Monkey and crayon portfolios performance review.

Monkey and crayon portfolios performance review. Monkey and Crayon stock portfolios five years later. This is an update on the current status of the experiment. In this blog follows a performance review of the two stock portfolios. Both portfolios are being constructed as per the guidelines of the book “Beat the Stock Market Casino” (available on Amazon). The purpose is to show how one can build a retirement stock portfolio perfectly fine by yourself, without much difficulty and hopefully with perfectly acceptable returns. For a quick recap the monkey portfolio picks a different stock randomly with a marker in the quotations page of the newspaper once every six months. The crayon portfolio follows where the monkey portfolio leads in order to keep things comparable. The chosen stocks need to have a US listing in order to be tracked by the portfolio tracking websites. Last but not least the primary listing needs to be in a different currency from the previous two stock picks. That is the experiment in a nutshell. The blog started on the blogger.com website. This is the last update on the experiment on that website. New updates for this project will be released on Rogier’s substack going forward; Substack Home - Rogier’s Substack A full history on this beat the stock market casino project for the monkey and crayon portfolios can also be found on the below company website; Blog | Holland Park Capital London The monkey and crayon portfolios are paper portfolios. Paper portfolios as in not exactly tracked with real money. Holland Park Capital London however believes in putting your money where your mouth is. As such the company is long all the stock holdings in this project.

The number of shares purchased is different though and the time of purchase is not similar either so performance wildly differs. We are about five years in the project by now. What has happened in the meantime? We have had two old American presidents since 2019, a nasty virus escaped from China and central banks have mistakenly believed they could increase the money supply unlimited without unleashing the inflation monster. 1. The first goal of any stock portfolio is to start to make money in absolute return terms. Both the monkey and the crayon portfolio have achieved this so far (ignoring dividends). Why are dividends being ignored in the return evaluation? As per Meb Faber some investor’s like to take their dividends and buy Pina Colada’s on the beach with them. Re-invested dividends can grow to be a huge part of long term stock returns. Since not all investor’s re-invest dividends though excluding dividends will create a more realistic return assumption. 2. The second goal in investing is to increase your purchasing power so one needs to stay ahead of inflation. Inflation measurements vary but the BLS has the following inflation numbers for CPI-U; 1.8% in 2019, 1.2% in 2020, 4.7% in 2021, 8% in 2022 and 4.1% in 2023. So starting with a value of 100 in 2019, in 2024 you would need to have around 126.96 to be able to buy the same amount of hamburgers. So in the last five year fiat money in the US lost about 27% of its purchasing value. 3. The third goal when picking single stocks is for returns not to be too far below the S&P 500 index returns on a time weighted basis. Otherwise it would have been clearly better to just invest in the good old S&P 500 index. So how do the returns of these paper stock portfolios stack up? The return for the Crayon portfolio is as of now 49.3% according to the Sigfig portfolio tracking website.

The return for the Monkey portfolio is now 15.1%.

So both portfolios excluding dividends are making money so the first goal is accomplished. Inflation has proved harder to beat. The Monkey portfolio has not beaten inflation so far. The Crayon has achieved the second goal of beating inflation and increasing the purchasing power. Excluding dividends in the return evaluation is mostly unfair for the Monkey portfolio since the dividends here are higher than in the Crayon portfolio. For 2024 for example the StockRover website expects the Monkey portfolio to receive $ 1668 in dividends compared to only $753 in the Crayon portfolio. Over the last five years the Crayon stock portfolio would likely have received around $ 4800 in dividend income. Including that would push the Crayon return up to about 23% return which is still below the second benchmark of 27% in inflation, but at least not a million miles away anymore. Sometimes the stock market has a couple of bad years and it “owes you” some performance. At other times equities get ahead of themselves and you “have already gotten” some of your future returns. Equities should be an inflation hedge long term and at a minimum stay ahead of inflation. It seems therefore reasonable that the monkey portfolio has been unlucky so far and is “owed” some good future performance. Mean reversion is a powerful force. Ten global holdings so far is also not a diversified portfolio yet. Power laws apply in long-term equity portfolios where one or two holdings can be responsible for the majority of your stock market return. You might find only one such super-stock in a portfolio of 100 or even 200 equity holdings. So as the crayon and monkey portfolio will keep on adding stocks eventually they should each find at least one super-stock. Let’s evaluate returns versus the S&P index now excluding dividends. The easiest way is to check versus an investable option like an S&P 500 index ETF that pays out the collected dividends. The SPDR S&P 500 ETF Trust (SPY) is up about 85.2% over the last five years. So a lump-sum investment in May 2019 in the SPY ETF would have worked out best with hindsight. Holland Park Capital London Ltd has pointed out before what a bloody good and under-loved investment the S&P 500 index can be. Lump-sum investing is more risky though as the investments are not time diversified. Also the monkey and crayon portfolios are more globally diversified than the S&P 500 index. So was all that extra diversification a price worth paying? So far the answer has to be no. Because the monkey and crayon only make an investment every six months the time weighted performance is better than reported returns above. The capital of the crayon and monkey had considerably less time in the market compared to the SPY ETF. Time in the market is crucial for stocks and is more important than timing the market. If we would halve the SPY return to 42.6% it would become a fairer comparison. The crayon portfolio managed to beat that with a 49.3% return. The monkey portfolio underperformed that 42.6% return. So far the monkey has picked more value stocks with higher dividend yields. The monkey portfolio return so far was not worth it with 15.1% return. One of the most boring books I ever read was from the late Daniel Kahneman. The book called “Thinking, Fast and Slow” dives into human overconfidence and mean reversion. Luck plays a much bigger role than we give it credit for in investing. Basically mean reversion should help the monkey portfolio to catch up a little in performance going forward if we had to make a prediction according to the book. By the same logic the portfolio that performed best in the past the crayon portfolio should be predicted to underperform going forward. Time will tell. Let the games begin! To be continued... May the force be with you! Good luck on your investing voyage. Please leave a like and subscribe on my Substack if this blog was of value to you. This blog was written for entertainment and information purposes. The above is not financial advice or investment advice. Investors in stocks can lose money. If in doubt please hire a licensed financial advisor before committing money in the stock market. Do your own research. Holland Park Capital London Ltd is not liable for anything written in this blog.

Tenth pin stuck in the newspaper

Warren Buffett’s portfolio is very concentrated. Berkshire Hathaway is the second largest owner of Apple. The percentage owned is 5.83%. According to the Stratosphere website the Apple holding makes up 50.04% of the listed equities portfolio Warren and Charlie invested in for Berkshire. Charlie Munger died recently. He will be missed. Warren and Charlie have created immense joy and value for their stakeholders. Charlie was one of those old school gentleman for who their word was their bond. Munger’s formula for success should be taught in schools around the world. “It’s so simple. You spend less then you earn. Invest shrewdly, avoid toxic people and toxic activities, and try and keep learning all your life, etcetera, etcetera. And do a lot of deferred gratification because you prefer life that way. And if you do all those things, you are almost certain to succeed. And if you don’t, you’re gonna need a lot of luck.”

