2023

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.

2022 Q1 Update

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 Q3 Update

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.

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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.

Q3 Update

2020 has been a remarkably odd time to be an investor. Granted, it has been an incredibly strange time to be alive in general. It is now October and Covid continues to rage on, a seemingly never ending storm without respite. Our President just tested positive for the virus and has entered the hospital. He has the best medical care and will therefore almost assuredly be fine, but you never know. The word has been used over and over, but that is because it rings true, these are unprecedented times. I think we would all like to just get this chapter over and move on with our lives. With an election right around the corner however, I expect more volatility to be on the horizon. I’m not one to make market forecasts, but I would not be surprised to see some pretty big swings in the near future.

Q3 Performance

As of 10/1/2020, my 10K portfolio stood at $13,047.01. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 10/1/2020 the SPY had a price of $334.89. In reality, the SPY has done even better due to dividends given out, so I have accounted for dividend reinvestment in the return calculations.

	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(1/1-9/30)	10.41	5.32	5.09
Since Inception(8/19/18)	30.47	21.85	8.62

As we can see, I have done reasonably well in both 2020 and overall. I am by no means crushing the index, but a steady outperformance compounded over years can grow into a massive delta. If I can keep beating the S&P by 4-5% a year, I will be thrilled. So far, my GARP strategy has worked. I hope my portfolio keeps up the momentum, but don’t be surprised to see some reversion to the mean.

My stocks are now worth $12,778.29 and I am sitting on an additional $268.72 of cash, meaning I am almost fully invested. The market does appear to be frothy in my opinion, but in general I like to have my money invested rather than sitting on the sidelines. Should the market fall, I expect my companies to make intelligent capital allocation decisions, coming in the form of share buybacks or acquisitions of target companies at lower prices.

BUYS

INTC– I saw someone on Twitter(I would give credit, but I don’t remember who) mention that Intel shares looked attractive given current prices. I decided to take a look and based on numbers alone I liked what I saw. Problem was, the semiconductor industry was well outside of my circle of competence. I then went on to do a mini deep dive and educate myself. Admittedly, I will never be a semiconductor expert, far from it. But I think I have learned enough to be able to assess the competitive dynamics, time will tell if I am right or wrong.

So why the Intel discount, what’s the rub? Intel has been perceived to be in a losing CPU race against smaller faster competitors, AMD and Nvidia. They have the advantage of being fabless, in other words they do not manufacture chips themselves. Rather they design the chips and outsource manufacturing, mostly to TSMC, the Taiwanese semiconductor giant. TSMC brings fantastic technology to the table, enabling the smaller competitors to leapfrog over Intel in ultra high performance technology. This perception very well may be correct, but I feel it fails to paint the full picture. Intel is now so diversified that they are no longer completely reliant on the microprocessor. The second quarter of 2020 marked the first time that the data center portion of the business overtook the CPU portion, accounting for 52% of overall revenue. Data centric revenue was up 34% YoY. Certainly doesn’t look like a company on the brink of death to me.

Intel likely did take their eye off the ball and let competitors catch up in areas they previously held complete dominance. While Intel used to be a microprocessor company, they now are involved in so many different lines of business. Their focus has shifted to data, which they estimate to have a total TAM of $230 billion by 2030 according to this past quarter’s earnings transcript. This is significantly higher than the PC market TAM and Intel has therefore made it into the priority.

At the end of the day, Intel is still an incredible business that spins off loads of cash that can then be reinvested back into the business. In 2019, they spent 16.2B on CapEx and an additional 13.3B on R&D. That is 29.9B being spent on innovation and improvement, almost 3x what Nvidia and 5x what AMD did in total 2019 revenue. Intel trades at around 13x expected 2020 FCF, a deep discount to the rest of the market. I expect the company to continue to make use of their vast resources to invest in the future. Simultaneously, they will continue to pay out increasing dividends, make accretive acquisitions and opportunistically buyback shares.

