A Look at Senvest Capital

Senvest Capital is a company that I've discussed many times but not recently. Many things have happened since I lost wrote about it. So, I am going to review the company here.

Senvest Capital is well-known for being home to the Senvest Master Fund and the Senvest Technology Partner fund. The Mashaal family are majority owners of the company and these two funds are hedge funds managed by Richard Mashaal. This means that Richard Mashaal (through a company he owns) is the general partner. Senvest Capital is a limited partner in this enterprise. And there are also many LPs who are outside investors. The company also owns a lot of illiquid stuff like real estate, REITs, and private companies.

So by owning Senvest Capital, a shareholder actually downs several hedge funds and investments that the public don't normally cannot access.

So the pros and cons of buying this stock is, in principle, very simple. The stock trades at a tremendous discount to equity value — more about this later. And the investment management has an exceptional track record. However, on the negative side, the employee salaries and fees are very high, and they have never paid out dividends.

Another characteristic, which can be good or bad depending how you look at it, is that Senvest Capital's financial fortunes can be wild! The company earned CDN$(51.72) and CDN$39.16 per share in 2018 and 2019, respectively. And the first quarter 2020 has been a disaster, shareholders lost CDN$(129.38) per share! These are all due to the drop in market values of equities, be it realized or unrealized.

For the reset of this document I will refer to all amounts as Canadian dollars.

Senvest Capital promptly posts its monthly hedge fund resulte online. This gives us some idea of the company's performance. The Master fund lost 53% in Q1! No wonder its earnings were so bad. However, it has come back for Q2 and gained back half of the losses by August 1. The Senvest Technology fund was up 25% in Q2 and is positive for the year.

Just like Berkshire Hathaway, the main gauge of Senvest's stock value is the company's equity.

The company's stock should rise and fall proportionally with its equity. Senvest has traditionally traded at 60%-70% of equity. But the recent market drop has increased the discount significantly.

To illustrate the company's value, I have broken down the balance sheet into five components. The first is working capital. This is the safest part of the equity. Market conditions should not affect the value. The second component is the hedge fund portion of the company. The company consolidates the entire hedge fund value onto its balance sheet. So, it must also consolidate the amounts owed to the funds other partners as liability, as well as short positions. The third component comprises the illiquid assets including a lot of real estate, investments in private REITs and private companies. The company tends to put the illiquid investments onto its own books and more liquid investments into its hedge funds. The fourth component of the balance sheet includes assets and liabilities that don't fit in the above three categories. And the last componenent is the amount owed to Richard Mashaal as minority interest.

The following table shows the equity values of the five components at the end of 2019 and Q1 2020, the most recent balance sheet data. All values are thousands of CDN dollars.

	Aug 2020	Q1 2020	2019
Working Capital		29873.00	14284.00
+ Equity investments and other holdings		496424.00	818797.00
+ Real Estate and Illiquid Assets		125701.00	113107.00
+ Other assets minus liabilities		3750.00	-3533.00
- Non-controlling interests		16374.00	23265.00
= Shareholder Equity	780000 (est)	639374.00	919390.00
Shares	2630.00 (est)	2634.00	2652.00
BVPS	296.58	242.74	346.68
Price	135	110.00	172.25
PTBV	0.46	0.45	0.50

So the bulk of the Q1 loss appears to be from the second components which is mostly the hedge funds. The equity value went from $818M to $496M. And we already saw that Q2 hedge fund numbers are much better. The other assets are either liquid and safe, or are illiquid assets which I just assume didn't change in value. So then, the company has a lot of equity that are not tied to hedge funds. Therefore, the company did not do nearly as badly as the hedge funds.

But note the extreme low stock value when compared with the equity. This is not a reasonable valuation. And I don't know the reason for it considering that this was the case at the start of 2020 before the coronavirus impacted the markets. But there is a long-held perception that the company insiders do not treat the minority shareholders fairly. Company insiders are excessively compensated. The company has just 32 employees and they were paid $35 M. That is an average of over $1M per employee!

