Security Analysis Substack

I made a New Years Resolution to start writing up more companies. (I also would like to eat healthier and use less profanity, but I really enjoy Ben and Jerry’s and there are a lot of bad drivers.)

I want to turn over more rocks in the investment universe and do deeper dives.

This ought to add to my “crash wishlist” of companies which ought to be useful the next time that the market takes a dive. It will make me less reliant on stock screens if I’ve already done the homework.

I set up a Substack to facilitate these efforts.

Every entry in this substack will be a “company analysis” style post that I previously posted on this blog. Previously, I only wrote up companies that I decided to buy. Going forward, I am going to try to do more write up’s, including companies that I pass on.

I hope to analyze a lot of companies that are currently too expensive for my taste, but would be appealing at a more compelling price after a stock market crash, for instance.

I will still continue to update this blog and keep track of my portfolio in real time. I’ll continue to post my thoughts on investing concepts along with book reviews. I’ll continue to provide updates on my portfolio. However, the specific company level analysis will be posted in Substack.

If you would like to get on the mailing list, click here: https://valuestockgeek.substack.com/

Below is a copy of the first post, outlining the goals for the Substack. You can also read it here.

In Search of Wonderful Companies at Wonderful Prices

Greetings!

I have a blog where I track the performance of a real brokerage account where I invest my own money.

In the past, I only wrote about the companies that I decided to buy.

I’m starting this substack to do more company write-up’s. I am even going to write about companies that I don’t buy. I will still maintain my blog to track the performance of my portfolio, but I would like to use this substack as a medium to write up many companies – even ones that I pass on.

I am hunting for wonderful companies at wonderful prices, which I hold in a concentrated 12-15 stock portfolio.

“Wonderful companies at wonderful prices” is an extraordinarily tall order, but I don’t want to settle for anything less than that. I’m running an extremely concentrated portfolio, which means I have some very strict criteria. There are thousands of stocks globally, and I should be able to find 12-15 stocks meeting my criteria to fill up a portfolio.

I will pass on many companies because they don’t meet 100% of my criteria. Many will turn out to be great investments, anyway. I’m alright with that. I don’t need to be right about everything.

The sort of companies that I write up will meet most of my criteria. They have to at least pass a certain hurdle to get my attention to look deeply into it.

Because I am looking for cheap, high-quality businesses, you won’t find me writing up companies that are a cheap-dumpster-fire-with-potential (at one end of the spectrum) or excellent companies that are trading at very expensive prices (at the other).

To get my attention, it has to at least quantitatively look like it meets most of my criteria. This means I’ll write up companies like General Dynamics, but probably not Tesla (at one end of the spectrum) or a money-losing gold miner below tangible book (at the other end of the spectrum).

With all of that said, for every write-up, I will run through my checklist of criteria:

  • Can the stock deliver a 10% CAGR for the next decade?I am looking for situations where shareholder yield (dividends + buybacks) combined with modest growth in the business could deliver a 10% CAGR over the next 10 years.I would like the company to generate this shareholder yield with free cash flow that the business creates on its own. I’m not interested in companies that are issuing debt to buy back shares and issue dividends, which is a troubling sign.I do not want to rely on multiple appreciation (i.e., the P/E goes from 5 to 10) for my return. I tried for years to try to make money that way and failed at it. For future purchases, I am looking for businesses that are worthy of being held, not just traded for a pop in the next year.

    If I can’t meet this 10% hurdle, then I might as well own my asset allocation strategy, which I wrote about on Medium here.

    Owning individual securities is highly risky. Even the excellent situations that I’m looking for will have higher risks than a simple asset allocation strategy. If I can’t meet a 10% return hurdle as compensation for this risk, then I might as well own my asset allocation.
  • Has the business delivered consistent results over a long period of time? I am not looking for businesses where they endure a relentless boom-bust cycle. I want something with a proven track record of performance. I want a business that has survived recessions and thrived.