CBOE- This one is a little less controversial and much less discussed on the Twitter-sphere. CBOE, which started as the Chicago Board Options Exchange but now goes by CBOE Global Markets, operates as a market maker, creating a marketplace for options and futures as well as a global stock exchange. It is a brilliant business model, they take none of the risk, but rather create the rails for others to work on. They exhibit classic GARP characteristics that I like to see, high return on invested capital and a capital light business. The business requires very little reinvestment, which allows the company to use their cash flow elsewhere. In 2019, they generated operating cash flow of $632 million. CapEx for the year was a mere $35 million. This left just under $600 million to be used in value creating activities. For instance in 2017, CBOE made a $3.2 billion acquisition of BATS Global Markets that has really bolstered the company. Since then, top line, bottom line and FCF have all grown considerably. I expect more large acquisitions in the future.

There is actually a whole group of companies working within this greater marketplace industry that exhibit superior economics. Just some examples are CME, Intercontinental Exchange and Market Axess. I happen to like CBOE the most at the moment given current prices, but they are all great companies. Should an opportunity come available, I could see myself owning one or more of these companies in the future. I’m actually surprised I have never seen Warren Buffett play in this sandbox. Seems to be right up his alley, but he has his reasons.

As always, I would like to thank you for taking the time out of your day to give this a read! Feel free to leave some comments or questions. Follow me on Twitter @TheGarpInvestor.

Q2 Update

Count me as one who did not expect the market to come roaring back in the second quarter. I cannot quite claim to understand why the market has been so exuberant, but euphoria reigns supreme. Coronavirus case numbers are surging, major companies are being forced into bankruptcy and yet, the stock market continues to rise.

I see economic struggle everyday within my family business. We are commercial real estate landlords and many of our tenants are facing tough times. Some have been closed for months, unable to pay their rent. Others will probably have to shut down their businesses never to return. This is our new reality.

I truly hope things will recover, but we should all be preparing ourselves for any eventuality. You don’t have to think too hard to come up with some truly dire situations that could arise. I’ll spare you all the doom and gloom, but I have envisioned quite a few. Should certain events happen, calamity could ripple through the economy and really shock the financial world. Let’s pray I’m just being overly dramatic and none of these events come to pass.

Q2 Performance

As of 7/1/2020, my 10K portfolio stood at $12,478.91. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 7/1/2020 the SPY had a price of $308.36. The SPY has also given out $9.78 in dividends since I started tracking, so I have accounted for that as well.

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(1/1-6/30) 5.59 (3.03) 8.62

Since Inception(8/19/18) 24.79 11.6 13.19

As we can see, I have actually had a very strong 2020. In particular, most of the outperformance came within the second quarter. At the end of Q1, I was only beating SPY by 2.01% on the year. That delta has since grown to 8.62%. Given everything going on in the world, I’ll take it.

Screenshot 2020-07-02 at 11.22.27 AM

We can see my stocks are now worth $10,343.63 and I am sitting on an additional $2,135.28 of cash. This means the cash portion of the account now comprises 17.11% of the portfolio. I was uncharacteristically busy with my transactions this quarter, the state of Covid-19 and the corresponding effect it has on the economy really has me spooked. I therefore unloaded a few of my holdings. For the time being that money will just be waiting on the sidelines, I am not seeing many buying opportunities out there.

Buys

EGHSF– I purchased shares of Enghouse Systems in early June after the company reported their latest quarterly earnings. Enghouse is a vertical market software company not much unlike my largest holding, Constellation software. I purchased 30 shares for a total of $1,459. Enghouse has just come off an incredible quarter. Year over year, they increased revenue by 50%, net income by 63.8% and cash flows from operation by 72.5%. I don’t think I even need to say much more than that.

Sells

HEI and LUV– I decided to liquidate all of my holdings in any company competing in the travel industry. They very well may recover and I might end up missing out on some gains, but I would rather take the risk off the table. These are times that we really have never seen before. It is incredibly hard to predict how this will all play out. Heico and Southwest are both strong reputable companies. They will likely make it through to the other side, but I’d rather put my money in companies that don’t have to struggle through this crisis. Most of my other companies are operating from positions of strength.

FND and ULTA– I have also decided to sell out of my two big box retail companies. Floor and Decor saw a surge in the stock price and my confidence in the business began to wane. I don’t know where the economy will go, but I’m not sure a company looking to open up hundreds of more big box stores is where I want my money. Now that I’ve sold, I’m sure the price will double. I’ll live with those consequences. Coronavirus has really impacted Ulta’s business. As you can imagine, when no one is leaving the house, the need for beauty products has fallen to near zero. I expect their business to struggle for as long as the virus lasts. For that reason, I think my money can be put in better places.

