NVIDIA in - Last ETFs out

There has been considerable changes in portfolio due to recent downward slide in stock market.

• Increased technology stocks exposure
• Have now concluded selling all ETFs

I am long term bullish on the technology stocks over pretty much any other sector and felt that the recent series of slides and crashes offer a good point to increase our exposure into U.S. technology stocks and semiconductor stocks in particular.

NVIDIA (NASDAQ: NVDA) is the latest addition to our portfolio. Both current P/E and forward P/E of NVIDIA have come down to below 20 (source: Finwiz.com). It seems like a reasonable multiple given the 'E' or earnings part of the ratio will hold.

Adding NVIDIA is part of my plan to increase our semiconductor exposure while hedging bets over larger amount of companies than before. Right now, especially the 'commodity' end of semiconductor stocks offers significant short term risk and drama while market speculates over timing of the cycle bottom and how deep it will be this time.

Overall, the share of U.S. technology stocks in portfolio have increased now significantly over last few months with addition of Apple (NASDAQ:AAPL) and NVIDIA and additional investments into some of our existing semiconductor positions: Micron Technology (NASDAQ: MU) and Western Digital Corporation (NASDAQ: WDC).

These moves have been mostly funded by exiting all ETF positions. Thus, the performance of the portfolio is now down to 26 individual stocks out of which 10 largest positions make up over 60% of the entire portfolio.

More about the portfolio after we get year 2019 going..

New position: Apple Inc.

I have iniated a position in Apple (NASDAQ: AAPL) recently.

The stock has definitely trasformed from growth stock to a value stock and at the current level (closed in Dec 4th at $176.69) should in my mind offer a good entry point for a long term investor.

Apple has the kind of products, services, brand and pricing power that most other companies can only dream about. That pretty much sums up the "why" of the investment along with the price tag.

In terms of current valuation & financials we are looking at

• Forward Price per earnings est. 12,0
• Price per free cash flow 16,7
• Return on Equity 48,7%
• Cash per share $13,90
• Dividend yield est. 1,65%
• Long term debt / Equity 0,87
• Quick and current ratios both at 1,1

All above based on data extracted on Dec 5th 2018 from Finwiz.

About waiting for the right time

It is amazing how much chatter there is about whether a particular stock is going (still) to go lower or whether it is "right time" to buy (supposedly at the bottom).

Then there are articles where commentators beat other investors or companies about being wrong on their timing.

Putting short term speculation aside,

my view is that the only right way to think about whether or not to buy (as investor) or execute buyback (as company) is to look at the price today. Nobody can predict the future reliably. The one who could would make a fortune in instant so would not bother making anything else than trading on perfect information.

If the price is attractive given the outlook today then it is a buy. If it is cheaper in the future, then buy some more. It is then even a better bargain.

Take for example, Micron (NASDAQ: MU) stock buyback program. Yes, the price has dropped while company buying back stock, but so what?

I do not know how Micron or any other management team executes stock buybacks, but generally it would make sense NOT to try to chase the market or try to please market commentators.

I would personally spread it out evenly and reserve a possibility for opportunistic buybacks in case market goes insane and the stock drops way below level I would view as attractive.

Another way to look at this is that nobody can really in their right mind say Micron is grossly overvalued or in bubble (i.e. investors have gone insane the other way - which they have in my opinion for some other tech stocks). That being the case, the alternatives are "the right price" (market is right always) or then there is a small chance market is undervaluing the company.

Stock market is about risk and reward. You do not get reward if you do not take risk. I rather have skin in the game than stay in the sidelines with the chance I can look smart afterwards if the stock continues lower.

Apart from speculative short term investors, who really cares where the stock goes from here short term if you are in for the long term?



Disclosure: Long Micron.

Buffett's Apple vs. IBM positions

I have been thinking of initiating position in Apple (NASDAQ: AAPL).

While digging into this idea, I bumped into the fact that Apple has been the largest common stock holding of Berkshire Hathaway's (NYSE: BRK.A / BRK.B) portfolio for quite some time now. I kind of knew that they were heavily long into it, but it had not hit home how sizable the position was even for the Omaha-based legend.

Accoding to the datasource I used (Dataroma) Buffett's 252 million Apple shares makes it now close to 26% of Berkshire's U.S stock portfolio.

Since I recalled IBM (NYSE: IBM) was the first technology company where Buffett had a sizable position, I wanted to make a small comparison on the two positions and how they have evolved in last 5 years (IBM is in blue and AAPL is in yellow).