    I don’t want to rely on capturing a business at the nadir of a cycle and selling at a top. I will try to capture a business near a nadir – but I want the type of business where even if I get the timing wrong, I can still earn a decent return.
  • Does the return on equity consistently exceed 10% without the use of heavy leverage?This ties into my 10% return hurdle. Over the very long run (20+ years), the CAGR on most stocks is closely tied to the business’ return on equity over that time period.I would prefer a lot more than a 10% return on equity, but that’s the bare minimum to meet my return hurdle.

    I also don’t want companies that achieve a high ROE with the use of heavy leverage. Leverage works until it doesn’t. Even a rock-solid stable business can encounter unexpected trouble.
  • Is management sketchy?I don’t need the management team to be superstars. However, I do not want to be in business with someone who is dishonest or unethical. I don’t want to be in business with someone who can potentially be a fraud or engage in unethical practices that can sink a business. This means avoiding grifters, promoters, or the type of CEO’s that are obsessed with short sellers.
  • Is the company financially healthy?I discussed “low leverage” in the return on equity point, but there is more to financial health than low debt.In addition to a low debt/equity ratio, I will also take a look at the following criteria to assess financial health: 1) Interest coverage, 2) Altman Z-Score (bankruptcy risk), 3) M-Score (a measure that looks for signs of earnings manipulation), 4) Returns on capital consistently exceed the cost of capital.
  • Has the company consistently generated returns for shareholders? Is the industry in secular decline?I want companies that have already proven that they can generate returns for shareholders. I don’t want to speculate on companies without a proven track record. This means I will mostly avoid new & exciting companies. I’ll also avoid companies that appear to be in secular decline.
  • Has the company survived previous recessions? The economic cycle is unpredictable. This is a lesson I learned the hard way because I’ve tried to predict it and failed at it.I operate under the assumption that another 2007-09 recession can happen tomorrow. For that reason, I only want to hold companies that have proven themselves as able to endure past recessions without destroying shareholder value. If something had a 90% drawdown in 2008 and the firm was brought to the brink of bankruptcy, then I don’t want to own it in my portfolio.This criteria is also for my own psychology. I’m a risk-averse, pessimistic individual. When the world is going to hell in a handbasket, I don’t want to panic sell at the bottom. If I hold a business that has the ability to survive, then I can continue to hold it.
  • Does the company have a moat?I am looking for businesses with strong defenses against the competition. If a competitor can copy the company’s business model and kill it, then I’m not interested in owning it. If the product is commoditized and a lower price can causes customers to switch, then I’m not interested. I want businesses that have the ability to survive and are worth being held for long periods of time. I’m not interested in fads. I’m interested in businesses that will continue generating excess returns for the next 10 years.
  • Is the stock cheap on an absolute and relative basis?I want to pick up bargain securities that trade with a margin of safety.There are two reasons for this: 1) I want multiple appreciations to be a potential source of returns even though I don’t want to rely on it. 2) I don’t want to get killed by multiple compression. Coca-Cola in the late ‘90s was a wonderful business, but the market bid it up to a P/E of 50. It spent the next 10 years delivering zero returns to shareholders even while the underlying business grew.I want the cheapness of the stock to be obvious. I am not trying to find a margin of safety by torturing a DCF until it gives me the answer I want. I want actual quantitative bargains with low multiples.If I can maintain my discipline in this area, then it will keep me out of the hottest stocks and the hottest industries. That is by design.
  • If I was forced to hold the stock for 10 years, would I be terrified?This point combines all of the above criteria. I want to own businesses worthy of being held and I want to own them at compelling prices. If the thought of not being able to sell is terrifying, then I probably shouldn’t own it at all.

Future write-up’s will analyze companies on all of these points.

Random

One of my favorite rush songs. I was fortunate enough to hear them play it live back in 2011.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Intel (INTC)

Key Statistics

EV/EBIT = 8.96x

FCF/Price = 7%

Debt/Equity = 49%

Return on Equity = 29.5%

Dividend Yield = 2.53%

The Company

Intel is the world’s dominant manufacturer of chips for PC’s and servers.