On top of this, Richard Mashaal, the vice-president of the company, is also paid his fees for running the GP of the hedge funds. The hedge fund charges 1.5% of assets plus a 20% share of profits as management fees. Senvest Capital gets 60% of that fee for providing the infrastructure and employee resources for the hedge funds. But still, 40% goes to Richard Mashaal's company.

The company does not disclose how much it owns in the hedge funds. Instead it lumps all the hedge fund holdings together with its own holdings. The company does show the the external portion of the hedge funds as "Liability for redeemable units" Based on this, I can calculate that the Senvest Capital portion of the hedge funds is about 35%.

The accounting for the hedge funds' fees can be quite confusing, so I've broken it down into a table for clarity. The following table shows who pays the fees and who receives it.

Recipient	External Partners Fees (65%)	Senvest Capital Fees (35%)
Senvest Capital Shareholder Equity (60%)	From: income, liabilities 39%
Minority Interest (40%)	From: income, liabilities 21%	From: income, shareholder equity 14%

So the Senvest Capital receives 39% from external partners and pays Richard Mashaal 14%. This means the company get a net 25% to pay employees salaries. In a down year where the only fee is the 1.5% of assets, one can see it is ony a few million, and that is only a tiny fraction of employee payroll. And even this amount is an overestimation of fees because $189M of assets owned by "employees" are exempt from fees.

On the other hand, Richard Mashaal gets 40% of the fees as minority interest, which was $5.2M in 2019!

Richard Mashaal has certainly been an incredible hedge fund manager. In his more than twenty years managing the funds, funds have grown from $5M to more than a billion under management. But Richard Mashaal and his father Victor already own more than 50% of Senvest Capital, and yet Richard still gets $1.7 M compensation from Senvest Capital, plus payments to him as minority interest.

In the end, there isn't much I can do as a tiny minority shareholder. I do not have the capital nor the time to be an activist. My cold calculation says that no matter the employee compensation, the company is a profitable enterprise in the long run. As such its assets, which are all investments, should not trade at 46% of equity, which is what it is trading at today. The current valuation is 55% off its peak a few years ago. To simply go back to 60% of equity, the shares will gain 33%. And I am confident it will happen sooner than later.

Why I Bought Altria, Again

My most old and familiar holding is Philip Morris. Altria (MO) is the US version and Philip Morris International (PMI) is the international version. They are the famous makers of the Marlboro brand.

In a way these two companies are the simplest businesses to understand. They spit out copious amounts of cash. And the majority of the cash goes to the government coffers. At the same time these governments want to ostensibly regulate the tobacco industry out of business. And finally, people are generally smoking less than before. Today in the US only 16% of the population smoke and the per capita consumption is 1/4 the number at the peak in 1960.

First, I'll discuss Altria. In the US the best selling cigarette by far is Marlboro. It is 43% of the market!

	MO
Price	$39.1
Marketcap (M)	$72726
PE	2019: (loss) 2018: 10.49
Div Yield (%)	8.18

In my table, I have omitted the equity metrics because they have negative tangible book value. That is not to say that these companies are not valuable. It is just that their value is almost entirely in their brand. Moreover, these companies have enormous debt that is more than tangible assets they have. So their investment utility is solely based on their dividends. And they are very generous with dividends. Their pay ratios approach 100%. But everyone knows the future looks bleak for tobacco. But this has been the case for more than 20 years. In the last 10 years after Altria and PMI split into two companies, Altria has increased dividends at a 9.5% rate! And today it yields 8.2%. Somehow Altria has managed to increase profits when cigarette sales have steadily declined consistently. Just last year US cigarette volume decreased 5.5%.

Because of Altria's simplicity, we can deduce its value simply from its cash flow to shareholders. Imagine this plausible situation. Tobacco consumption and regulation will drive companies like Altria to bankruptcy in 30 years. But right now it is doing ok, and say it continues to pay generous dividends and grow at 9.5% as the recent past for the next five years. Then growth will taper. So for simplicity say dividend growth becomes zero for five years. And after that the dividend falls until zero 20 years later. So what I described can be shown by the following chart. The return from just the dividends is 8.3%!

