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.

New Year

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.

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.

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!

Happy New Year!

I hope everyone had a happy new year and took some time to celebrate! For us investors these past few months haven’t been too wonderful, so finding reasons to celebrate is always nice. As anyone following the market knows, we have seen a precipitous drop in prices. Everything from tech stocks to blue chips have seen a significant fall. From the market highs in October, prices now sit about 20% lower. This has given us a reminder that prices often fall much faster than they rise. Watching your portfolio drop by multiple percentage points day after day can truly leave you breathless. Volatility however is a price we must pay for satisfactory results.

This drop has certainly not left me unscathed. My personal accounts have taken a beating and my 10K portfolio now sits just around $9,000.00. I clearly chose the exact wrong time to start a portfolio. I made a rookie mistake and rushed into my investments, instead of letting ripe opportunities arise. Let it be known that I am far from a perfect investor. This is merely one mistake of the many I am sure to make. I only hope that in the aggregate, my winners will outshine my losers and overall my portfolio will beat the market in the long term.

Let me make it clear, no one likes losing money. I hate losing money as much as anyone, probably even more than most. It pains me to watch my hard earned money wash away. I could have had a lot more fun blowing $1,000.00 than losing it in stocks, but that is the risk us investors take. In the short run anything could happen. There are infinite possibilities, but we play a game of probability. In the long run, measured over many years not days or even months the market has grown and grown enormously. I therefore choose to let the numbers dictate my investing philosophy. Pick great companies and allow time and compounding to increase my wealth.

The ability to control your emotions is probably the most important attribute an investor can have. What is most important is not intelligence, nor financial modeling, but the ability to remain calm and think rationally. Never one to mince his words, Charlie Munger stated “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.” The stomach is often what makes or breaks an investor, not the brain.

Market volatility also happens to provide opportunities to buy at a discount. If you have a long investing horizon, you should actually root for the market to fall in the short term. It allows you to accumulate shares of great companies at lower prices, that in 20-30 years will be worth far more. If you are a net buyer of stocks, falling prices are your friend not your enemy. Another thing to consider is that not only can you buy stocks at cheaper prices, so too can the companies you invest in. If you invest into companies with high free cash flow, they can use that cash to buyback their own stock or even make investments into other companies at reduced prices.

I used this drop in the market to enter two more positions and effectively fully commit my entire 10K portfolio. I have $150 leftover that I’m saving to use on a rainy day. Over time I will also accumulate money in the form of dividends and I’m sure there will be some turnover in the portfolio as certain companies do not perform according to my investment thesis. Therefore, I doubt these are the final decisions I make.

APH- I purchased 9 shares of Amphenol at $82.97 for a total of $746.73. Amphenol is a neat company which sells fiber optic connectors and other such products to all kinds of industries ranging from hospitals to aerospace. They grow their earnings each and every year and they generate lots of free cash flow. They sit around a 20 P/E which is still on the rather high end, but at a level I am comfortable with given the quality of the business.

MKL- I purchased 1 share of Markel for $1,029.96. Often referred to as a baby Berkshire, I am happy to be an owner of such a high caliber business. Much like Berkshire, Markel operates primarily as a specialty insurer and then reinvests the float into all kinds of other vehicles. A company of this magnitude rarely goes on sale, but such an occasion recently occurred. One of the small subsidiaries they own got in trouble with regulators for misrepresentation of loss reserves. I believe this is a one time small issue, and not endemic of the entire company. This caused a great drop in price, that put Markel under 1.5X Price/Book value. The company almost never trades at such a level, so I pulled the trigger on a company I will be happy to own forever.

As always, thanks for reading! Questions are encouraged and feel free to comment how your portfolio has performed. Remember to follow along and join the email list on the side.

6 GARP Investors to Follow

Tis’ the season and I hope everyone is enjoying this time of year. I just finished celebrating Hanukkah and Christmas is only a couple short weeks away. With the new year just around the corner, I thought I’d put together a list of some great investors you all should have on your radar. I try and soak up as much wisdom as possible and these investors are dripping with juicy nuggets of information. This list ranges from bloggers to CEO’s of Fortune 500 companies, running the entire gamut. Knowledge can be gained from all kinds of different sources. This is far from a complete list, but just a few names you all should familiarize yourselves with.