Intel was founded in 1968 by Gordon Moore and Robert Noyce. They left Fairchild Semiconductor to form their own company. They positioned themselves at the forefront of the new industry and sought to have the fastest chips in the market.

Gordon Moore coined “Moore’s law”: the number of transistors doubles on a chip every two years. The law became a target for the company and Intel has frequently had the fastest chip in the market. Intel itself has been the driving force behind Moore’s law becoming a reality. They have sometimes been outpaced by their competition, but they have always been able to regain their dominant position.

Over time, demand for chips has increased and Intel’s business grew with it. They developed close relationships with PC manufacturers, and this tight relationship along with strong R&D made them the dominant chip company.

Intel’s dominance has its roots in their development of x86 architecture, which was pioneered by Intel in 1978 and is still used by most PC’s and servers. Most PC software was written for the x86 architecture, giving Intel a sticky position in the PC market. AMD also makes x86 chips, but Intel remains the dominant player.

Below is the growth of Intel’s business over the last twenty years. In the last 10 years, EPS has grown at a 19.9% CAGR through a combination of growth in the business and buybacks.

Does this look like a falling knife?

My Take

Intel has high ROE, an incredible track record, secular growth prospects (we’re going to need more chips 10 years from now today than we do now). Why is it selling for a 8.96x EV/EBIT multiple?

The stock is cheap for two reasons: 1) Intel has recently fallen behind its rivals technologically. 2) The market prefers companies that outsource chip manufacturing and focuses more on chip design, a capital-light business.

Technological decline

In recent years, Intel has fallen behind the technological curve. I think this is temporary. The market seems to think it is permanent.

In July 2020, Intel announced that their 7-nanometer chips (nm – nanometer is a metric for measuring the size of transistors on the chip & smaller is better) were behind schedule and wouldn’t be released until 2022. In contrast, Samsung and TSMC have already transitioned to 5 nanometer manufacturing, making it clear that Intel is falling behind the curve. The delays mean that Intel will temporarily fall behind rivals AMD and Nvidia, who will likely gain more market share in the next couple of years. After the announcement, Intel shares fell by 9%.

Additionally, Apple announced that they are ending their reliance on Intel chips. Apple computers have used Intel chips since 2005. Apple is going to start using its own chips. Microsoft is making a similar move and announced that they are going to use their own chips in their products.

The perception in the market is that Intel is falling behind, squandering their cash flow on buybacks while they lose their competitive position, mirroring the similar decline of IBM.

Meanwhile, Intel spent $13.3 billion on research & development in 2019. This compares to $2.8 billion for Nvidia, $1.5 billion for AMD, and $3 billion for Taiwan semiconductor.

For all of the concerns over Intel’s loss of their competitive position, they still spend more on R&D than anyone else. They aren’t squandering their future to buy back stock and pay dividends, which is the popular narrative. This R&D spend has obviously been misspent – but the cash is available to make better chips.

Additionally, revenues, earnings, and cash flows have not declined. Through all of this, Intel has been consistently growing. 2020 was actually an excellent year for Intel, as lockdowns boosted demand for PC’s and Laptops.

Intel still has the dominant position in the PC market. Their revenues massively outpace that of any of their rivals.

They are pushing for faster and better chips. They aim to create 1.4 nanometer chips by 2029. Chip design & manufacture is an arms race and the key driver of that arms race is the money spent on R&D. I think that the company spending 375% more on R&D than the next rival will eventually be able to make a better chip.

In-house fabrication vs. a focus on design

Intel designs & fabricates computer chips.

The market prefers chip companies that don’t fabricate their own chips, like Nvidia, who outsources their manufacturing. Designing chips is a more profitable business than manufacturing them.