Table: Top 20 U.S common stock positions of Berkshire Hathaway [data source: Dataroma]

Clearly IBM was a favourite for a long time and then Apple replaced it in top 20. The interesting thing behind the top 20 table is that the value of the entire common stock portfolio has grown from 105 billion to 221 billion USD during the five years. Therefore, it is likely that many of the positions have grown in absolute monetary terms moving from left to right in the table.

I wonder what is the average cost of Apple share in Berkshire's portfolio.

According to various sources Buffett accumulated some 57 million shares by end of 2016. Then by Q1/2017 the total of Apple shares was 133 million and year later 240 million.

Let's look at Apple share price during the same timeperiod:

Apple share price during the time Buffett has accumulated it [Chart courtesy of StockCharts.com]

It can be concluded that Buffett accumulated 57 million shares of Apple in 2016 in the neighborhood of USD 100 +/- 15. Then 76 million shares in Q1 2017 between USD 110 and 140 and in the year that followed (until end of Q1 2018) 107 million shares more between USD 137 and 182.

Looking closer to the information at hand from various sources, it can be seen that bulk of 107 million shares were accumulated in Q4 2017 (31 million) and Q1 2018 (75 million).

This is now purely quesswork, but it looks like average purchase price per share of Berkshire could be somewhere in the ballpark of USD 140 +/- 10.


Disclosure: At the time of writing the author did not have position in Apple, but was seriously considering initiating one in near future.

Major changes to portfolio

Fear has taken over the market.
We have lost all gains this year to date and then some.

However, the sell-off offers excellent point to make investments to smaller companies which otherwise would be rather illiquid.

I have no idea what-so-ever whether this is sensible timing or not (are we near bottom or not), but since I do not believe anyone can consitently time the market correctly, I try not to worry about it and concentrate on fundamental analysis (stock price vs. dividend vs. long term outlook).

I have shuffled a bit the positions in the bigger corporations, but the major part of the action lately has been to move money from ETFs to individual small cap stocks.

All ETFs except for few sector specific ETFs (e.g. health care) have been sold.
The net result is that the share of ETFs have gone first time below 10% of portfolio.

Also, since the small caps I am investing are almost exclusively from Finnish stock market, the share of European stocks in the portfolio has grown to 68%. The rest have been invested to U.S. stocks.

Our direct exposure to emerging markets is now 0%.

While these moves increase the risk in the portfolio we still hold quite many stocks that I consider low risk (so we are quite far still from all-out "risk-ON" position). Also, there is a two-fold reason why investing into individual stocks looks to be better trade right now than going broad market via an ETF:

1. The individual stocks in Finland that we have in portfolio have much better dividend yield than any broad market ETF
2. There is a taxation benefit in Finland to invest directly into stocks vs. via ETFs: dividend from a stock is taxed less than same dividend amount from an ETF. The difference isn't big, but long term even small differences matter.

Besides, we have hold on to some broad market ETFs that have gone almost nowhere last 5 years compared to rest of the market..

Vampires and wolves (Part II)

Continued from Part I ..

Mark Hanna: "Revolutions, you follow?" 

Jordan Belfort: "Revolutions."

Mark Hanna: "Keep the client on the Ferris wheel, and it goes, the park is open 24/7, 365, every decade, every go**amn century. That’s it. Name of the game." 

-- ending of a scene in the movie The Wolf of Wall Street where Matthew McConaughey (playing Mark Hanna) explains to Leonardo DiCaprio (playing Jordan Belfort) how the brokerage business works.

Enter dream customer.

I would imagine this is the dream scenario what comes to milking a client in investment services business:

• investments are inside insurance or other 'wrapper' with a yearly fee and there is significant penalty in changing from one financial services provider to another (e.g. being exposed to taxes)
• inside the 'wrapper', client is instructed to invest into funds-of-funds (many layers of cost)
• to top off the dream cake, client is instructed often to change allocation (because it is both "free of cost" and tax free)

I have been there as a client long time ago so I know exactly how this works.

A smooth-talking person in an expensive suite invites you to a meeting to discuss about investing. The setting will be impressive and everything will be free of charge. You may wonder how these guys are paid. You may even ask it directly (I did). Because they are good salesmen they will have an answer for pretty much anything you will ask. One by one they will eliminate any reason you may have for not investing via their shop.

Naturally they are not going to voluntarily expose all the ways they or their business partners are going to take money from your pocket (extract fees from your investment). Just the surface of it (the obvious commissions and fees).

If you read everything about their products and dig deeper into the funds you will slowly understand all the ways you are getting milked. Because of course you are. How else they will pay for their rent in the most expensive part of your city or get paid ridiculous amounts of money in the top tiers of their management pyramid.