Francois Rochon- First on our list is Canadian investor Francois Rochon. Rochon started his investment firm, Giverny Capital, over 20 years ago. Unfortunately, I had never heard of him until earlier this year. To make up for this delay, I devoured all of his annual reports in a single day. He is a classic GARP investor, focusing far more on the quality of a business than on the price of a stock on any given day. He is more concerned with how the earnings of a company are increasing each and every year. His returns are admirable, averaging 15.7% since 1993 as compared to the index result of 9.2%. Over the course of 25 years, this discrepancy has led to magnificent results. I particularly enjoy his writing style, mixing humor and humility. He includes a section every year highlighting his greatest mistakes, something that every investor can surely relate to. My own personal account seems to overlap with his constantly, with companies such as: Markel, Berkshire, Google, Visa and Union Pacific showing up in both. You can see his reports located on his company’s website
2. Pat Dorsey– I was introduced to this famed investor through Patrick O’Shaughnessy’s great podcast The Investor’s Field Guide. Dorsey gained notoriety through being the director of equity research at Morningstar, a well known investment research company. He went on to write a couple of highly regarded books The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth, as well as start his own asset management firm. He focuses on companies with strong moats, otherwise known as durable competitive advantages. Due to those advantages, they are able to keep high returns on capital far longer than the average company. In his own words, his strategy can be summarized as “We purchase these businesses at what we believe to be reasonable discounts to a rational assessment of intrinsic value, and we seek to invest in companies with corporate managers who we believe can allocate capital in ways that benefit long-term minority shareholders.” Here is a great compilation of resources he has shared on his Website
Warren Buffett– I would be remiss to make a list of extraordinary investors and exclude the granddaddy of them all. While often thought to be a value investor, I think he can more appropriately be given the categorization of a GARP investor. I probably don’t need to spend much time talking up his accomplishments, you’ve heard them all before. Just know that he is as wise as they come and his lessons are timeless. You can of course read his annual reports, watch his numerous interviews or even go to Berkshire Hathaway’s annual shareholders meeting as I have done myself in the past.
Mark Leonard– Another famous businessperson I am embarrassed to have only found this year is Canadian superstar CEO Mark Leonard. Leonard is the CEO and founder of Constellation Software. While Warren Buffett has famously avoided technology, Leonard has embraced it. Realizing that software companies in niche industries spin off tremendous amounts of cash while only requiring minimal ongoing capital investments, Leonard has created a decentralized juggernaut. Leonard uses the vast amount of free cash to then acquire an ever growing list of niche software companies. His real brilliance was in identifying how strong a moat these companies could have. Think of a dentist or an optometrist. Once they start using a particular software for their office, it becomes incredibly difficult to switch. All of their patient records are stored on that program. In order to switch, all of that data would need to be reentered and staff needed to be retrained on a brand new software. He has taken that premise and bought up companies in hundreds, if not thousands of different industries. You can read his annual letters, going back all the way to 1996 here.
John Huber– I’ve been following this fellow blogger for a number of years at BaseHitInvesting. Not only does he run an incredibly informative blog, he also runs his own fund, Saber Capital Management. In his own words “Our general strategy is to make meaningful investments in high quality, predictable businesses that can be expected to grow intrinsic value at high rates and that are currently available at cheap prices.” I would peg that definition right up the GARP alley. I’ve learned a lot from Mr. Huber over the years, particularly his series on ROIC and compounding. He recently wrote up a new post entitled “Facebook Is Undervalued.” I’ve shared my thoughts on FB previously and the two of us seem to see eye to eye. I look forward to reading more of what he has to say over the years.
Connor Leonard– I was introduced to our final GARP investor of the day through a guest post on Huber’s blog BaseHitInvesting a couple of years ago. Leonard(No relation to Mark as far as I know) runs the public securities portfolio for Investment Management Corporation. IMC is a particularly interesting business case study. On only $50,000 of startup capital, the founders started the restaurant Golden Corral. Due to managerial brilliance and the fixation on cash flow, they have never needed to invest a penny more. With such great cash flow, they have entered into many other business arenas, as well as their public securities division, which is where Leonard fits in. He runs his portfolio in a GARP oriented style. With a focus on moats and capital light compounders he has found great success. I foresee his notoriety in the investment community growing considerably over the years.

As always thank you for reading. I hope you found this post interesting. These are all great investors you can learn a ton from. Subscribe and let me know what you think. Thanks again!

What a Roller Coaster!(3Q Update)

I’d like to start by apologizing for not posting in a while. Due to a combination of work, life, laziness and a sinking market, I’ve found it hard to muster the energy to type up a new post. That of course is not a great excuse and I’d like to get back into posting regularly. Without further ado, let’s get down to business.

Since I last posted, the market has given us all a roller coaster of emotions. Volatility has been extremely high, with markets moving 1, 2 and sometimes even 3% in a single day. October was a rather brutal month, the S&P 500 fell over 10%. The question is, what should we do about it?

While watching your stocks fall is never fun, you have to take a step back and think rationally. Are your companies executing? That is ultimately what is important. A falling price allows a company to buy back shares at a discount, increasing your overall ownership. A falling market also provides a buying opportunity for you. I took advantage of this opportunity and bought shares of three strong companies.

New Purchases

LUV- Southwest Airlines is a leading low cost travel provider. By focusing on providing value to their customers, Southwest has emerged as a dominant player in their field. They simply offer the best value in the business and over time will continue to grow.