This is why Nvidia is rewarded with an EV/EBIT multiple of 86.2 and Intel with 8.96. This vast difference in valuation shows a simple narrative: Intel is a dying company and Nvidia will eventually dominate.

Even with the “bad” business of chip fabrication, Intel sports excellent margins. It currently has an operating margin of 32.8%, compared to Nvidia at 26.1%. With that said, Nvidia has significantly higher ROIC because chip design is more capital-light. Nvidia’s ROIC is 51.7% vs. Intel’s 21%.

This is why the market wants Intel to focus more on design.

Dan Loeb has recently announced a significant position in the stock and is pushing Intel to make strategic changes. This is why the stock went up 5% after Loeb’s activism was announced.

Management was already moving in the direction of outsourcing more production. Bob Swan is relatively new and is changing course from the management of the last decade, which oversaw the erosion of Intel’s competitive position. Management indicated recently that the “Ponte Vecchio” graphics chip may use outside factories, for instance. They also announced that they plan on outsourcing more manufacturing to TSM, another chip stock that has gone parabolic in 2020.

If that’s why they wanted to do, anyway – then I think Loeb’s activism will easily push them in a positive direction.

Prospects

I think it’s a fairly safe bet that Intel will pursue a strategic change, particularly considering that it was already considering going in a different direction.

It also seems unlikely to me that the company spending 375% more on R&D than its next competitor will remain behind the curve for long.

In addition to making faster chips for x86 style PC’s and servers, Intel is also acquiring smaller companies. Mobileye, for instance, is an important subsidiary. Mobileye is focused on self-driving car technology. Intel is also making significant investments in artificial intelligence, covered in this article by Fast Company. Nvidia has positioned itself as the AI leader, but I think Intel can catch up.

The incentives are strong to turn this situation around and Intel has the cash to make it happen.

They have fallen behind technologically and management has failed to execute over the last five years, but I don’t think that any of this is fatal or permanent.

Moat

Does Intel have a moat that defends it from competition?

I believe it has a moat. With that said, it isn’t as strong as other companies I have purchased recently like General Dynamics. The moat is also currently under attack, which is why the stock sells for a such a cheap price.

Intel’s moat is derived from its scale and tight relationships with the dominant manufacturers of PC’s.

Even with its recent manufacturing issues and the upcoming loss of Apple, it remains the top chip company. Intel did $71 billion in revenue last year. In contrast, AMD did $7.1 billion and Nvidia did $10.9 billion. TSM, which focuses on the manufacturing process, produces $35 billion in revenue. Intel is overwhelmingly the dominant player.

Competition is nothing new for Intel. It has battled AMD for decades. The sheer scale of Intel’s design & manufacturing capabilities gives it a cost advantage over its rivals and usually this results in Intel’s victory. Additionally, because x86 is the primary architecture for most PC’s, Intel’s dominance gives it a foothold there.

The recent worries over Intel losing customers is another major reason that the stock is down. Apple, for instance, used Intel chips in their PC’s and will use their own chip design in the future.

With that said, Intel still has relationships with the dominant sellers of PC’s. As of 2019, Apple represented only 7% of the PC market and is a relatively minor player. The big ones are Lenovo (24%), HP (22.2%), and Dell ( 16.8%). A bulk of all of these products run on Intel chips.

Of course, Intel can’t rest on that dominant position, as the world is subject to rapid technological change. Intel needs to use its scale and cash flow to solidify its future.

Recent manufacturing issues aside, I think that Intel is committed to maintaining its competitive position in the future. This is probably best reflected in its R&D budget.

The scale and vastly superior size of Intel’s R&D budget gives it an advantage over rivals. The stock is now selling for a cheap price because this is in question, but I fail to see how Intel’s overwhelming $13 billion annual spend on R&D won’t eventually result in them winning. This is a war and the company with the most troops (dollars) should ultimately win. Any innovation in this industry is going to be quickly commoditized. It’s a constant fight to develop the best and fastest chip. Intel’s R&D spend ought to get them there, even though they’re suffering temporary setbacks.