Picture above; Stocks wheel of fortune Berkshire owns plenty of different stocks. The portfolio concentration is huge. Not everyone would or should put over halve of their value of the listed stock holdings into one investment (Apple). Charlie Munger and Warren Buffett however have proven their concentrated investment style worked for them. In terms of asset allocation their style is also concentrated and prefers equities. Warren Buffett has said that he never in his life had less than 90% of his assets in equities. For most investors it is true that if you get your asset allocation right you will make money. The asset allocation part is where most of the value is being created in investing. Vanguard UK; “Asset allocation drives the majority of long-term returns, not security selection.” Berkshire’s cash pile reached a fresh record of $157.2 billion in November 2023. It seems Warren is adding to the “T-bill and chill” part of his investments. With bonds yield finally around 5% again that is not a big surprise. Bonds are back as a valid investment for asset allocators after a horrid run... Bonds maturing in ten years or more have slumped 46% since peaking in March 2020 (source Bloomberg). That’s just shy of the 49% plunge in US stocks after the dot-com bust. Investors are now singing a slightly different version of Sabrina’s song Boys (Summertime Love); Bonds, bonds, bonds. I’m looking for a good time. Bonds, bonds, bonds. I’m ready for your love. Interestingly China and some petrol countries are this year actively selling US treasuries and realizing huge losses by doing so. The bank of England is also selling part of their bond holdings at terrible losses for the UK taxpayer. There might be a lesson in here for your asset allocation. Follow Warren and do the opposite of central banks and dictatorships. To ride on Buffett’s coattails means to become successful by attaching oneself to his success. There are plenty of investors that have sold out of stocks in the last two years. It is a good sign that the rent-a-stock crowd has left the stock market casino. Investing with permanent capital means one needs to be comfortable being uncomfortable. When buying something hurts like hell there is a good chance that is the right thing to do long term. To quote Maverick Equity Research; “Bears make headlines and lose money, bulls make money! As always...” You need the endurance to not to sell out of your equity positions at the worst part of the cycle. Actually practice buy-and-hold. Or as Holland Park Capital London says buy-and-hope... Peter Hargreaves stated recently in the Telegraph newspaper; “I must emphasise that a well-constructed portfolio should need very little tinkering. An important rule in investment is that time in the market is more important than timing.” The first rule of compounding according to Charly Munger; “Never interrupt it unnecessarily.” It is about time to stick the tenth pin into the quotation page of a newspaper and pick a (none £ listed and none Euro listed) stock this time. It makes sense to aim for a dollar listed stock this time for diversification reasons and according to the investment plan of the book “Beat the Stock Market Casino”. First though let’s have a look at how the monkey and crayon portfolio have done so far. Both the monkey and the crayon portfolios are paper portfolios. A paper portfolio doesn’t exist in the real world. No real money is put to work in a paper stock portfolio. Holland Park Capital London Ltd does seek to own all the companies in the monkey and in the crayon portfolios, but the timing of the stock market purchases will be different and the number of shares purchased and the average purchase prices will be different as well. The returns that Holland Park Capital London Ltd will achieve will be completely different from the paper portfolios as a result. The monkey portfolio is still making money and is up 9.2% now excluding dividends. The crayon portfolio was luckier so far. The crayon portfolio is up 51.5% (excluding dividends) according to the Sigfig.com website since inception. The real performance difference between the monkey and the crayon is less than it appears because of dividends. The last couple of stock picks for the crayon portfolio are in the red. That makes sense as when the tide goes out all boots are sinking. LVMH (9th), Diageo (8th), Inmode (7th), Games Workshop (5th) are hurting the performance of the crayon portfolio. The earnings of those four companies are still growing nicely though. Holland Park Capital London is happy to be owner of a small chunk of those businesses for the long term. This project started in May 2019.

Above; S&P 500 return May 2019-November 2023 with dividends reinvested, fees ignored and taxes estimated (source dqydj.com). A lump sum invested in an S&P 500 ETF in May 2023 would have done better than the monkey and the crayon portfolios. The return figures for the monkey and crayon portfolios are with dividends excluded (so the returns would be higher in reality). Also the lump sum invested would require all the money to be there up front. The monkey and crayon portfolio invest piecemeal every six months. Therefore the monkey and crayon had a lot less money invested for most of that period versus the lump sum to come up with those returns. The time-weighted returns therefore are better than it looks above for the monkey and the crayon portfolios. The investments for the monkey and crayon portfolio aim to be more globally diversified than the S&P 500 index. Of course the S&P 500 earnings also come from overseas earnings so the S&P 500 index has some of that global diversification already baked in. Finally the goal for Holland Park Capital London Ltd is to make money on an absolute return basis with this investment method. Relative returns are interesting, but one can eat from absolute returns and not from relative returns. The tenth position will have a new position value of about $5000 according to the “no capital gain taxes growth investment plan” in the book ‘Beat the Stock Market Casino’. Have you bought the book “Beat the Stock Market Casino” yet on Amazon? The crayon portfolio follows where the monkey portfolio leads to keep things simple and comparable. Both portfolios will invest around $5000 in the tenth round of investment picks. Holland Park Capital London Ltd’s stock selection skills are completely incompetent compared to Warren Buffett and Charlie Munger. Diversification, buy-and-hope with a long time horizon and asset allocation is the name of our game. The company just bought a 2027 junk bond in the UK with a 12% yield. The first investment in the bond bucket in order to diversify the asset allocation as well. Bonds, bonds, bonds; we are looking for a good time! For the tenth round the marker landed on the listed stock Dollar General Corp with code DG on the quotations page of the FT newspaper. The day range on Friday the 15th of December 2023 for this listing was 129.35-130.99 in USD. For the monkey portfolio a paper transaction was added to the paper portfolio of 38 shares at $130.99 the day’s high price. That transaction had a value of about $4978.