As always, thank you all for reading! You can follow me on Twitter @TheGarpInvestor.

Updating The Watchlist

I’m not sure about the rest of you, but I have found myself with an abundance of time on my hands. I have spent the last couple of months quarantined to the house and much of my normal business work has been put on hold. I am not married and don’t have any kids, so let’s just say I have nothing but time. Watching Netflix and playing video games can only get me so far, so I figured I should at least be somewhat productive.

I have dedicated at least an hour or two every day to investment research. Some days I have done far more than that, while others have gone completely wasted. What I can I say? I am human. Whether it is running screens, glancing through company financial statements, or reading 10Ks and quarterly transcripts, I have found the last couple of months to be the perfect time to learn.

Now is also an opportune time to update my company watchlist. I’m not sure what the next few months or even years will hold, but I am trying to get myself ready. Recently many of us tuned in to watch the Berkshire Hathaway annual meeting. Berkshire is now sitting on a record level of cash, over $130 billion. Buffett remarked that he wants to be prepared for any financial situation. Things could return to normal in a matter of weeks, but the Covid-19 numbers could spike and businesses could be forced to close for months further. If that should happen, economic calamity will ensue and I would assume that markets will drop into free fall. I want to have a list of companies ready to go for such a buying opportunity. I want to emphasize that this is not a prediction, but rather I am doing my best boy scout impersonation by being prepared.

The first companies on a watch list should always be ones you already own. These are companies you have studied and had the conviction to buy. Many variables have likely changed since the initial purchase, but that’s where research should begin. Check one by one and see how the businesses have performed. Have revenues and profits risen or fallen in recent quarters? Has their balance sheet held up, or have they taken on additional debt? Think into the future and consider where the obstacles might lie and whether they are still in a position to grow. Finally, when you have a good grasp on the business, look at the price. If the business scenario looks bright and the stock price is below your purchase price, that business is likely a good candidate for buying more. Conversely, if business conditions appear dour and the stock price has risen, you have a good indicator that it may be time to sell.

Aside from companies I have already invested in, I have compiled a short list of companies I am watching closely:

Comcast (CMCSA)- Look we all know them and if you are anything like me, you probably hate them. They may have terrible customer service, but that doesn’t change the fact that they are a phenomenal business. The cord cutting revolution was probably overblown, but it has been interesting to follow. As less people order cable, Comcast has simply raised prices on internet services. They are essentially an unregulated monopoly on a vital product. They are a cash machine, churning out a whopping 13 or 14 billion dollars of free cash in 2019 depending on how exactly how you measure it.

After a rather steep decline in the stock’s price, my interest has been piqued. Let’s be conservative and use the lower number 13. Comcast now trades at 12.5x 2019 FCF, a very reasonable number. Much like Disney, we know the business will be adversely affected by the virus, they have been forced to close all Universal theme parks, a big money maker for the company, that comes along with high fixed costs. My real hesitancy however is the amount of debt the company holds on their balance sheet. Over 100 billion in debt and 180 billion in total liabilities. I need to dig in more before I would feel comfortable making an investment.

Copart (CPRT)- I just finished reading Junk to Gold: From Salvage to the World’s Largest Online Auto Auction, the story of Willis Johnson, founder of Copart. I encourage you all to pick up a copy, I thought it was a great short read. The book depicted his rise from humble beginnings to Copart’s domination of the auto salvage business. What started as just a tiny scrap yard has turned into the world’s largest auto auction business. It is a classic rags to riches story. Johnson is a tremendous entrepreneur and has a penchant for finding opportunities to make money in any situation.

Today, the company sits in a great position. Their financials look better every single year. In my opinion they are probably a bit expensive at current prices, but Copart will remain on my radar. They have a solid balance sheet and produce a fair amount of free cash. They reinvest that cash back into the business, which has allowed them to grow immensely.

Intel (INTC)- Intel is probably the company I am most interested at the current moment. It is a company you have probably all heard of, but may not actually know what they do. I understood what they did at a cursory level, but never did a deep dive until this quarantine began. I thought the semiconductor industry would be too difficult to understand, so I just skipped over it entirely. After taking a brief look through their financials however, I couldn’t push it off any longer.