Intel’s acquisition of AI and self driving businesses also shows a commitment to their future: like Mobileye and Habana Labs.

This is not a company squandering its competitive position on buybacks, which seems to be the consensus view in the market.

Quantitative Considerations

Intel has a high degree of financial quality. The Z-Score is 3.54, implying that they have practically zero chance of going bankrupt in the near future. Debt/equity is only 49%. Return on equity is 29.5% despite the low leverage. With an M-Score of -2.88, there are no signs of earnings manipulation.

It seems unlikely that the stock will deliver negative returns over the next 10 years, unless they are completely overtaken by competitors.

Shareholder yield is high. The dividend yield is currently 2.53% and share count was reduced by 5% last year. They also have the margins and cash flow to sustain this yield that without ruining their business.

Intel isn’t operating in a declining industry. They are simply losing ground to rivals. It seems likely that semiconductor demand will be higher in 10 years than it is today.

Between EPS growth and shareholder yield, it seems likely that Intel stock could deliver a 10% CAGR over the next 10 years without any multiple appreciation.

With that said, at a 8.96 EV/EBIT multiple, I think a multiple re-rating is likely. Companies like Nvidia trades at 83x and AMD trades at 99x because they have temporarily leapt ahead. TSM trades at 27x. If the multiple re-rates, then the CAGR should be a lot higher than 10%. A 20x multiple seems reasonable for a high ROIC company with a dominant competitive position.

All of this said, I don’t have any special insight or knowledge into the chip industry. What I do understand is that 1) the incentives are there to turn this around (Bob Swan just became CEO in 2019 and seems determined to change course. The company is now attracting activists like Loeb), 2) the money is there to turn this around, 3) chip demand is not an industry in secular decline, 4) despite its trouble, Intel remains the dominant chip manufacturer with overwhelming financial resources to stay dominant.

Intel strikes me as a wonderful company at a wonderful price.

There is a leap of faith involved here. Faith is needed to believe that Intel will be able to turn around a deteriorating situation. I think they have the resources to do so. I think the incentives are there to do so. There is new management and activists are involved. The wonderful price is a result of the uncertainty. By the time that the uncertainty is gone, it will be 20x EV/EBIT and the opportunity to purchase a company of this quality will be gone.

Also, I think it’s worth noting that I looked at Intel back in October and I actually passed on it. Loeb’s involvement changed my mind. Now that it is attracting activists like Loeb (and Intel is listening), I think that the risk/reward is compelling. I think it’s a situation comparable to Microsoft in 2012 or Apple in 2013. It’s a strong company with a lot going for it, but it has been mismanaged for a few years and will benefit immensely from some activism & change. It has the resources & incentives to turn things around.