Above; FT newspaper green marker landed on the stock Dollar General for the monkey stock pick of the tenth round. For the crayon portfolio a paper transaction was added as well. The advantage of buying a stock every six months for the long term is that is focuses the mind. It reminds of the Lose Yourself song from Eminem. “You only get one shot, do not miss your chance to blow. This opportunity comes once in lifetime, yo.” To the crayon paper portfolio unsurprisingly the stock Apple Inc with code AAPL listed in the USA was added. Good enough for Warren and Charlie so good enough for Holland Park Capital London. The traded day range on Friday the 15th of December 2023 for the AAPL listing was 197.02-198.4 in USD. For the crayon portfolio 25 shares of AAPL at $198.4 were selected. That transaction value on paper was about $4960. Future performance of the two new stocks will depend on the future multiple of the earnings paid by investors and the future earnings themselves. Both are impossible to predict. There is no analysis here of why Holland Park Capital London Ltd put AAPL in the crayon portfolio in the tenth round. It is just the opinion of Holland Park Capital London Ltd to like this stock at this moment in time best for the US stock market. This is not financial advice. Do your own research please. This article is for information purposes only. Both paper portfolios have 10 holdings now. Slowly but surely the portfolios start looking a little like diversified portfolios. May the force be with both paper portfolios. Thanks for reading this blog. Holland Park Capital London hopes you enjoyed the information in the blog. This is not a financial promotion. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long the stocks in the crayon portfolio and the monkey portfolio. Holland Park Capital London Ltd just doesn’t have the same amount of shares per holding as the paper crayon and monkey portfolios. The purchase prices are also completely different. Holland Park Capital London Ltd is also long the S&P 500 index. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. This blog is for information purposes only. Make your own decisions please. Do your own research. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Your capital is at risk when you invest in stocks. In other words you can lose all your money by investing in stocks. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London Ltd is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.

Ninth pin stuck in the newspaper

Warren Buffett’s portfolio is very concentrated. Warren Buffett and Charlie made some comments on their investments at Berkshire Hathaway’s 2023 shareholder meeting.

Berkshire owns plenty of different stocks. The portfolio concentration though is huge. Just five companies make up about 76% of the value of the listed stock holdings for Berkshire Hathaway Inc. Charlie Munger doesn’t see any problem with that. Apple, Bank of America, Chevron, Coca Cola and American Express are the top 5 in common stock investments for Berkshire Hathaway. Charlie said it is not that easy to find good stock opportunities that are easily identified. If he can only find limited numbers of good investments say three. Charlie would then rather be invested in those 3 stocks instead of his worst ideas. The beauty is of course that Warren and Charlie can say with confidence what their best investments will be going forward say the next five years. If they invest in only 5 stocks, they are likely right with 3 of those. The other 2 stocks will likely underperform the S&P 500 mildly or be only down 20% over 5 years. Most other people that will try that will not fare so well. Most people can’t predict upfront which companies from their stock portfolio will perform best in the next five years. Holland Park Capital London certainly cannot predict that. So only for investors that have a proven track record of predicting their best stocks in advance a concentrated portfolio makes sense. For the rest of us mortal souls that can’t tell their best ideas from their worst a diversified portfolio makes more sense. So do concentrated portfolios make sense? It depends on who you are. If you are in the same league as Warren Buffett and Charlie Munger then yes by all means go for it. If you are smart enough to realize you are no Warren Buffett than diversify, diversify and diversify even more. Holland Park Capital London prefers the second solution for its own money. Buy and hope for the best suits Holland Park just fine. Warren wasn’t very impressed by how the regulators had handled the US banking crises so far. The unrealized loss of trillions of dollars in the financial industry by underwater bond investments is clearly making the case for diversification for people that do not know what they are doing. Berkshire is still long Bank of America but has sold off or reduced most other bank stocks it used to own. On balance Warren has reduced the equity exposure in 2023 so far. Buffett seems to feel morally imposed to hold on to his Bank of America shares since he was invited to help them out back in the day and was rewarded for his risk taking with a good investment in Bank of America. More worrying for stock and bond investors in US banks is that so far in case of the banks that have gone down the stock and bond investors have been wiped out. It becomes a self fulfilling prophecy. When a bank is seized by the US government, its common shareholders are wiped out. First Republic shareholders and debt holders will not receive anything. So when a bank is in trouble according to Twitter why wait? Sell now ask questions later is a good capital preservation method for US stock and bond holders in troubled US banks. Everyone knows any stock holding can go to zero. Any bank stock equity holding just can get there faster because of leverage and a mismatch of assets and liabilities. Warren wasn’t very complementary about the management of the failed banks. His father lost his job once thanks to a bank run. He despises the heads I win and I get rich and tails I keep my bonuses stay rich and just lose my job as manager of a failed bank attitude. Berkshire Hathaway is not sitting on unrealized losses on investments in bonds. As expected Warren and Charlie know what they are doing. Buffett mentioned his companies are expecting lower profits this year. The earnings of listed companies are already in a recession. It is a matter of time this year for the real economy to hit a recession as well. The equal weighted version of the S&P 500 index (RSP +2.1% YTD) has underperformed the standard capitalization weighted benchmark (SPY +11.92% YTD) by the most in a calendar year since Bloomberg started tracking this in 1990. Small companies always underperform more and faster going into a recession. The money supply is negative year over year now. Fed officials are once again very busy overcompensating for their previous overcompensation that is now causing big problems. As Milton Friedman said: “Inflation is always and everywhere a monetary phenomenon.” Warren Buffett also thinks that Apple is still worth it. He loves the customer loyalty and Apple’s speedy share buybacks that actually shrink the number of outstanding shares in the company and not just enrich the management. On that topic Apple’s latest banking offering is a savings account with a 4.15% annual percentage yield. The big US banks still offer deposit rates of below 0.25% annual percentage yield. Who is having a better stakeholder policy Apple or the big US banks? It is about time to stick the ninth pin into the quotation page of a newspaper and pick a (none £ listed and none $ listed) stock this time. It makes sense to aim for a Euro listed stock this time for diversification reasons and according to the investment plan of the book “Beat the Stock Market Casino”. First though let’s have a look at how the monkey and crayon portfolio have done so far. Both the monkey and the crayon portfolios are paper portfolios. A paper portfolio doesn’t exist in the real world. No real money is put to work in a paper stock portfolio. Holland Park Capital London Ltd does seek to own all the companies in the monkey and in the crayon portfolios, but the timing of the stock market purchases will be different and the number of shares purchased and the average purchase prices will be different as well. As such the returns that Holland Park Capital London Ltd will achieve will be completely different from the paper portfolios by default. The monkey portfolio is making money again and is up now over 3% excluding dividends. The monkey portfolio has a higher dividend yield than the crayon portfolio. The Stockrover website for example guesses that the current monkey portfolio will pay over $2000 in annual dividends in 2024. The crayon portfolio was luckier so far. The crayon portfolio is up almost 55% (excluding dividends) according to the Sigfig.com website since inception. The real performance difference between the monkey and the crayon is less than it appears because of dividends.

