Portfolio update: Cash position increased

Our cash position is currently at 10% and has not been this large for years. Most of our sales recently have been kept as cash instead of reinvesting to another stock. Pandemic, US elections, Brexit etc. aside -  it is increasingly hard to find stocks that are reasonably priced. That's the bottom line. Another reason is that we start to be massively long in a few stocks I particularly like. We have roundabout 20 stocks in portfolio so 5% would be an even stake. But that's not how most portfolios are and ours even less so. Top 10 stock stand at close to 70% of portfolio already so that starts to spell out as decent company risks.

Sector allocation is as shown in the picture:

As an aggregate different technologies and IT related sectors are close to 40% and that is the backbone of the portfolio. We do like IT/Tech and would like to accumulate even more, but not with any price.

Financials is our second largest bet. 

Our top 5 stock positions currently are:

• Berkshire Hathaway (USA)
• Metso Outotec (Finland)
• Nokia (Finland)
• Intel (USA)
• Verkkokauppa.com (Finland)

Last N of FANGMAN out

We have sold all of our NVIDIA position and no longer have any positions in the hot dominant technology stocks dubbed as "FANGMAN". After selling Apple, NVIDIA was our last stock in this category. However, it rose to price level where I felt it was no longer in touch with realities.

The last N in "FANGMAN" has currently forward P/E valuation* of 42. With that it falls short only to ridiculous valuations of the other N (Netflix) at 64 and Amazon at 85.

While the valuations of the rest are also on the rich side, they are still more reasonable:

• Microsoft 34
• Alphabet (Google) 28
• Apple 26
• Facebook 25

For the first time in a very long time, we left the proceeds as cash waiting for future opportunities. 

Market overall seems a bit expensive compared to no-so-great economical situation and future projections. 

*Forward P/E valuations from Finwiz.com

Berkshire back in portfolio for the 3rd time

In the depths of 2008-2009 financial crisis, we bought Berkshire Hathaway (NYSE: BRK.B) for the first time. The second time was approx. 3 years ago when P/E ratio was near multi-year lows and P/B was approaching 1,2x book value. That was the level  Warren Buffett had indicated to be the trigger for the formal share buyback program at the time.

Berkshire has been lately trading close to 1x book value. However, it has to be also taken into account that majority of Berkshire's common stocks have been beaten badly and the insurance industry is expected to take quite a hit.

Still, I felt comfortable raising Berkshire from zero allocation to pole position (largest holding). In my eyes there are few stocks better than that to own at times like these. I really like the management / investing style of Warren Buffett. It has taken Berkshire where it is today. I also like the fact that they had insane amount of cash available when the stock market tanked.

As Sean Weston wrote in his recent article about Berkshire in Seeking Alpha "shares trading this close to book value is a truly rare event, taking place only on two other brief occasions this century".

Sven Carlin examines in his recent article this attractive opportunity from the viewpoint of P/E when the Berkshire’s $124 billion cash pilecash have been backed out from the price of the company. The result of his analysis: Based on 2019 earnings and deducting the cash, the price to earnings ratio is ~10.

A word of warning: Berkshire earnings (and thus P/E) is very volatile as they use mark-to-market for their stock portfolio. Also, both of the above analysis have to be taken from the view point of long term (i.e. where the profitability / book value will likely return in 3-5 years).

Yet, we like.

Disclosure: Author is Long Berkshire Hathaway.

Changes in top 5 positions

Our top 5 positions on January 1st were:

1. Apple (USA)
2. Western Digital (USA)
3. Micron (USA)
4. UPM (Finland)
5. NVIDIA (USA)

The biggest changes have been (done in the midst of market crash):

- Sold Apple stock (all of them)
- Trimmed down Western Digital
+ Acquired shares in Berkshire Hathaway
+ Increased heavily our position in Nokia
+ Acquired shares in Broadcom


At the moment top 5 positions are as follows:

1. Berkshire Hathaway (USA)
2. Nokia (Finland)
3. UPM (Finland)
4. Intel (USA)
5. NVIDIA (USA)

Our largest sector allocation continues to be semiconductor industry by a wide margin to the next.