Intel is the world’s largest designer and manufacturer of semiconductor chips used in virtually all computing equipment. Though they are known for their microprocessors, they design chips for a range of products from mobile phones to the self driving car. I admittedly will never understand the technical minutia of the industry, but I think I can at least understand the competitive dynamics and why Intel has been so successful.

Intel is the gorilla in the fight. With a market cap of around 260 billion and sales of over 70 billion in 2019, Intel is the major player in the US. To put that in context, their main American competitors, AMD and NVIDIA had sales of 6.7 billion and 10.9 billion respectively. In 2019 alone, Intel spent 13.3 billion on R&D and another 16.2 billion on CapEx. That means they spent just under 30 billion bettering their competitive advantage, all while spitting out over 15 billion in free cash flow. AMD and NVDA have found footholds in successful niches, but catching up to Intel in the overall market is incredibly tough. Intel just has so many more resources at their disposal. The company actually faces much tougher competition from companies outside the US. Samsung and TSMC are great companies in their own rights, but do somewhat different things. I’m not going to go too deep into this today, but know I am watching Intel very closely for now.

Medifast (MED)- As someone who was born and raised in Baltimore, I have a sweet spot for any local company. Medifast is one of the few public companies still located within city borders, so I like to check in on them. With a renewed focus, Medifast has grown quickly these last few years. Revenue has grown over 2.5x over the last 5 years. Their financials look very strong, the company holds zero dollars of debt on their balance sheet. Any company able to grow quickly without having to take on a single dollar of debt is impressive in my book.

I am a little cautious about investing in this company however. I wouldn’t go as far as calling Medifast a pyramid scheme, but at first glance I would say they have pyramid like tendencies. Most of Medifast’s growth has come from the Optavia brand. Optavia is a multi level marketing company selling weight loss products. Their model works through having members sign up as coaches, who then make money selling products to other members. Perhaps this is all just a clever marketing scheme, but it sounds a bit fishy to me. Unless I can understand what differentiates Optavia from a pyramid scheme, I’ll be staying away.

As always, thank you all for taking the time to read! I hope you take some time and update your watchlist. If you find any companies I might be interested in, please send them my way. You can follow me on Twitter @TheGarpInvestor.

Q1 Update

Well that was a doozy! We just finished the quarter in what has easily been the scariest investing environment I have ever faced. In fact, it has probably been the most frightening time for any investor, young or old. Unfortunately, the situation we all face isn’t close to being over. I don’t know how long this will last, nor do I know how devastating the consequences will be. The best we can do is hold strong and remain ever vigilant waiting ready for opportunities.

As for my own investing performance… it has been rather putrid. I have scolded myself many times in the last few weeks for not keeping more cash on the sidelines. This was a rookie mistake and I own up to it. I just personally hate sitting on cash, I enjoy owning partial shares of some of the world’s greatest businesses. Cash can’t compound, it sits idly losing value due to inflation. It does however provide a lifeline should an opportunity come knocking. If there is no cash available, you either have to watch it go by or tap into a margin balance, which I personally refuse to do.

While the future looks grim, now is not the time to panic. These kinds of events are what separate novices from those who outperform. This crisis will shuffle money from the know nothing investor, to those who have done their homework. It will expose those who made use of excess amounts of leverage and those who bet on companies that lack durable competitive advantages. As Warren Buffett put it “You don’t know who’s swimming naked until the tide pulls in.” Everyone looks great during a bull market, it is only when the bear roars that the score is settled. This can be applied not only to investors, but to companies as well. Some are prepared for these kinds of situations and can prosper, others will be forced into bankruptcy.

For that reason, I try and invest into companies that perform well in all economic conditions, feast or famine. A strong balance sheet is imperative. It is hard to go broke if you don’t owe any money. Cash is king and I prefer companies acting like a dragon sitting on a hoard of gold, protecting that cash at all costs. You can bet a company such as Berkshire Hathaway won’t be filing chapter 11 and instead will be using this occurrence as an entry point into outstanding businesses.