Picture above; the current 8 holdings of the Crayon Portfolio courtesy of the Sigfig website. Because the monkey portfolio now makes money the ninth position will have a new position value of about $5000 according to the “no capital gain taxes growth investment plan” in the book ‘Beat the Stock Market Casino’. Have you bought the book “Beat the Stock Market Casino” yet on Amazon? The investment plan makes sure of higher $ value bets when the stock portfolio loses money. Simply put when the market is down the odds of buying a stock that goes on to double or more (long term) is higher. So a down market when the stock market is flashing a “for sale” sign can be an opportunity for long term investors. Because of the higher $ value bets when the stock portfolio is down method is embedded in the investment plan there is no need to time the market. It is just a matter of following the investment plan. Part of the value added of this strategy should be the “doubling up” in down markets that is in the investment plan. The crayon portfolio follows where the monkey portfolio leads to keep things simple and comparable. So the crayon portfolio will also invest around $5000 in the ninth round of investments in the crayon paper investment portfolio. Holland Park Capital London is no Warren Buffett or Charlie Munger so diversification is the name of our game. Clearly a portfolio with only nine holdings is still way off from a diversified portfolio... So both the monkey and crayon portfolio are still extremely risky, but the plan is to add another holding to both portfolios every 6 months so both paper portfolios will get diversified eventually... Plus both paper portfolios are being “time diversified” as well and at least that is reducing risk as well..... The monkey has no opinion and no knowledge. Just sticking to an investment plan and throwing darts at the quotation page of the FT or Wall Street Journal will do the trick of making money. Holland Park Capital London would bet that the monkey portfolio after another 8 years will consistently make money. Time in the market and a diversified portfolio are hard to beat. Put your money where your mouth is. While the monkey and crayon portfolios are paper portfolios, Holland Park Capital London has a holding in all the stock holdings of those portfolios. Just not the same amount of shares per holding as the paper portfolios. The purchase prices per holding are completely different as well. For the ninth round the highlighter landed on the listed stock EssilorLuxottica SA with code EL of the quotations page of the FT newspaper. Ideally one would buy the liquid French listing. For portfolio tracking reasons however we looked up the most liquid US listing for the same stock. That listing is ESLOY. The day range on Tuesday the 6th of June 2023 for this listing was 89.21-89.95 in USD. For the monkey portfolio a paper transaction was added to the paper portfolio of 55 shares at $89.95 the day’s high price (on the 6th of June 2023). That transaction had a value of about $4947.

Above; FT newspaper yellow marker landed on the stock EssilorLuxottica for the monkey stock pick of the ninth round. For the crayon portfolio a paper transaction was added to the crayon paper portfolio of stock LVMH Moet Hennessy Louis Vuitton SE with code MC listed in France so also in listed in the Euro currency. There is a less liquid US listing of the same stock under code LVMUY. The traded day range on Tuesday the 6th of June 2023 for the LVMUY listing was 173.49-174.57 in USD. For the crayon portfolio 28 shares of LVMUY at $174.57 were selected for the paper portfolio (also on the 6th of June 2023). That transaction value on paper was about $4888. Future performance of the two new stocks will depend on the future multiple of the earnings paid by investors and by future earnings. Both are impossible to predict. There is no analysis here of why Holland Park Capital London Ltd put LVMH in the crayon portfolio in the ninth round. It is just the opinion of Holland Park Capital London Ltd to like this stock. This is not financial advice. Do your own research please. As Mark Manson says in his book “The Subtle Art Of Not Giving A F*ck”; “True happiness occurs only when you find the problems you enjoy having and enjoy solving”. Both paper portfolios have 9 holdings now. Slowly but surely the portfolios start looking a little like diversified portfolios. May the force be with both paper portfolios. Thanks for reading this blog. Holland Park Capital London hopes you enjoyed the information in the blog. This is not a financial promotion. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long the stocks in the crayon portfolio and the monkey portfolio. Holland Park Capital London Ltd just doesn’t have the same amount of shares per holding as the paper crayon and monkey portfolios. The purchase prices are also completely different. Holland Park Capital London Ltd is also long the S&P 500 index. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. This blog is for information purposes only. Make your own decisions please. Do your own research. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Your capital is at risk when you invest in stocks. In other words you can lose all your money by investing in stocks. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London Ltd is not liable for any mistakes in this blog. Sorry for any grammatical errors in advance, but Holland Park Capital London Ltd hopes the reader still understands the content. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.

Eight pin stuck in the newspaper

 

Eight pin stuck in the Evening Standard newspaper

You don’t know what you are doing

Or as the Premier League footie supporters sing to opposite team managers that not win enough;

“You will be sacked in the Morning”.

Liz Truss and Kwasi Kwarteng can vouch for all of the above.

Despite that they were right about a couple of things.

Growth increases tax income.

Hike taxes too much and one reduces tax income.

The Bank of England (BoE) for example has been criticized by Mr Kwarteng for failing to get a grip on inflation.  It is the BoE job to ensure inflation should be around a 2 percent target. You can hardly say job well done BoE now that UK inflation is higher than 11 percent.

Central bankers around the world have failed in their fiduciary duty to citizens to keep inflation under control.

The Financial Conduct Authority (FCA) is part of the BoE. The FCA is constantly criticizing financial firms for not delivering good outcomes for their customers. The BoE has made UK citizens and UK firms at least 9% poorer (11-2) than planned.

How come the FCA is not criticizing its own boss the Bank of England for delivering such a poor outcome for its customers?

 The UK in all it wisdom is still raising tax rates this year yet again despite being or going into a recession.  Prime Minister (PM) Sunak “firmly believes in lower taxes”. The English have a good word for that and it is poppycock.

More than 1 in 5 people out of the working-age population in the UK is now not working and “economically inactive”. More than 600,000 UK people are now out of the workforce than compared to the period before Covid. Clearly Netflix and chill has some fans in the UK. PM Sunak’s current tax hike exercises will add to the incentive for UK people to Netflix and chill. Charlie Munger has repeatedly stated to just look at the incentives if you want to understand why things happen in the way that they do.

Furthermore for the first time in 20 years the number of registered businesses in the UK has gone down for 2 years in a row now. Making UK tax digital just put another burden on UK businesses. Corporation taxes are set to go up as well in the UK next year. Companies House registration fees for setting up a new business are about to rise as well. Clearly hiking UK dividends tax or UK capital gains taxes on top of that is not going to help the UK businesses going forward. The social contract between the small businesses and the UK government was already on feeble ground after the UK government forbade plenty of UK businesses to serve their clients in the pandemic.

Liss Truss analysis on how to make a success of Brexit was right; it will require growth, stable or lower taxes, less regulation and an open for business attitude.

PM Sunak is also right about one thing; neighbour countries don’t finance healthcare out of the general taxation as the UK does with the NHS.

The UK treasury sold 25% of the UK bonds as inflation linked bonds. That decision looks very costly now. The UK consumer price index (CPI) is 11.1%. Inflation linked bonds pay interest linked to the UK retail price index (RPI). The latest RPI hit a cool 14.2%. In financial year-to-August data from the UK office for national statistics (ONS) the UK interest payments were already up 65% compared to the same year before period. The ONS says; “the recent high levels of debt interest payable are largely a result of higher inflation, with the inflation payable on index-linked gilts rising in line with the RPI.”