Evaluating Altria using discounted cash flow (DCF) analysis would require the cash return in this scenario to be greater than the risk-free return plus the risk premium. In my analysis, I'd like to replace the risk-free rate with the cost to borrow money to buy the stock. In today's low interest environment, this can be as low as 2%. And a common risk premium is 6%. So therefore, I have a 8% hurdle for this investment, which Altria just passed. And this is a very negative case scenario. So Altria's cash flow can be worth the price today.

So putting the worse case aside, there are positive factors in Altria's future. Cigarette consumption has declined consistently, but I think there is a limit. Society has clamped down on minors smoking and smoking in public places. But for the hard-core smokers, nothing will deter them. And taxation is already 45% of the current cigarette price. It is primarily a business for the government! It is not in the government's interest to kill cigarettes. This also means that companies like Altria have big hidden pricing power. Altria gets less than 20% of each cigarette sold, so when it increases the selling price by 10% the consumer only feels a 2% increase.

Also, some of the decline is due to the switch to new and old alternative products such as e-cigarettes, smokeless tobacco and marijuana. It is easy to see the appeal of a nicotine fix without the social stigma. And marijuana does less damage to health than tobacco products.

Altria, has dabbled in all these areas. Altria is the leading US supplier of smokeless tobacco products such as Copenhagen. They bought a $13 B stake in JUUL Labs, a e-cigarette maker. However, this deal was a disaster for the Altria and the company has written off 2/3 of the investment. And finally, the company has also tried to invest in marijuana through its 45% ownership of Cronos, a Canadian cannabis company. That hasn't worked out well either as Cronos stock has dropped by 2/3 also!

Aside for tobacco and marijuana, Altria is also big into their sin companion: alcohol. Altria owns a small wine maker, and most importantly, a 10% stake in Anheuser-Busch InBev, which is worth $18B.

The human race may get more and more health conscious, on average, but I think there will always be a place for sin. We are living better and longer, then we should also live it up more! So, over the long term, I think that Altria may very well be able to hit on a killer product that will replace cigarettes, if and when cigarettes are regulated to oblivion.

All these factors support my view that Altria and other tobacco companies are underestimated companies with a large margin of safety and are well worth the risk to invest. They are the quintessential value stocks.

Update on My Insurance Holdings

Kansas City Life Insurance (OTC:KCLI) is a smallcap life and health insurance company with a long and stable history. In the company's Q1 earnings report their investments were down $38 M due to the market downturn. Consequently the company equity dropped $3 per share but book value is still $81 per share.

	KCLI	EUPIC
Price	$29.4	€ 3.69
Marketcap M	$282.24	€ 101.47 ($ 114.97)
ROE %	2.6	11.8
PE	14.11	6.55
PTBV	0.36	0.78
Div Yield %	3.67	6.5

KCLI makes 30% of its revenue from investments, therefore investment income is critical to be profitable. But in this low interest environment the company must sacrifice safety to get decent yield. The company has more than half of its assets in corporate bonds. Virtually all of its bonds are investment grade, but there is still a lot at the bottom tier of investment grade. When the downturn happened, there was a big fear that we would see a wave of corporate downgrades and defaults. Fortunately, the Fed pulled out the bazooka and said it was willing to buy up corporate debt to shore up the market.

In the report, the company still has $779 M of equity, even after factoring in Q1 losses. That may seem like plenty but the company's capital and surplus (equity) for statutory regulation purposes is only $260 M at 2019 year end. This $260 M amount is used by regulators determine if the company is solvent and can do more business. So a deep downturn in the bond market can be very scary for the company. But they dodged a bullet, maybe, as the bond market has been quite bullish recently.

KCLI is a really conservative old insurance company. The Bixby family has run it for four generations! Philip Bixby CEO has run the company for the last two decades. Because the company is so stable, past data can be very useful to understand the company and its management intentions.

In the last 15 years, their overall book value has gone from $692 M to $779 M. Over the same period, their shares outstanding have gone from 11.9 M to 9.6 M, as they have consistently tried to buy their shares back, mostly in the $40-$50 range. So the net result is that their book value per share has gone from $51 to $81 in 15 years. That's a paltry 3.13% return.

Along with equity growth, shareholders also get a steady dividend. Sadly, since the current CEO has taken over the company twenty years ago, they have never increased the dividend, although one year, they did distribute a special dividend of $2 per share.