This is what being long in stock market at times like these look like

I have said previously that I don't believe in timing the market. This includes pledge of not jumping out of market when it starts to look bad. Only exception to this rule would be a clear stock market bubble (i.e. valuations become crazy like for tech stocks back in 1999).

Well,
This is what following these rules have looked like recently:

That's value of our largest broker account over 3 years. As you can see the recent crash has taken the aggregate value of all stocks in that portflio back to levels seen at end of 2018 and early 2017.

Some are still above 100% the buy price, but some have sank 50% of the purchase price. And the rest are in between these extremes.

Whatever time I have currently to spare to following market (and that's very little considering the exceptional situation we all are exposed to), I spend not focused on the daily swings of the market, but to the quality and financial condition of the corporations we continue to be invested in.

As Benjamin Graham has said and lately most famously echoed by Warren Buffett:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

My experience with stock market crashes like this, 1999, 2008 and many more smaller ones is that market will overshoot both directions and it's close to impossible to find the top or the bottom. This is not to say I haven't made a lot of changes to the portfolio - I have. The point is that I make sure we are 90-100% exposed at all times because one day this craziness ends and markets correct very rapidly. We have stocks where the daily swings to both directions might exceed 15%. Missing few upward swings would be really bad especially now that we have taken the ride all the way down.

Rising tide will eventually lift all boats. The trick right now is to stay away from the boats that might sink and stay invested in the ones that will be there also very likely in 10-30 years.

Good health to you and your families and friends.
Stay safe.

Portfolio on January 1st

Our starting portfolio allocation for year 2020 was as follows:

• Stocks 96,7%
• Gold 1,0%
• Cash 2,3%

No bonds. We simply substitute bonds with quality dividend payers in our portfolio. The cash position was temporary and related to transactions near change of the year.

No big structural changes were made during 2019 (certainly not compared to what was done during 2018).


Geographical Allocation (stocks):

• Europe 57,3%
• North America 42,7%
• Emerging markets 0%

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


Sector Allocation is heavily tilted towards technology companies (IT & Technology 54,8%) and specifically to semiconductor sector (27,5%).

Sector Allocation (stocks)

The plan is to sell technology stocks early 2020 and invest into other sectors. As much as I like and believe in our technology portfolio it has come time to balance the portfolio.

Top 5 positions - in order of weight in portfolio:

1. Apple (USA)
2. Western Digital (USA)
3. Micron (USA)
4. UPM (Finland)
5. NVIDIA (USA)

There is now 5 Finnish and 5 U.S companies  among largest 10 positions. The plan for 2020 is to increase weight and number of Finnish corporations at expense of the technology companies listed in the top 5.

2019 - Best year ever

Happy New Year 2020!

The year 2019 ended up to be the best year we have ever had in stock markets in terms of

• yearly gains (+36,2%)

• gains relative to our benchmark investment* - passive index investing (+8,6%)

• absolute gains 💰

Our best performing stocks were mainly from USA: Apple and most of our semiconductor plays (NVIDIA, Micron and Western Digital). Also some of our Finnish stocks did really well even though the Finnish market lagged most other markets with OMXH25 index returning "just" about 15%.

Portfolio performance 2009-2019.

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

In terms of cumulative yearly gains, we are now 17,7% above the benchmark investment. In the larger scheme of things (cumulative gains net of taxes 218,8% so far) this is very small deviation. Therefore, the key contributor to gains have been quite simply the decision to stay fully invested in the market.

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

As a new chart I have included the view to the absolute value of the portfolio so that the starting level on 31.12.2018 is scaled to 100. The orange bars single out money added to the portfolio each year. I would call this "the snowball view" as it gives very good idea on the benefits of compounding gains. 

It also puts in perspective our worst year (2018) and our best year (2019) so far. 

Portfolio absolute size (scaled 2008 = 100)

What we started with at end of 2008 (scaled to 100) has grown to 25-fold portfolio over the past 11 years.

Going into 2020 we continue to be almost 100% invested into stocks. I will cover our starting allocation in the next post.


*) 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).