“Saving the NHS” will mean that the NHS will suck up an ever increasing percentage of UK tax going forward. The long term outlook for the UK currently is that 50% of tax income will have to be spend on honouring interest payments on UK debt/bonds. The other 50% of UK tax income will go to the NHS.

In the Netherlands in the 1990’s it took a leftish politician Wim Kok (PvdA) to admit that the Netherlands was “sick” and reform the Dutch benefit systems. In the UK we can look forward to a similar playbook as the UK is clearly sick at the moment.

Picture; £ is sinking.

Ambrose Evans-Pritchard on November 7^th 2022 had a great article in the Telegraph newspaper on central banks and pushing the QE experiment too far. He rightly pointed out that Quantitative Easing (QE) is completely different technically than printing bank notes Zimbabwe or Weimar Republic style. QE is more like a long term bond purchase financed by a short term bond liability owed to commercial banks. The central banks have borrowed short to buy long. The QE is a derivative and looks like a maturity swap derivative. Going long those long term bonds in 2020 and 2021 is not the best trade this year. ING said the Federal Reserve Board (FED) has incurred a paper loss of $1 trillion (and counting) in 2022 on its $8.7 trillion balance sheet. $1 trillion is a big number. This might go down as the worst trade ever in human history...

Question; “How are you doing?”

Answer; “Not so well. My employer the FED just lost 1 trillion dollar on their P&L this year”. 

Obviously no FED central banker will get fired for losing that much money. The FED might even ask for more resources/money for “better risk management”. No sh*t Sherlock. Always ask for more people, power and money after doing a bad job.

In real cash flow numbers the game is up as well. Having an inverted yield curve is absolutely killing the interest income versus interest bill equation. For example the US short term interest rate is around 4.17% now at the time of writing. The US 10 year interest rate is around 3.69% now. The difference of 48 basis points may not sound like a lot but the FED will have to find it from somewhere. An interest payment of 0.48% over a lot of money is still a lot of money to pay.

QE could well go down in history as the worst trade ever. 

The snapback globally in interest rates was not only dangerous for the defined benefit UK pensions industry with their Liability Driven Investment structures (LDI) or investors with long term bonds in their (retirement) portfolios but also dangerous for the central banks that played with QE .. The UK Treasury just had to make the first ever payment to the Bank of England in October 2022 for the cost of the BoE QE experiment. The ONS called it the first indemnity payment from HM Treasury to the Bank of England Asset Purchase Facility Fund.

As Alice Guy said for Interactive Investor; “In the UK, interest rates have climbed from 0.1% to 3% in less than one year. That is an increase of 2900%.” This year we have seen quite a snapback in interest rates indeed and the snapback is ongoing. Mean reversion in financial markets can be very powerful.

All of this begs the question;

What does it take to fire a central banker?

Football managers that do not collect points in the Premier League get fired left right and centre. Even UK politicians can get fired. What is the name of the last central banker you can name that got fired though?

Surely the damage to society of a football manager not working out is smaller than the damage to society a central bank manager not working out can do.

When do we say enough is enough?

Central Bank independence is a very charming ideology but it seems to have pushed box ticking regulators that love to regulate financial markets more heavily all the time to the top of the food chain. Maybe it is time for some central bankers that actually understand financial markets.

UK long term interest rates technically already broker higher outside of the long term range the day before the mini budget. Mr Kwarteng got all the bad press but the damage already started when the BoE failed to match the FED’s interest rate hike literally the day before the UK mini budget.

What is the point of having an inflation target if there are no central banker’s job consequences for missing the 2% inflation target by 550% of more?

If western inflation goes to 100% like in Turkey are the Western top central banker’s jobs still going to be safe because of “central bank independence”?

One can easily make a rule that the central banks stay independent but the top central banker in a country will automatically get “sacked in the morning” when inflation deviates more than 100% from the inflation target set. The top central bankers with their high salaries and gold plated pensions can afford to take that risk.

Alternatively we can ask a couple of football fans to do a poll every quarter with only one question; fire the top central banker yes or no? That should spice things up.

We should also get rid of the interest rate setting groups/meetings at central banks while we are at it. They have done an appalling job.

Credit to Meb Faber for saying the interest rates always go in the direction of the 2 year bond yield set by the market anyway.

Let’s just adjust the interest rate every 3 months to be the average of the current interest rate and the 2 year bond in a country set by the market. Easy peasy.

That was enough ranting for this blog. It is time to link the UK story to the next investment.

 

It is about time to stick the eight pin into the quotation page of a newspaper and pick a (none Euro listed and none $ listed) stock. It makes sense to aim for a £ listed stock this time for diversification reasons and according to the investment plan of the book Beat the Stock Market Casino.

Considering the less than rosy macro outlook for the UK it pains Holland Park Capital London Ltd to pick another UK listed investment in this round.

Luckily the UK listed holdings of the crayon portfolio Ashtead and Games Workshop also make money from outside the UK and are not 100% sterling (£) earners. Ashtead probably only makes 10% of its earnings from the UK. Games Workshop probably only makes around 30% of its earnings from the UK.

The monkey portfolio already owns Lloyds Banking Group PLC which is for the most part a sterling £ earner and Lancashire Holdings Ltd which has more global earnings.

Maybe one more sterling earner in the portfolio can’t do too much harm. After all no country stays a disaster for ever.... Here is for hoping...

First though let’s have a look at how the monkey and crayon portfolio have done so far. Both the monkey and the crayon portfolios are paper portfolios. A paper portfolio doesn’t exist in the real world. A paper stock market portfolio is a simulated portfolio so that investors can practice without the involvement of real money. Holland Park Capital London Ltd does seek to own all the companies in the monkey and in the crayon portfolios, but the timing of the stock market purchases will be different and the number of shares purchases will be different as well. As such the returns that Holland Park Capital London Ltd will achieve will be completely different from the paper portfolios by default.

The monkey portfolio is under water and losing money now. The monkey portfolio is down $680 or around 1.5% (excluding dividends) according to the Sigfig.com website since inception. Luckily the dividend adjusted return is actually higher for the monkey portfolio. The Stockrover website for example guesses that the current monkey portfolio will pay $1700 in dividends in 2023. 

 

Picture above; the current 7 holdings of the Monkey Portfolio according to the Stockrover website.

The crayon portfolio was luckier so far. The crayon portfolio is up about $26310 or around 59.3% (excluding dividends) according to the Sigfig.com website since inception. The crayon portfolio has given up a lot of its previous winnings this year. Mean reversion is a bitch. The real performance difference between the monkey and the crayon is less than it appears as the current crayon portfolio will pay lower yearly dividends than the monkey portfolio. The current crayon portfolio will only pay $770 in dividends in 2023 as predicted by the Stockrover website. 