Like you have a fund, which invests in other funds (I wonder how many layers there can be..).
And like you are not charged "anything" if you change from one fund to another, but then you note that there is a significant spread (difference between the bid and the ask price) in all of their funds.



Garlic, anyone?

Avoiding vampire squads is easy.

It starts by avoiding complex hard-to-understand financial constructs and companies who are just men/women-in-the-middle.

You can minimize your costs by handling the investments by yourself and invest directly in stocks and passive low-cost (yet high quality) index ETFs.

Do not be lured into frequent buy/sell flip-flop. I am a customer who mostly buys and rarely sells.

Also, please check my old article 'avoid costs' on why even 1-2 percent periodical holding cost/fee makes a big difference over the years.

THE END

Vampires and wolves (Part I)

"In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the Marketplace."  

-- Warren Buffett in 1987 letter to shareholders of Berkshire Hathaway Inc.

Buy! Sell! Short! Boom! Crash! Panic!

The constant barrage of market news and opinions has got much worse than anyone could have imagined back in 1980s. One can get easily lost without clear principles on which articles are worth reading and who to believe.

Fugazzi

I personally dismiss articles that are not based on real fundamentals. These include articles where author tries to time market or uses extensively technical analysis.

I suppose every investor will at some point get lost in moving averages, trend lines, support levels, resistance levels, MACD, RSI and so on. To me it happened quite early on. People want to believe they can predict the future via past/present and that they are smarter than the others. And everyone will try to time the market.

There are a lot of people who benefit from frequently changing mood of "Mr. Market" and keeping up the illusion that this would be predictable. In fact, the ones who benefit have also clear incentive to feed Mr. Market with either fear or greed - whatever it takes to create fuzz.

The stories can be based on company fundamentals, market fundamentals, market timing, pure technical analysis or unicorns and fairy dust. They really don't seem to care.

In the modern attention economy market commentators, blogs and news media get paid by clicks they get. So they want to create a lot of stories and market them via luring click-bait titles. However, sharing advertisement revenue via various mechanisms pales in comparison to profit that 'masters of the universe' have been extracting as long as there has been a stock market.

Enter vampires

"Name of the game, move the money from your clients pocket into your pocket."
-- Matthew McConaughey (playing Mark Hanna) in the movie 'The Wolf of Wall Street'

There are two main ways to milk a client in investment services business.

Somebody always benefits from trading (buying and selling) no matter what is told to the customer.

Secondly, some financial assets (e.g. mutual funds) expose clients to periodical holding and other costs (some of which may be well hidden especially in the case of mutual funds wrapped inside an insurance envelope).

The providers of financial services seek to maximize both.
Neither is in the interest of the individual investor.


To be continued (in part II) with e.g example of dream customer (for vampires)..

Helsinki Top 10 Over Billion Euro Companies

There are currently 36 companies listed in NASDAQ OMX Helsinki that exceed market cap of 1 billion euros. I ran my personalized screen to get top 10 list out of those companies.

I use a service provided by Valuatum.com via Pörssisäätiö to screen stocks listed in NASDAQ OMX Helsinki. I was not able to rank the following companies due to missing data: Nordea, Ericsson, SSAB and DNA.


Top 10


1 Orion

• Score 2,6
• Market cap 3,55 billion €

2 Citycon

• Score 2,5
• Market cap 1,68 billion €

3 YIT

• Score 2,2
• Market cap 1,26 billion €

4 Nokian Renkaat

• Score 2,2
• Market cap 4,6 billion €

5 Outokumpu

• Score 2,0
• Market cap 2,14 billion €

6 Sampo

• Score 2,0
• Market cap 24,94 billion €

7 Fortum

• Score 1,9
• Market cap 16,71 billion €

8 Elisa

• Score 1,8
• Market cap 6,15 billion €

9 Finnair

• Score 1,7
• Market cap 1,46 billion €

10 Sanoma

• Score 1,7
• Market cap 1,47 billion €

Average Score of all 101 companies in the research database: 1,5
Median Score: 1,4


Parameters used in screen (weight):
-------------------------------------------
 P/B estimate current year (13%)
 P/E estimate current year; next year (8%; 10%)
 Dividend yield estimate current year; next year (8%, 8%)
 ROA estimate current year (10%)
 ROI estimated 3 year average ending current year (8%)
 ROE estimated 3 year average ending next year (8%)
 Turnover estimated increase in 3 years ending next year (8%)
 Net Profit estimated increase in 3 years ending next year (8%)
 Gross Margin estimate current year (8%)
 Profit Margin estimate current year (8%)

The used parameters emphasize attractive valuation (31%), profitability in broad sense (26% weight), growth (16%) and dividend yield (16%).