The stock is right now at $29.40 after the recent market drop, but at this level it still hasn't recovered like the favoured US large caps. If the company could return to around $36, that is a 3% dividend. Add the dividend to the 3.13% equity growth and overall, shareholders can expect around a 6.13% return.

This isn't a great return, but I just live with KCLI as a steady source of income. If I have spare cash, I can put it to work at KCLI. Or if I want to get adventurous, I could borrow money to buy KCLI. With interest rates so low, I can pocket the spread between the dividend and the interest cost.

My second insurance holding is European Reliance (ATH:EUPIC). This company is similar to KCLI. It does life, health and auto insurance for the Greek market. EUPIC had a great 2019, the company earned € 17.5 M, and € 22.4 M pre-tax. Of the pre-tax profit, € 7.3 M was from underwriting, and all other was € 15.1 M. As expected however, Q1 2020 was bad news. The company's book value dropped by € 13 M. Again, it was better than I feared, because I saw that they have downside exposure to € 30 M of Greek mutual funds. The ratios in the table are as of Q1 2020, so they still aren't bad. If that is the worst of it, EUPIC is a good company selling for really cheap. And it is very generous with the dividends. I added to my position during this downturn.

That's the second update of my holdings. Next post I will update my cigarette stocks.

Adding More Japanese Value Stocks

In the last entry I described my view that the way to win in this market is to arbitrage across time and markets.

I've described here that right now the US largecap market is the most overpriced ever. But many overseas markets are reasonable. I am quite heavily invested in Japan and South Africa. I feel quite strongly the coming decade is going to be all about emerging markets and value stocks.

Japan is a value country. It is a very developed country that has been heavily discounted for a generation. But, whereas in previous times Japanese companies mainly disregarded the minority shareholders, now they are much more generous. One can find dozens and dozens of companies that pay more than 3% dividends, and are growing dividends around 10%.

Yes, the persistent explanation for stocks being so cheap is the aging population and their ballooning debt. But look at the US. Their debt is getting up there, and the dollar is stronger than ever. And the same goes for the euro.

In March this year, the US market fell 35% off the peak. And I took the opportunity to add to my Japanese holdings. The table here shows the four stocks I currently own. The latter two I have had for 7 years. Both are up more than 3x when factoring in dividends.

	San	Takamatsu	Tachibana	Riken
Price	¥ 1234	¥617	¥ 1760	¥2402
Marketcap (M)	¥ 13820.80 ($ 127.38)	¥ 6663.60 ($ 61.42)	¥ 45760.00 ($ 421.75)	¥ 56687.20 ($ 522.46)
ROE %	6.8	9	6.3	8.7
PE	7.45	4.71	10.42	13.78
PTBV	0.51	0.42	0.66	1.27
Div Yield %	2.59	4.05	2.73	1.67
P/NCAV	‐	0.6	0.71	‐

I also added two new stocks. My main criteria are

• little or no debt
• high dividend yield
• growing dividends
• low PE

The first, is San Holdings (TSE:9628) a smallcap funeral home operator. One might think I bought it because of the recent coronavirus death toll. But not so. The funeral business is hardly a growing business. Coronavirus or no coronavirus, the death toll hardly changes from year to year meaningfully. There is one negative that concerns me. Management said that attendance is lower at funerals because of the dwindling population and cultural trends, This may result in less spending on funerals. I will be paying attention to the number of funerals and the total revenues in the future. But right now San Holdings is the kind of stock that I am looking for: stability during the market turmoil. Yet San Holdings is down 25% off the peak! That 25% is my margin of safey.

The other stock is Takamatsu (TSE:6155) , which is a small niche manufacturer of sophisticated lathes. Now I know very little about lathes in the same way I know little about funeral homes. But their products look very complicated and expensive, as seen below. And they must be very expensive. If there is anything we learned from the current crisis, it is that the coming decades we need to rely more on automation. We need automation to serve the sick and to reduce overcrowding in factories. When you have this kind of a backdrop and the company sells for less than 5x earnings and pays 4% dividends. That's all I need to know to decide to buy.