Q1 Performance

As of 4/1/2020, my 10K portfolio stood at $9,700.23. When I started on 8/19/18, the SPY had a price of $285.06 and my account started with $10,000. As of 4/1/2020 the SPY had a price of $257.75. The SPY has also given out $8.44 in dividends since I started tracking, so I have accounted for that as well.

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(1/1-3/31) (17.91) (19.92) 2.01

Since Inception(8/19/18) (2.99) (6.62) 3.63

As you can see, I have actually beaten the S&P since the inception of this account, albeit I have done so while still losing money. I therefore find no sense of accomplishment in this feat. If the S&P was to fall 50% over a 10 year period while my own account only fell by 35%, I’m not going to be happy. The ultimate point is to make money, not just outperform an index.

Current Portfolio

Here is an updated look at my portfolio as of 3/31/20

Screenshot 2020-04-07 at 5.50.41 PM

We can see I have $9,652.61 invested and have an additional $47.62 in cash. I made some changes to my portfolio this quarter, time will tell if any of these were good ideas.

Buys

CNSWF- I invested into Constellation Software, which has immediately become my largest holding. The company acquires small companies that provide vertical market software to niche customers such as dentists, fitness centers and hospitals. They serve customers in virtually every market you can think of. They own hundreds of businesses and have extremely high customer retention. Constellation is a company I have followed for years and given a large fall, I became a happy buyer. Of course right after purchasing, the stock continued to plummet. I could have gotten a much better price, so be it. They are run by Mark Leonard, a brilliant capital allocator with an amazing beard. I have great confidence holding this company indefinitely.

HEI.A- I also bought shares of Heico corporation. They have a dual class structure, so I bought into the A shares, seeing that they traded at a discount to the standard shares. They offer only 1/10th the voting power, but given how small a position I hold, I find this to be immaterial. Heico is a niche supplier of airplane parts. They are a fantastic company that has fallen greatly due to the decimation of the travel market. While I was initially thrilled by the drop in price, I may have acted in haste, not fully appreciating how long the impact of the virus will last. I will continue to monitor the situation, but am considering getting out. I don’t like quick in and outs, but sometimes you can get lured in on false hope. The travel market might be impacted for years to come, I’m hoping that is not the case but who knows at this point. If people aren’t flying, planes won’t need new or replacement parts. Even a great business with a pristine balance sheet can get into trouble if sales fall off a cliff for years.

Sell

BKNG- For the very reason I am considering selling out of Heico, I have already sold out of my position in Booking Holdings. They are a fabulous company, but the impact of the virus on their business is immense. They make their money selling hotel rooms, car rentals and airline tickets. It is a brilliant business model, they take on none of the heavy lifting and merely act as an agent. As long as this pandemic lasts however, their entire business has essentially been cut to 0. They have a strong balance sheet and smart management, so I have no doubt they will weather the storm. I just can’t predict how this will impact their bottom line and for how long. I wouldn’t be surprised if I one day get back into the company. I’m not comfortable holding them right now, but that won’t always be the case.

Hold???

LUV- I haven’t made a decision on Southwest yet. Just like the last two companies I discussed, Southwest’s business has been crushed by this pandemic. I am loath to get out of an industry leader that is trading at a deep discount to prices seen just a few months ago, but my hands might be tied. The company just announced they are cutting 50% of flights through the end of June. Don’t be surprised if they are forced to cut flights deep into the summer or longer. Will Southwest need to be a part of the government bailout? Maybe, I honestly don’t know and I’m also not sure what kind of stipulations will come as part of such an agreement. No dividends or stock buybacks? That would really impact the investment potential. I’m weighing all these variables, but might pull the trigger soon and sell. I also notice I have allocated too heavily into the travel industry. I did not foresee this kind of crisis impacting so many of the companies I invested in, but I have to play the hand that is dealt. I need to make sure I diversify better so one industry can’t bring me down.

As always, thank you all for reading! This is a strange and difficult time. I invest to make money, not to watch it wash away. Let’s hope the rest of 2020 sees a return to normal and we can all start leaving our houses again. You can follow me on Twitter @TheGarpInvestor.