Googl- If there is one no brainer company, it is Google. They dominate the world of digital advertising. Online search is one of the highest margin businesses around and competitors can’t seem to steal market share no matter how hard they try. I simply needed to wait for a reasonable price. Thankfully, the market was gracious enough to present me with such an opening.

MSFT- I wasn’t always a believer in Microsoft during the Steve Ballmer era, but Satya Nadella has proven to be the real deal. Microsoft Azure is the fastest growing product in the cloud infrastructure arena. Microsoft is a free cash flow machine, paying a solid dividend and rapidly buying back shares. They are pushing all the right buttons and I’m happy to be an owner.

3rd Quarter Performance

Reminder I started with $10,000 and bench marked against the SPY at 285.06 which as of the closing on 11/13/18 stands at 272.34

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

Portfolio value- $9,275.89 (7.25%) (4.65) (2.6)

So far pretty terrible, I clearly chose an awful time to start this portfolio and even worse my companies have under performed the benchmark. That being said, 1 quarter doesn’t tell a full story. To get a better idea let’s look into how the companies (not their stock prices) have performed this past quarter.

DG- Reported a great quarter. EPS growth of 40.7% YoY and bought back a significant amount of shares.

FB- Top line growth of 33% and remains debt free. Also bought back a significant amount of stock. DAU and MAU both increased, will be an interesting story to follow given all the adversity surrounding the company.

FND- Continues strong growth, adjusted EPS up 41.2% YoY. Opened 7 new stores during the quarter with plans to open many more.

GOOGL- Google put up another amazing quarter. The company is a behemoth, now sitting on over 100 Billion dollar of cash and cash equivalents. EPS grew over 36% YoY, never ceases to amaze.

HII- EPS grew a whopping 61% from 3.27 to 5.29. This high moat company keeps chugging along.

IPGP- Faced a tough quarter due to the macroeconomic environment. EPS fell 13% YoY. They did however acquire a smaller competitor, growing market share in the robotic welding division.

LEA- Eps grew 3% YoY. Not too wonderful, but the company was able to reduce the share count considerably.

LUV- Southwest produced a steady quarter. EPS was up 22%. The share count continues to fall while paying out a decent dividend.

MSFT- Crushing earning estimates, Microsoft grew EPS by 36%. Continues to be an absolute machine.

ODFL- While last alphabetically, Old Dominion was anything but last performance wise. EPS grew a tremendous 71% YoY, a simply remarkable amount.

Overall, I think their is a lot to be encouraged about with this group of companies. They continue to compound and business continues to improve. IPGP and Lear continue to show weakness, but I remain confident in the long term viability of both companies. All others reported very strong quarters. Although the portfolio has not done well this first quarter, remaining patient will pay off eventually. Remember what Ben Graham said all those years ago, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” It is going to take time for these companies to reach their intrinsic value, but I am happy to wait.

As always, thanks for reading! Questions are encouraged and feel free to comment how your portfolio has performed this past quarter. Remember to follow along on the side.

Flooring Is Boring(That’s a Good Thing)

Warren Buffett has often said he knows within minutes whether or not he wants to buy a company. As I was looking through a stock screener yesterday, I knew in moments I wanted to own the company. Floor & Decor(FND) is amongst the fastest growing non technology stocks I have ever seen. Imagine my surprise when I saw it trading 5% lower on the day. I knew I had to pull the trigger and pounce on the opportunity.

I bought 35 shares for $32.49 a piece. I’m down to $4,166.81 in my 10k Portfolio, maybe I need to slow down. Sometimes I just can’t help it, when I see a company I like at a decent price, I act. Over time, compounding will work its magic. Let’s check out why I like Floor & Decor.

Why FND?

This company is what I would categorize as a classic Peter Lynch stock. For those unfamiliar, Peter Lynch is a famed investor who ran the Magellan Fund at Fidelity. His mutual fund performed incredibly well during the 1980s, buoyed by a bull market. He is known for picking stocks based on what he saw day to day. He would walk around the mall, tracking customer habits and then go research the financials to see if they matched up. He particularly liked small retailers that could replicate their success in one location over and over all around the country.

Floor & Decor is my kind of small retailer. According to their most recent quarterly report, the company just opened its 90th store. They intend to open 400 total stores over the next 10 years, more than quadrupling their current size. They do one thing, but do it incredibly well. They sell hard surface flooring at value prices. FND stocks a large big box store, filling about 70,000 Sq. feet with all of a customer’s possible flooring needs.

I have a bit of an edge here, during the day I work in commercial real estate. We often have to buy flooring and there is a local company I often marvel at. They sell overstock flooring at rock bottom prices. The local company is often busy and seems to turn over their inventory quickly. While I can’t invest in this local flooring success, I can invest in FND which has a similar business model. Not only is the model similar, but they are much larger and therefore able to achieve all kinds of economies of scale.

