing to sustain some short term pressure to buy into a fantastic company with long term advantages. IPGP sells lasers that enable manufacturers to cut their costs. A business that allows their consumers to cut their own costs has a recipe for success. They are simply selling a better technology. Metal cutting and abrasion systems wear out, whereas lasers are more precise, cost less and last longer. This has translated into robust sales growth, which has in turn led to much greater profits.

Given how long I talked about FB, I didn’t want to get too far into the weeds with IPGP. Just know they are a great company with a long track record. They have a squeaky clean balance sheet and generate loads of cash. Who knows how long this trade war will last, but when its over, I expect IPGP to burst out of the gate at a sprint. I’m willing to hold on to this gem for the very long term.

As always, thanks for reading and subscribe!