COVID-19

Fear, agony, depression, anger, and desperation are just a few of the feelings creeping through my mind over the last couple of weeks. As I’m sure you are aware, the market has gone into free fall and the world is in a true state of panic. Coronavirus has spread and brought the world down to its knee. I know things look grim, but as always when investing, it is best to remove emotion from the process. Take a deep breath, go for a walk, whatever you need to do to get yourself into the right mindset.

One mantra I have been repeating over and over is an ancient Persian proverb, This Too Shall Pass. Things look terrible, but the world will one day return to something that resembles normal. In America, we have gotten through the great depression, the financial recession, two world wars, a civil war, four presidential assassinations and once came on the brink of mutually assured nuclear destruction. I have confidence that in time we will overcome and get through this pandemic. We will look back on this as one of those events that we will never forget. This too shall pass.

I don’t say that to minimize the current state of affairs. This is an extremely serious situation that has ramifications felt in all walks of life. Our economy has essentially been put on hold and our most vulnerable citizens are left scared and hopeless. Unfortunately innocent people who did nothing wrong will die. Our hospitals will be strained far beyond capacity. People will lose their jobs and companies previously thought to be impenetrable will fold and go out of business. All we can do is persevere and make the best out of a terrible situation.

Peak to trough, markets have fallen roughly 35%. If your accounts have taken a massive hit, do not feel alone, everyone is suffering. I myself am suffering right along with you. It pains me to my core watching my money wash away. Across the nation, the sense of freedom and security has disappeared in the blink of an eye. Many have lost a significant portion of their retirement savings. I am lucky enough to be somewhat young and hopefully have a long runway ahead of me, but I sympathize with those who don’t. For those who plan to be net buyers of stocks in the coming decades, the only positive way to spin this is knowing that you can now buy stocks today at a 35% discount to what they were just a few weeks ago. I know that doesn’t make it any better, but it is now more important than ever to keep investing.

At some point in the future, there will be a resolution. I don’t know if that will be a month, a year or even many years from now, but eventually we will know where things stand and how the COVID-19 virus played out. In the end, this situation can really only go one of two ways. Either things will ultimately recover and return to normal or our entire world order will collapse and our financial system will turn to ruin. In the first situation, patience and delayed gratification are crucial. In the second, financial assets will cease to matter. Human society will have broken down, so what’s the difference? Who cares what stocks you own or cash you have if the entire system has collapsed? I happen to think the second scenario is incredibly unlikely, but just my 2 cents.

So the question is, how can we make the best out of this awful situation as an investor? Below I have listed 5 actionable steps we can all take.

5 Actionable Steps

Stop Panicking- Easier said than done, but panic provides no benefit. Calm, rational well thought out decision making will always win. Now is the time to start formulating a game plan. Most of us have been quarantined and are stuck at home. You have an abundance of time, make use of it. Take this as an opportunity to learn and grow. Determine what your goals are and how you can reach them.
Give Gratitude- I find myself to be a bit useless at times like these. Other than giving away money, I have no ability to save anyone. I do not have the necessary skills for these kinds of disaster situations. For that reason I find it especially important to be thankful. There are men and women out there on the front lines risking their lives in order to give care to those who fall ill. Thank the doctors, nurses, hospital staff and administrators, emergency responders and anyone else who is out there providing vital relief. They are not the only ones putting themselves at risk however. Thank the cashiers at the grocery store, thank the delivery driver who drops off a package so you don’t have to leave the house, thank the bar and restaurant workers providing you with food to go. There are countless other brave souls out there potentially exposing themselves to the virus, making sure our society continues to function. Thank them!
DO NOT SELL!- The absolute worst thing you can do is to sell out in the middle of a panic. It truly sucks watching your stocks go down every day. I hate it as much as you do, but you never know when the tide will turn. I am not in the game of timing the market. The market will likely recover long before we see the end of the virus. It will turn when sentiment burns bright. I’ll leave it up to Peter Lynch to describe it better than I can. “A stock market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in a panic.”
Look To The Greats- We may not immediately know what some of the best investors out there are currently doing, but we can at least attempt to put ourselves into their shoes. Even better, what would they do if they were in our own shoes? If Warren Buffett wasn’t handicapped by Berkshire’s massive size and the public scrutiny that comes along with all of his decisions, how would he proceed?. I can’t tell you exactly, but I would imagine he would be turning over every rock trying to find the diamond in the rough. He would be looking for great companies with a strong moat, that have fallen to a price far beneath their intrinsic value.
Put Your Research Into Overdrive- As an investor, this is probably the most important step. Everything else you do is all for naught if you don’t put in the work. Populate your watch list, start reading 10Ks and sift through as many balance sheets as you can. As for myself, I plan on taking a look at every company within the S&P 500. I’ve gotten to the point where it only takes me about 30 seconds to know if I might have interest in a company. If I do, more work needs to be done, but otherwise I Just pass on to the next one. After that I’ll start using screeners to help me find smaller companies not located within the S&P. This might feel like a daunting task, but truth be told, you don’t get the reward without the process. When the time comes, you will be ready to pounce.