Picture above; the current 7 holdings of the Crayon Portfolio according to the Stockrover website.

Because the monkey portfolio now loses money the eighth position will have a new position value of about $7500 according to the “no capital gain taxes growth investment plan” in the book ‘Beat the Stock Market Casino’.

Have you bought the book “Beat the Stock Market Casino” yet on Amazon?

 

The investment plan makes sure of higher $ value bets when the stock portfolio loses money. Simply put when the market is down the odds of buying a stock that goes on to double or more (long term) is higher. So a down market when the stock market is flashing a “for sale” sign can be an opportunity for long term investors. The current market should give investors plenty of opportunities to invest in companies whose share prices have the possibility to double in the next 5 years. If an investor makes around 15% a year then the investor will stay comfortably ahead of current Western inflation. As the higher $ value bets when the stock portfolio is down is embedded in the investment plan there is no need to time the market. It is just a matter of following the investment plan. Part of the value added of this strategy should be the “doubling up” in down markets that is in the investment plan.

The crayon portfolio follows where the monkey portfolio leads to keep things simple and comparable. So the crayon portfolio will also invest around $7500 in the eighth round of investments in the crayon paper investment portfolio.

Clearly a portfolio with only seven or eight holdings is still way off from a diversified portfolio... So both the monkey and crayon portfolio are still extremely risky, but the plan is to add another holding to both portfolios every 6 months so both paper portfolios will get diversified eventually...

Plus both portfolios are being “time diversified” as well and at least that is reducing risk as well.....

The monkey has no opinion and no knowledge. Just sticking to an investment plan and throwing darts at the quotation page of the FT or Wall Street Journal will do the trick of making money. Holland Park Capital London would bet that the monkey portfolio after another 8 years will consistently make money. Time in the market and a diversified portfolio are hard to beat. Put your money where your mouth is. While the monkey and crayon portfolios are paper portfolios, Holland Park Capital London has a holding in all the stock holdings of those portfolios. Just not the same amount of shares per holding as the paper portfolios.

For the eighth round the yellow highlighter landed on the UK listed stock Hikma Pharmaceuticals PLC with code HIK of the quotations page of the Evening Standard newspaper. Ideally one would buy the liquid UK listing. For portfolio tracking reasons however we looked up the most liquid US listing for the same stock. That listing is HKMPY. The day range on Friday the 25^th of November 2022 for this listing was 36.57-37.10 in USD. The volume in this listing that day was only 1800 shares. For the monkey portfolio a paper transaction was added to the paper portfolio of 202 shares at $37.10 the day’s high price (on the 25^th of November 2022). That transaction had a value of about $7495.

Above; Evening Standard newspaper yellow marker landed on the UK stock Hikma Pharmaceutical PLC for the monkey stock pick of the eight round.

For the crayon portfolio a paper transaction was added to the crayon paper portfolio of stock Diageo PLC with code DGE listed in the UK so also in listed in the £ currency. There is a less liquid US listing of the same stock under code DEO. The traded day range on Friday the 25^th of November 2022 for the DEO listing was 183.3-184.49 in USD. For the crayon portfolio 40 shares of DEO at $184.49 were selected for the paper portfolio (also on the 25^th of November 2022). That transaction value on paper was about $7380.

Future performance of the two new stocks will depend on the future multiple of the earnings paid by investors and by future earnings. Both are impossible to predict with any kind of certainty. Hence no analysis here of why Holland Park Capital London Ltd put Diageo PLC in the crayon portfolio in the eighth round. All that will be said is that Diageo PLC is not a 100% sterling (£) earners. Diageo probably only makes around 10% of its earnings from the UK. Diageo has a price/earnings ratio (P/E) of about 27 and a price/book ratio of 11. As Nick Train has rightly pointed out before some UK companies are trading at lower valuations than global peers as the UK is unpopular at the moment. Diageo’s competitor Brown-Forman Corp for example is trading at a P/E of 39 and a price/book of almost 13. Also three of the companies in the crayon portfolio (Inmode, Argenx and UnitedHealth Group) could be seen as part of the healthcare sector. For diversification reasons and in order to get more balance in the crayon portfolio Diageo is a good addition to the crayon portfolio as Diageo is completely different than the three “healthcare” stocks.

Holland Park Capital London Ltd was delighted to read the book Zero to One: Notes on Start Ups, or how to build the future recently. The authors Peter Thiel and Blake Maters write;

“Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up”.

Holland Park Capital London Ltd believes second-guessing stock prices and trying to solve the puzzles in order to get your hands on some of the secrets of the world is what drives us forward. Pursue the secrets. Dare to dream.

Both paper portfolios have 8 holdings now. Slowly but surely the portfolios start looking a little like diversified portfolios. May the force be with both paper portfolios. Thanks for reading this blog.

Holland Park Capital London hopes you enjoyed the information in the blog. This is not a financial promotion. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long the stocks in the crayon portfolio and the monkey portfolio. Holland Park Capital London Ltd just doesn’t have the same amount of shares per holding as the paper crayon and monkey portfolios. Holland Park Capital London Ltd is also long the S&P 500 index. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. This blog is for information purposes only. Make your own decisions please. Do your own research. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Your capital is at risk when you invest in stocks. In other words you can lose all your money by investing in stocks.

 

Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London Ltd is not liable for any mistakes in this blog. Sorry for any grammatical errors, but Holland Park Capital London Ltd hopes the reader still understands the content. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.

 

 

Seventh pin stuck in the newspaper; Grow Forest Grow

Growth and especially exponential growth is something that not a lot of people really understand. Rest assured though it is a lot easier to grow out of problems than to dig the hole deeper and deeper.

Growth stocks had a wonderful 2020 on average.

This year and 2021 have been pretty terrible for growth stocks though.

Even though some of them have had pretty solid earnings they all sold off this year. Let’s not throw out the baby with the bath water.

A decent quality slowly growing large cap US stock in the second halve of 2020 and 2021 wasn’t easy to find with a price earnings ratio (PE) below 30 times. A fast growing US stock in the second halve of 2020 and 2021 wasn’t easy to find below 60 times PE. Well times have changed. With inflation headlines above 10% a year in some major western countries and central bankers talking hawkish to regain some measure of credibility, some investors might expect interest rates to also go to 10% a year in western countries. That isn’t going to happen though. Negative interest rates are here to stay. Governments have simply grown the debt to GDP levels so high now globally that they will need their central banks help to finance and service the debt. Government’s interest rate payments of 10% on their debts per year would sink most countries and therefore their governments. Already this year we have seen unrest in Kazakhstan (because of high gas prices) and Sri Lanka (because of high inflation and shortages of food and fuel). There will be more “Arab springs” this year. When the poor can’t afford to buy bread or to fill up their motorcycle or car they tend to get very angry fast.