Checklist

  • Can the stock deliver a 10% CAGR for the next decade? The dividend yield is currently 2.5% and it is sustainable. Intel consistently buys back shares and share count is down 5% in the last year. Revenues grew over the last decade at a 7% rate. Even if that declines, a low growth rate combined with the shareholder yield could easily result in a 10% CAGR. Currently, the free cash flow yield is 7% and free cash flow is likely to grow in the future. At a P/E of 9, multiple appreciation on top of the growth & yield seems likely. It is easy to imagine how the stock could deliver a 10% CAGR for the next 10 years, if not more. Pass.
  • Has the business delivered consistent results over a long period of time? Despite the recent troubles, Intel has been able to consistently grow sales, cash flow, dividends, and earnings over the years. It is free cash flow generative. Pass.
  • Does return on equity consistently exceed 10% without the use of heavy leverage? Intel has averaged a 21.5% return on equity over the last decade with minimal leverage, passing my 10% hurdle. Pass.
  • Is management sketchy? Management has been transparent about the problems facing the company. The recent trouble has nothing to do with dishonesty or fraud. They aren’t shifty promoters or grifters. They aren’t obsessed with short sellers. Bob Swan strikes me as a competent and transparent leader who is committed to fixing the current situation. Pass.
  • Is the company financially healthy? Intel has a debt/equity ratio of 49%, which is low. The Altman Z-Score is 3.52, so no bankruptcy risk. M-Score is -2.88, so there are not any signs of earnings manipulation. Interest coverage is robust at 31. WACC is estimated at 4.5% and ROIC has averaged 19% for 10 years, so the company is not a net destroyer of capital. Pass.
  • Has the company consistently generated returns for shareholders? Is the industry in secular decline? The company has consistently generated positive returns for shareholders. Intel has generated a 11% CAGR since 2010. It returned only a 3% CAGR since 2000, but was in a bubble at that point. Chips are not an industry in secular decline. We will need more of them 10 years from now than we do today. Pass.
  • Has the company survived previous recessions? Intel did not report losses in earnings or negative free cash flow during the last two recessions. Cash & earnings declined slightly, but the company was never in any dire trouble. The stock drawdown was serious in the early 2000’s (80%), but this was due to the overvaluation of the stock, not the performance of the business. Pass.
  • Does the company have a moat? Intel has a moat in terms of its dominance of the still-dominant x86 architecture and tight relationships with PC manufacturers. Its scale also give it cost advantages over competitors. It has an overwhelmingly larger R&D budget than its competitors. However, Intel’s moat is under attack. With that said, I think that Intel has the financial resources to survive the current assault on its moat. With new management and activist involvement, it is likely that they shift their strategic direction. The current troubles are also a source of the compelling price. If I wait for the issues to be resolved, the “wonderful price” will likely be gone by that point. Pass, with reservations.
  • Is the stock cheap on an absolute and relative basis? EV/EBIT is currently 8.96, the P/E is 10, and the forward P/E is 11. The free cash flow yield is 7%. These metrics are cheap on an absolute and a relative basis. Pass.
  • If I was forced to hold the stock for 10 years, would I be terrified? I wouldn’t be terrified if I was forced to hold this company for 10 years. The industry isn’t in secular decline and the company is not a mall-retailer or Kodak-style melting ice cube. Intel is financially healthy, so I think the possibility of a bankruptcy in the next 10 years is approximately zero. They’ve shown resilience in past recessions, so I would be comfortable holding through a nasty recession. The stock isn’t expensive, so I don’t think it can be destroyed by multiple compression if interest rates go up or if the broader market embraces reason. While they could see their moat erode over the next decade, I don’t think that this is an investment which could result in a permanent loss of capital or suffer a catastrophic drawdown. Pass.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

2020: Year End Review

Performance

The performance of the active account that I track on this blog was poor. This was mainly due to my mistakes.

It has been four years since I began this experiment: move money to a fresh investment account and track the trades in real time on a blog.

The great thing about this exercise is that it has forced me to rub my nose in my errors. This is a live trading journal. Putting my thoughts down here makes it impossible to delude myself.

This is now year #4 of poor performance. I’ve had three years of underperforming the market and 1 in which I basically matched the performance of the market. I’ve outperformed the deep value universe, but that is little consolation.

In 2020, I lost 2.98% compared to the S&P 500’s gain of 18.37%.

With that said, it could have been even worse.

My max drawdown this year was only about 20% compared to the 50% drawdown that occurred for the EV/EBIT < 5 universe that I track. That universe is down 7% for the year. It’s also pretty good performance considering I managed to recover from a 20% drawdown when I was 80% cash and also owned a short ETF.

The March drawdown was contained because I went into that crash nearly 50% cash.

I also sold aggressively as the crash went on, eventually building my cash balance up to 80%. I should have pounced on the value that was available at that time, but didn’t because I assumed this was another 1973-74 and 2007-09.

I even bought a short ETF. Fortunately, I had enough sense to get out of that position when the S&P 500 went above the 200-day moving average.