I know this time is challenging and things are likely to get worse, but remember This Too Shall Pass

Thanks for reading. I’ll be back sometime next week to give you my Q1 portfolio update. Sneak Peak: It’s bad! You can follow me on Twitter @TheGarpInvestor.

Goodbye Summer (Q3 Update)

Unfortunately, all good things must come to an end. Summer came and went in the blink of an eye. Labor day weekend is now well behind us and so are any hopes I once had of not gaining a good 15 lbs over the Summer. A couple of trips and way too many burgers and beers are probably the primary culprits. I hope you all got to enjoy the summer heat as much as I did.

September however brings a new level of excitement. Kids are back in school and if they are forced to learn, we should be as well. We are all mere students of the game and therefore we need to work on our investing practice. A day doesn’t go by where you cannot learn something, so seize hold of the opportunity. A little bit of knowledge every day, will turn into a mountain of information over a lifetime. With that out of the way, let’s check in and see how I did this quarter.

Q3 Performance

As of 9/1/2019, my 10K portfolio stood at $11,088.12. When I started on 8/19/18, the SPY had a price of $285.06. As of 9/1/19 the SPY closed at $292.37(it’s actually had quite a run up since.)

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

Portfolio value $11,088.12: 10.88 2.56 8.32

With dividends reinvested into the SPY their returns would look a bit more like this.

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

Portfolio value $11,088.12: 10.88 4.42 6.46

I have to say that I am more than satisfied with my results thus far. I have cut a few of my losers and held tight onto my winners. I like to let my winners ride and let compounding do the work. Some might be overvalued and others are hopefully undervalued. In the long run, stocks will follow suit with growth in intrinsic value. I feel good about the companies I’m invested in and their prospects for the future. That being said, I hold onto almost $1,700 in cash. I am finding it hard to find deals I am comfortable with in the current environment. That doesn’t mean the search is over, just means I have to turn over more stones. One will appear and I will be ready to put my remaining capital to work.

Taxes

One topic I don’t see talked about nearly enough is the effect of taxes on investment returns. So often I hear analysts talk about a stock hitting their price target, meaning it is now a sell. Too often, these recommendations fail to mention taxes. Should you have a good gain, the second you initiate that sale, your gain is now realized. You will now be responsible for the taxes. Let’s just look at a simple example. Say you bought company A at $100. You made a great pick and after 6 months, the stock has now doubled to $200. Obviously you have made a fantastic investment, the question is what do next? If you sell out entirely, you will have a gain of $100 and it will be considered a short term capital gain, as you have not held it for longer than a year. It will be taxed at your normal income tax bracket. As of now, these taxes will fall somewhere between 10% and 37%. Let’s just assume a middle tax bracket of 24%.

On the $100 gain you will have to pay $24, leaving you with $176 to work with. Additionally, depending on where you live, you will owe state and local tax. Here in Baltimore County, Maryland you owe 5.75% to the state and 2.83% to the county. This lops off another $8.58, bringing that initial $200 down to $167.42.

The variables are of course ever changing. Should the characteristics of company A fail to live up to expectations or should your investment thesis no longer hold true, it very well might be a good time to sell out and switch companies. The important lesson is to take the effects of taxes into consideration and make an apples to apples comparison. In this example it is not $200 in Company A vs $200 in Company B, but instead $200 in Company A vs $167.42 in Company B. With that in mind, selling out of Company A might not be as enticing.

As always, thank you for reading. Be sure to subscribe and follow me on Twitter @Thegarpinvestor. Feel free to share the post, thanks!

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!