The economy is much more fragile than people give it credit for. In the UK and US the short term interest rates have now gone from about zero to 1%. These short term interest rates can probably be doubled from here to 2% before the economy will really start to hurt and crash into a recession.

The 30 year US mortgage rate has gone up already from 3% in May last year to 5.3% now. High energy prices correlate highly with a US recession as well. Biden’s third round of stimulus checks should have all been paid out by now and there is no chance of a new fourth round. Of course free stimulus spending of other people’s money by Mr Biden raised inflation in the US when the US economy was already running along just fine. The responsibility for the next US recession is entirely on Mr Biden and the FED.

China’s dubious lockdown strategy means China is already in a recession. Unless China wants to be in a permanent lockdown going forward one of the consequences as and when they go back to normal is another Chinese inflation spike higher as that is one of the logical consequences of lockdowns. Of course inflation is a hidden tax that will mainly make the poor even poorer.

The terrible geopolitical situation in Eastern Europe means Europe is already in a recession now as well. The EU really got exposed this year for one major policy error after another in the past. The chickens came home to roost.

The UK in all it wisdom has been raising tax rates this year yet again.  Since the Conservatives came back into power in 2010 their one major accomplishment seems to have been the raising of UK taxes. Of course UK tax hikes in the short term raise the UK inflation rate even more. Long term the UK tax raises are bad for animal spirits and will decrease growth. After all why come out of your bed in the morning to work when the state takes most of the fruits of your labor? Another unintended consequence of the lockdowns seems to be what has been named the “great resignation”. In the UK it is estimated 1 million people have left the labor force. Some of those have simply left the UK; others have retired while it is unclear how another part of those 1 million people now get by. What is clear is that there will be almost no income taxes coming in from those 1 million people.... What was the aim again? Raising UK tax rates or maximizing the amount of UK tax revenue coming in yearly?

With central bankers pushing up interest rates globally the global economy is probably only 6 months away from a recession now if we are not in a global recession now already....

Quantitative tightening (QT) is causing a Mexican standoff between the US stock markets and the FED. Who will blink first? The US stock markets are now again throwing a taper tantrum by going down week after week in order to calm down the hawkish FED talk. Is the FED put still alive? It seems unlikely a politically appointed FED Governor Jay Powell (Chair) will want to be accused of destroying Americans 401k accounts..... Time will tell.

On the QT subject it is one thing for a central bank not to reinvest the proceeds of their bond assets into new government bonds. This decreases liquidity but should be manageable as interest rates find their new equilibrium and the central bank balance sheet will decrease naturally and slowly. It is another thing altogether if central banks will actively start selling their bonds in order to bring down their balance sheets faster. Central banks will then effectively be front running the bond issuance of their own governments. This is the opposite of QE by central banks helping to finance their governments. There is no way this aggressive reducing of the central bank balance sheet will go down nicely in their government circles.

In the past 10 years whenever interest rates went up short term the so called “bond proxies” sold off hardest in the equity markets. These sell offs in bond proxies all provided perfect buying opportunities in the last 10 years. Of course with the help of hindsight interest rates also in the last 10 years continued their downward trend of ever lower interest rates. Bond proxies companies like Procter & Gamble Co, Hershey Co, PepsiCo Inc and Coca Cola Co are now instead trading around all time highs. That is curious. Never say the stock market is predictable or heaven forbid rational. This time the stock market prefers to sell off growth and tech stocks on the fear of higher interest rates. Will this again provide a buying opportunity to go contrarian and buy tech and growth stocks now is the question?

So with a recession looming another question should be which companies will profit most from inflation coming down?

Undoubtedly that will be the growth stocks.

In 2023 we will be in a situation again where growth will be very hard to come by. Inflation is likely to moderate anyway from August this year on wards on the base effect. This time last year it was still illegal for a family in the UK to fly out of the country on a holiday. So there was a very low base of flying going on this time last year in the UK. The “flying inflation” year over year is then obvious going to be huge in the UK until the measure was dropped on the 18^th of July 2021. So only in August 2022 is this low flying base effect going to run out of the 12 month inflation numbers. The UK Coronavirus Act 2020 only expired on the 25^th of March 2022 when UK politicians found it politically convenient to get rid of it after the UK politicians themselves were found out of not following their own ridiculous rules. So there is a global base effect at play in the inflation numbers for 1 or 2 more years at least after countries ditch their Corona laws which will slowly fade from the data. This part of the inflation will be indeed transitory.

Why does compounding favor the highest possible yearly earnings growth over dividend payments and low growth?

Let’s run a little theoretical experiment. We have a paper portfolio that invests $10000 in ten investments of $1000 each in ten different high earnings growth stocks. These are fast growing stocks that actually make money by the way (try to check for GAAP earnings in the US and positive free cash flow). Not the previously fashionable revenue growth with zero profits nonsense stocks. We compare the paper portfolio to an investment of $10000 in the S&P 500 index. We have a ten year investment horizon. 

	S&P 500 index	Return S&P 500 index
Start	10000	10% per year inclusive of dividends
After 10 years	25937
Start	Paper Portfolio
10 stocks $1000 each	10000
After 10 years	7 growth stocks went bust and values zero at end	1 returned 100% per year inclusive of dividends. 1000 turned into 1024000. The PE ratio/valuation stayed the same.	2 stocks returned 30% per year inclusive of dividends. 2000 turned into 27572. The PE ratio of those 2 stocks stayed the same.
Paper Portfolio End Value	0+1024000+27572= 1051572

Dare to dream. An end value of $1051572 thanks to compounding and exponential growth beats the heck out of the $25937 end value after 10 year that the S&P 500 index would have delivered in this example.

For long term investors’ having a diversified portfolio with also some growth stocks in there actually makes sense. It is simply easier to grow your way out of problems. Let’s grow the forest/your investment portfolio. Grow Forest Grow!

Impression above of a 7 year old of Grow Forest Grow...

When you are picking growth companies beware of companies that “grow” by making acquisitions. Usually the managers of those companies use a lot of financial engineering and accounting tricks in order to push the share price up temporarily in order to get rich themselves. Companies like this also pay their employees with a lot of newly issued shares that somehow do not seem to count in their companies cost of doing business. Comparing the GAAP earnings per share (EPS) number versus the “adjusted” EPS number can be a clear warning signal here as well. Long term investors cannot eat “funny” earnings at the end of the day. Growth companies need to be run in order to increase all stakeholders’ value and not just the value of the employees and the managers.