Mistakes

I made a number of mistakes including:

  1. Timing the market.
  2. Attempting to predict the macro-economy.
  3. Trading too much.
  4. Purchasing bad businesses in the hopes of flipping them for some multiple appreciation.

I previously thought that an astute investor could predict the macroeconomy using things like the yield curve, valuation metrics, and statistics on debt.

This year finally rid me of that belief. I don’t think anyone could have predicted that a pandemic would decimate the market in March. I also don’t think anyone could have predicted that the market would bounce off the lows in March. Those that bought in March got lucky it didn’t turn into a 2008 debacle. It could have easily turned into that.

The last time we saw action in the market like this (when the market collapsed and then bounced back into bull territory) was in 1987. I thought this one was going to unfold more like 1973-74 or 2007-09, considering that the impact of lockdowns was reflective in the real economy. The 1987 crash was a purely market event. Nothing was wrong in the real world.

Lessons

My errors this year caused me to revisit the entire approach that I had to investing.

I’ve had four years of getting my butt kicked by the S&P 500, and then I failed to accurately call the macroeconomy this year.

This summer it started to become apparent to me that I made an error as I watched the unemployment rate collapse as the lockdowns ended and stimulus kicked in.

I considered moving this account to my passive strategy, the Weird Portfolio. That’s how I am investing most of my money and the strategy has been working for me. I thought about giving up on this pursuit of trying to pick stocks.

This account was money that I specifically set aside to apply Ben Graham’s “Simple Way” strategy. Put another way, this account on the blog is a variable portfolio: an account where I can pick stocks and try to actively beat the market.

My frustrations over this account made me reconsider whether it was worth all of the aggravation of analyzing stocks and actively trading. For four years, I have been pounding my head against a wall with nothing to show for it. The amount of effort I’ve put into this has basically been a part time job. It’s really frustrating when you put all of that effort into something and have nothing to show for it after four years of trying. I probably would have been better off with an actual part time job. Effort spent delivering pizza would have been a more productive use of my time.

Ultimately, I decided to continue. Rather than give up, I decided to learn from my failures and try something new. Instead of trying to flip bad businesses and time the economic cycle, I decided that I would try a longer-term approach. I would buy businesses worth owning for the long haul and purchase them at attractive prices.

The positions that I purchased in the last four months reflect this philosophy:

General Dynamics

Charles Schwab

Enterprise Product Partners

Biogen

These are all businesses that I am confident will grow over time and I purchased them at attractive prices. These aren’t the kind of stocks that I need to immediately sell as soon as there is an operational hiccup or if they hit a reasonable valuation. I used to own things like Gamestop and the Gap, which needed to be sold as soon as they rose in price or if the operations fell apart.

For a company like General Dynamics, if the economy rolls over tomorrow, I don’t have to worry about the business collapsing. I don’t have to frantically get the sell order in as soon as it hits my target price.

I am saying “no” to a lot of stocks that I would have purchased aggressively a few years ago. If it’s not at a compelling price, it’s a no from me. If I would be terrified to be stuck in the position for 10 years without selling, then I’m saying no.

No more compromises.

I am trying to look at the market less as a trader and more as the owner of businesses. I want to rely less on multiple appreciation as a source of returns and buy the sort of businesses worth holding.

I used to check my portfolio multiple times a day. I deleted the app on my phone. I have been checking it less and less. I still probably look at it too much, but at least I’m making progress. I would like to get to a state where I only look at it once a quarter.

Cash Drag

My pursuit of wonderful businesses at wonderful prices comes with a problem: there aren’t a lot of them. This means I wind up holding a lot of cash, which is a drag on returns.

I decided to put the cash into my asset allocation strategy, the weird portfolio.

Currently, 53% of this account is invested in my weird portfolio strategy.

Eventually, my hope is to be fully invested in 12-15 wonderful businesses purchased at wonderful prices.

As I hunt for these rare opportunities, the remaining balance of this brokerage account is in my asset allocation strategy to prevent cash drag.