Let’s dig in to the numbers a bit. In 2013 FND sold 441 million worth of goods. That number increased to 1.385 billion in 2017 for a CAGR of 33.1% over that time period. EPS grew even faster, growing from .13 to .88. This gives us a CAGR of 61.3%. A company growing earnings at 61% a year will make shareholders incredibly rich. Obviously, this rate is unsustainable, nothing can grow this fast forever.

In fact, quarter over quarter earnings growth has slowed down to a “paltry” 35%. FND has been able to accomplish this while using little debt, only 160 million for a company with a market cap over 3 billion. I would actually prefer they finance their expansion with more debt, while financing options remain fairly cheap. The main problem with the company is that they are new and I’m not sure of managements capital allocation strategy. FND has been issuing shares, diluting existing shareholders. As the company grows, I hope they can generate more free cash and finance future growth with internal cash on hand.

The company now trades at a P/E of about 27, by far the lowest since their IPO in 2017. The stock price reached a high of 58 in April, but the stock has cratered since growth has slowed just a bit. I think this presents a tremendous buying opportunity. In the short term I’m not sure which direction the stock price will go, but over the course of many years this will be a much larger business.

Conclusion

Overall Floor & Decor is a fantastic company with a long road ahead of them. They provide value to their customers and fill a void in the market. They are growing rapidly, adding new stores and increasing same store sales. I think this is a great time to buy and shareholders will be rewarded handsomely.

As always thanks for reading and subscribe on the side! You can follow me on Instagram and Twitter @thegarpinvestor.

Tucker or Trucker?

Earlier this week, I bought 4 shares of Old Dominion Freight Line(ODFL) for $162.60 a piece or a total of $650.40. Of course since I bought shares, the stock has continued to fall. It now stands 3.5% lower than where I bought it. This always seems to happen to me, unfortunately luck doesn’t seem to run in my blood. Therefore I’ll have to keep relying on brains and long term appreciation to make my money. For those keeping track I now own 6 stocks and have $5,303.91 left in cash in my 10k Portfolio.

Why ODFL?

Founded in 1934, Old Dominion Freight Line has been around for a long time. I generally like old companies (as long as they are still growing), they have survived all kinds of different economic environments. ODFL is a less than truckload(LTL) transportation company. Rather than trucking a full capacity for one company, they pick up small loads from various customers. They then put them all together and because of their logistic mastery are able to deliver the goods quickly. They service all kinds of customers ranging from auto parts to healthcare equipment. If you need something trucked, they are happy to help.

According to their 2017 annual report, they are now the 4th largest LTL company in the country, up from 6th in 2011. Gaining market share is certainly a good thing and I hope this trend continues. One sentence from their report I particularly liked was that “Significant capital is required to create and maintain a network of service centers and a fleet of tractors and trailers. The high fixed costs and capital spending requirements for LTL motor carriers make it difficult for new start-up or small operators to effectively compete with established carriers.” This forms a bit of an oligopoly with the other large LTL companies. New competitors simply can’t compete with the incumbent businesses, due to a lack of existing infrastructure.

Now let’s take a look at some of the numbers that make ODFL so compelling. They grew revenue every single year since 1996 with the exception of the 2009-10 recession. Consistency is key, allowing me to sleep easy at night. From 2013-2017 EPS grew from 2.39 to 4.35 for a CAGR of 12.7%. While not exactly stellar over this period, growth is beginning to rise quickly. This past quarter earnings grew 67.2% over the prior year and growth is not expected to slow down anytime soon. The company is winning new jobs and growing market share. They trade around a 27.5 P/E which in a vacuum is quite high, but I find to be reasonable for a company that is growing considerably and of high quality. Remember, I am the GARP investor after all. Growth at a reasonable price is my goal.

ODFL has a ROE above 20%, meaning for every dollar of equity put into the business over the years, they are able to generate a 20%+ return. This is frankly quite stellar. They are investing heavily into CapEx every year and if they can keep up these same level of returns, investors should do quite well. The business is actually remarkably simple. They earn a generous amount of cash flow, then take that money and invest it into new trucks and fulfillment centers for logistics. With whatever cash is leftover ODFL pays a small dividend, buys back some shares and pays off whatever debt they owe. The company has a very clean balance sheet with only 839 million in liabilities, a minuscule number for a 13 billion dollar company.

Conclusion

Overall, I don’t expect ODFL to be my portfolios best performer 5 years from now. I do however expect it to be a portfolio anchor, that is meaningfully larger every single year. They are a simple business that can be relied upon. Management knows what they are doing and the stock is trading at a fair price.

As always thanks for reading and subscribe on the side! You can follow me on Instagram and Twitter @thegarpinvestor.