Quantitative investors might explain investment returns with performance with factor building blocks. Investment factors could be as diverse as value, growth, momentum, large cap versus small cap. One thing to keep in mind is that these factors as so many other things in investing go in and out of fashion. When a factor is very fashionable and there is a lot of investment of the fast money crowd into that factor already that factor can become “overvalued”. What that means is that if the popularity and valuation of the companies in the factor group comes back to the mean investors can lose a lot of money when the weak hands sell out of that factor. In a way that is exactly what has happened to the growthy lockdown winners group. On the opposite side of the coin the value factor had been out of fashion since central banks started to finance their governments with the so called quantitative easing (money printing) since around 2009. This year now that central banks have promised to shrink their balance sheets and the Value factor is only down 6.8% year to date (YTD) and the High Dividend Yield Factor is only down 3.6% YTD (data based on Seeking Alpha website). The S&P 500 is down 15.42% YTD. The Growth factor is down -23.14% YTD and the Momentum factor is down 21.7% YTD. Dancing with fashion can be a dangerous hobby indeed. The value factor may now include growth stocks.

It is about time to stick the seventh pin into the quotation page of a financial newspaper and pick a (none Euro listed and none £ listed) stock. It makes sense to aim for a $ listed stock this time for diversification reasons and according to the investment plan of the book Beat the Stock Market Casino.

First though let’s have a look at how the monkey and crayon portfolio have done so far.

The monkey portfolio is under water and losing money now. The monkey portfolio is down $2219 or around 5.9% (excluding dividends) according to the Sigfig.com website since inception. Luckily the dividend adjusted return is actually higher for the monkey portfolio. The Stockrover website for example guesses that the current monkey portfolio will pay $1687 in dividends in 2023.

The crayon portfolio was luckier so far. The crayon portfolio is up about $14113 or around 38.1% (excluding dividends) according to the Sigfig.com website since inception. The crayon portfolio has given up a lot of its previous winnings this year. There were a number of holdings that were up 100% plus previously that have come back to earth in the crayon portfolio. That shows the wisdom of selling halve of your stock holding value when the stock is up 100% plus from where you bought it and re-investing the proceeds in something totally different and as uncorrelated as possible. The real performance difference between the monkey and the crayon is less than it appears as the current crayon portfolio will pay lower yearly dividends than the monkey portfolio. The crayon portfolio will only pay $619 in dividends in 2023 as predicted by the Stockrover website.  

Above; Crayon portfolio value over time chart from the Stockrover website

 Because the monkey portfolio now loses money the seventh position will have a new position value of about $7500 according to the “no capital gain taxes growth investment plan” in the book ‘Beat the Stock Market Casino’. The investment plan makes sure of higher $ value bets when the stock portfolio loses money. Simply put when the market is down the odds of buying is stock that goes on to double or more long term is higher. So a down market when the stock market is flashing a “for sale” sign can be an opportunity for long term investors. On that note have you noticed that Warren E. Buffett has been putting cash to work again this year for Berkshire Hathaway? Borrowing a Warren E. Buffett quote from the CFP SDL Free Spirit Fund Factsheet of May 2022;

“The market has been extraordinary. Sometimes it is quite investment oriented... and other times, it’s almost totally a casino, and it’s a gambling parlor.”

Have you bought the book “Beat the Stock Market Casino” yet on Amazon?

The crayon portfolio follows where the monkey portfolio leads to keep things simple and comparable. 

Beating the S&P 500 index would be nice, but first things first let the portfolios make more money than cash on a bank account as in retirement that would be a good start as that is one of the alternatives in the asset allocation.

 

Clearly a portfolio with only six holdings so far is still way off from a diversified portfolio... So both the monkey and crayon portfolio are still extremely risky, but the plan is to add another holding to both portfolios every 6 months so both paper portfolios will get diversified eventually... Plus both portfolios are being “time diversified” as well and at least that is reducing risk.

 

The monkey has no opinion and no knowledge. Just sticking to an investment plan and throwing darts at the quotation page of the FT or Wall Street Journal will do the trick of making money. Holland Park Capital London would bet that the monkey portfolio after another 8 years will consistently make money. Time in the market and a diversified portfolio are hard to beat. Put your money where your mouth is. While the monkey and crayon portfolios are paper portfolios, Holland Park Capital London has a holding in all the stock holdings of those portfolios. Just not the same amount of shares per holding as the paper portfolios.

 

For the seventh round the green highlighter landed on the US listed stock Equinix Inc with code EQIX of the quotations page of the FT newspaper. For the monkey portfolio a paper transaction was added to the paper portfolio of 11 shares at $662 (on the 13^th of May 2022). That transaction had a value of about $7300. This time the monkey portfolio has selected a REIT stock. And this REIT is an expansive one (115 times PE) at that. The Equinix dividend yield is around 2% which is not high for a REIT stock. It is good to see the monkey portfolio not again selecting a value stock. On the internet the data says that Equinix has grown its yearly net income by 34% a year on average for the last 5 years. For diversification reasons it is great news that the monkey portfolio will now finally add its first growth stock. 

Above; FT newspaper green marker landed on the US stock Equinix for monkey stock pick

For the crayon portfolio a paper transaction was added to the crayon paper portfolio of relatively unknown growth stock Inmode Ltd with code INMD listed in the US so also in listed in the $ currency. For the crayon portfolio 296 shares of Inmode at $24.6 were selected for the paper portfolio (also on the 13^th of May 2022). That transaction value on paper was about $7300 as well. On the internet the data says that Inmode has grown its yearly net income by 245% a year on average for the last 5 years. Inmode shows now as having a Price/Earnings Growth Ratio (PEG) of 0.05. It doesn’t come much lower than that. Inmode has a price earnings ratio (PE) now of around 12. 

So Inmode is a growth stock, but a value stock as well! 

Inmode’s stock price implies that the stock market thinks that Inmode’s net income earnings will decrease in the next couple of years. Maybe yes. Maybe not. Time will tell. Inmode’s growth rate is highly unlikely to keep up the previous growth rate in the next 10 years and is likely to disappoint. As the saying goes; “Returns from the past are no guarantee for the future.” Then again there is a very small chance Inmode keeps growing nicely and that is nice call option for the crayon portfolio. Hopefully the share price of Inmode does not go to zero in the next ten years... Grow Forest Grow! Inmode can be seen as a little sapling addition to the crayon forest. Hopefully the little Inmode sapling can grow into an old forest giant of the crayon portfolio in the next 10 years or more.

Both paper portfolios have 7 holdings now. Slowly but surely the portfolios start looking a little like diversified portfolios. May the force be with both paper portfolios. Thanks for reading this blog.

Holland Park Capital London hopes you enjoyed the information in the blog. Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long the stocks in the crayon portfolio and the monkey portfolio. Holland Park Capital London Ltd just doesn’t have the same amount of shares per holding as the paper crayon and monkey portfolios. Holland Park Capital London Ltd is also long the S&P 500 index. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. Make your own decisions please. Do your own research. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Your capital is at risk when you invest in stocks. In other words you can lose all your money by investing in stocks.

 

Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” and brings extra discipline in the investment process. Holland Park Capital London Ltd is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.