To put it another way, I hope to never have another year where my frantic trading activity looks like this. This was a ridiculous waste of time and activity.

The Weird Portfolio

Speaking of my asset allocation strategy (which is how I invest most of my money), I have been pleased with the reception to it. I wrote a long-form Medium post about it and I’ve enjoyed discussing it.

I spent two years researching and refining it. Writing it all down was helpful for me.

The portfolio served me well this year.

When I was idiotically bailing in March with this account, I stuck to the weird portfolio.

I knew the treasuries and gold would restraint the drawdown. I knew that if the Fed’s money creation spurred inflation, I had gold and real estate. I knew that if we had a double dip recession, I had long term treasuries that would go up if the Fed eased more. I knew that if prosperity resumed, small value would rip.

This year (which felt like four years of market history), the portfolio did what it was supposed to.

In Q1, gold and treasuries restrained the drawdown. As the economy recovered, the “offense” pieces of the portfolio kicked into high gear. As people worried about inflation from the Fed’s actions, gold did well.

When the vaccine news came out in Q4, small value went nuts while LT treasuries went down.

The portfolio did what it was supposed to do. While I was trading like a maniac in this account, I let the rest of my money sit in my asset allocation and do what it was designed to do.

When all was said and done, the weird portfolio returned 10.87% and I had a max drawdown of 13.66% this year. I think that Ben Graham would refer to this performance as satisfactory.

Most importantly, it was a stress free return. I knew that no matter what happened to the economy, I had something in the portfolio that would benefit. No crystal balls or newsletter subscriptions required.

Macro

In past year-end posts, I included a big section with my predictions about the macro-economy. I’d talk about the yield curve, valuations, inflation expectations, the value-growth divide, etc.

I’m done with that. I have no idea what’s going to happen next. Maybe more lockdowns will cause economic turmoil. Maybe the vaccine makes the economy roar back to life. Maybe the Fed’s actions cause USD to decline and inflation to ramp up.

Markets looks frothy. We’re clearly in a “risk on” environment. There are stocks that are expensive. Of course, I don’t own those stocks. I don’t own market cap weighted indexes. So, what’s the point of worrying about it?

I have no idea what will happen next and I’m tired of thinking about it. I know nothing.

I have been following the market and investing for over 20 years. I started this bad habit in high school.

The entire time I thought that I could predict the macroeconomy if I thought hard enough and analyzed things. After 20 years of trying, I now concede that it’s impossible.

I’ve also finally realized is that no one else knows what is going to happen, either. I’ve wasted a lot of time and mental energy worrying about forecasts and predictions from “experts.” They don’t know what is going to happen, but that won’t stop them from plugging their predictions on Twitter, on podcasts, in book form, etc.

I stopped following these people on Twitter. I’ve muted their accounts. I stopped listening to their podcasts.

The reality is that no one knows wtf will happen with the dollar, inflation, or interest rates. Anyone who claims that they can do this is either a fool or a charlatan.

The finance industry is wretched hive of fools and charlatans.

What I do know is that I have an asset allocation that ought to protect my money no matter what happens and should deliver a decent return over the long haul.

In this account, I own some really great businesses that I bought at attractive prices. I think that strategy is evergreen.

Hopefully, this strategy will deliver satisfactory returns. While that’s not a guarantee, I can say with certainty that this approach will reduce my self-imposed stress.

Random

I re-watched Deep Space Nine this year. I watched it in high school and never revisited it. I’m glad I did. Through adult eyes, the show had relevance I never picked up on when I was younger. I recommend watching it. This is a great guide to watching it.

Three episodes stood out to me as the absolute best. They all had pretty heavy themes:

  1. Duet. An examination of war crimes.
  2. The Visitor. An episode about how obsession can impact your life. Also a good analysis of the relationship between father and son.
  3. In the Pale Moonlight. This one is all about moral compromise in war.

Also, CBS should remaster it in 4k. This is a good example of what that would look like.

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