The screen relies on estimates about future. Those combined with volatility of stock prices means that you should not try to chase screens like these (I don't). Ultimately any investment decision should be based on much more than just looking at the current numbers and estimates of future numbers.

Disclosure:

Author is long Citycon and Fortum.

PC is back?

Several stocks linked to personal computers (PC) have gained significantly in last 30 days or so:

Micron up whopping 47%
Western Digital up 28%
Intel up 18%

A bit more modest gains for Nvidia (up 7%) and AMD (up 3%).


What's going on here?

In my opinion atleast three tailwinds.

1) Market has revised pricing for Micron, Western Digital and Intel - rightly so.

As I wrote in December Micron, Western Digital and Intel seemed really inexpensive compared to peers and overall market. Especially so when considering how well these companies are positioned in their respective markets and with respect to growing demand for what they each produce.

2) Even though these companies contribute to much wider market, the "death of PC" narrative since iPhone and iPad came out has caused these companies to be priced at discount compared to the more "trendy" technology stocks.

3) Semiconductor sector overall continues to be red hot

The PHLX Semiconductor SOX ETF, which houses 30 chips stocks, has surpassed its record highs of March 2000 and is up nearly 16 percent in 2018. I recommend reading the linked article and watching the embedded video (contains Micron vs. NVIDIA commentary).

--

To drill a bit deeper to the "PC is back" theme, I would like to quote Jim Cramer from his recent "The personal computer is back" commentary:

 "The action off a return to growth of the PC, the steady burgeoning data center and the gaming business is now too great to ignore. This group is back and it's way too cheap. It's time to buy the breakout, as I believe the numbers are too low and the valuations are just plain out of whack with the rest of the stock market."

PC gaming has been somewhat shadowed by raise of mobile gaming and steady march of the consoles. Now it's raising back to focus thanks to e-sports and hit titles.

I am consuming games over all the mentioned platforms, but I have always liked PC gaming the best. It's the customizability of hardware and software, faster time-to-market of new games and cost of games when compared to console titles.


Disclosure: Author owns shares in Micron, Western Digital and Intel.

Allocations for 2018

At the start of the year 2018 our portfolio was allocated on high level in pretty much same way is it was last year:

Stocks 98,7%
Gold 1,3%
Cash 0,1%

No bonds. We simply substitute bonds with quality dividend payers in our portfolio.


Geographical Allocation (stocks):

Europe 59,4%
North America 30,1%
Emerging markets 10,5%

Actually, place of incorporation is pretty meaningless for most corporations we have invested in. Most operate and sell globally.


Sector Allocation (stocks) - in order of weight in portfolio:

Technology (Other)
Financial
Technology (Semiconductor)
Healthcare
Clean Energy
Basic Materials & related services
Industrial Goods


Top 5 positions - in order of weight in portfolio:

Siili Solutions (Finland)
Berkshire Hathaway (USA)
Fortum (Finland)
Citycon (Finland)
UPM (Finland)


19,4% of all stock positions are done via ETFs out of which 7,7% are allocated to broad emerging market ETFs. Rest are sector-specific ETFs.

Portfolio performance 2009-2017

Happy New Year 2018!

It's once again time to check how our portfolio fared in the previous year against passive index investing.

The year 2017 was a mixed bag. Our global ETF and U.S stock positions delivered very good results. Micron with +82,36% gain was by far our best performing position and generally technology stocks were having a very good run. Our Finnish large caps were not having a good year, but luckily the small caps gained nicely (on average >30%).

Overall our portfolio gained 12,1% vs. benchmark investment 7,3%. The "benchmark investment" is an imaginary passive ETF that closely tracks the performance of MSCI all country world (ACWI) index in euros (more info here).

In terms of cumulative yearly gains, we are now 11,2% above the benchmark investment:

Portfolio performance 2009-2017.
 Note: "Difference" column uses exact values as input rather than figures rounded to 1 decimal that are displayed.

Cumulative gains of our portfolio (blue line) vs. benchmark investment (red line). 31.12.2008 = 100.

In the year 2017 we had very good tailwind from euro which raised against U.S dollar from 1,054 to 1,201. Our portfolio contains significantly more European stocks than the ACWI index and we measure gains in euros, and therefore, EUR/USD exchange rate matters a lot.

Going into 2018 we continue to be almost 100% invested into stocks. I will cover our allocation in the next post.