A reader may think my analysis is very simplistic. But I make no apologies! My analysis will never mention fancy terms like enterprise value (EV), bullshit earnings (EBITDA) or sharpe ratio. My investment theme is based on simplicity, as explained best by this video. I highly recommend watching it.

That's it for Japanese stocks. In my next post I will go into some other new stocks that I acquired during the recent crash. Right now is an exciting time to invest, and I've been busy!

How Do We Beat the Market?

It's been two months since my last post when the coronavirus really became the world's biggest problem. Back then, people were saying life will never be same, the world will hit a recession worse than the great depression, and on and on. To me what people are saying is not necessarily wrong, but it is the peoples tone that I focus on. The media is having a field day with this. Their job is to maximize their views or sell their papers and magazines. They will emphasize the worst news over and over because it gets people's attention and hence sells. After a long period of this blanket coverage, it cloud peoples judgement.

And the key to successful investment is good judgement, even though investment has a huge luck component. When an investor's judgement is clouded they can seriously lose. An investor whose judgement is not affected can win. Or to put it more bluntly, the latter can take advantage of the former. And the latter group consists of the great investors. They are coming out of the woodwork to make some serious money. Among them are Paul Ichan and Bill Ackman. These people made bets against the market, against the coronavirus. And they succeeded not because they were lucky but because they noticed their bets had huge risk/reward ratios and they had the guts to act on it. One can easily google their names and see their recent interviews on Youtube. I found them highly informative and recommend others to watch.

Back in the 50s in Buffett's heyday when Buffett made 30 plus percent every year, his secret was find individual cheap stocks from the Moody's Manual. That was an edge back then because it is hard to read through several thousand pages of three-column text and numbers. And he did it twice! Today that doesn't work, because all such information is digitized. So one can simply use screeners or write their own code to do what Buffett did much faster and for much more stocks. Plus Buffett has already spread the gospel of value investing, so his secret is out. Because of these two factors, I heard many people suggest that the stock market is more efficient today than before.

I vehemently disagree.

Take a look at the following log graph of the S&P 500 (at top). The economy and market grow exponentially, so the trendline should be a straight line. When gods are the only participants in the market I guess the S&P500 should also be a straight line, because gods have perfect information. But since the stock market participants are mortals with limited information, the graph is not smooth. That doesn't mean the market is not efficient.

Next, we can look at two different time periods, one contemporary and one from the past. The second graph show the index over the last 40 years. And the third graph show the index in the period covering the two world wars, including the great depression. If the market is more efficient today than earlier times then it should show in differences between the second and third graph. But looking at graph two and three it isn't clear that one is more volatile than the other. We have had massive peak to trough moves around 1989, 2000 and 2008. Just as we had them in the 1910 panic and the great depression.



So I can argue the market is not any less volatile than earlier years! So the market has been and still is inefficient. But how can we take advantage of this inefficiency. I already stated that stock picking is harder today than in Buffett's early years. Well, the market is inefficiency today simply because all good American companies are expensive.

Take Microsoft for example. In the last 7 years the stock price has gone up by approximately 7x. Meanwhile its earnings has only doubled! Compare this with Tachibana Electech (TSE:8159), in the 7 years that I have held it the stock has gone up 2.5x but its earnings also doubled. And while Microsoft is selling at 30x earnings, Tachibana is selling at 10x earnings. And I know different people will say that this anomaly is justified in different ways. I can guess some of the reasons:

• the investors don't care about earnings and value
• the investors believe in America but don't believe in foreign currencies and foreign economies
• the cheaper company is more likely to be a fraud
• future growth will justify it.

But in my opinion all these arguments do not justify the anomaly, and there are many counter arguments against it. Therefore, in my opinion, these two stocks reflect the current market inefficiency. But they are not the exceptions right now. Many many companies like Microsoft are just as expensive. And in the Japanese market many many smallcap companies are as cheap as Tachibana.

So, following this train of thought, it is natural to wonder how to take advantage. The solution, as with all investing strategies is by arbitrage. But whereas Buffett arbitraged across the different companies in the Moody's manual. I believe successful arbitrage today must be across entire markets and across different periods. For example, in the US, the market has swung between value and growth over long periods. In the 90's it was all tech growth. But the 2000s it was value, and now 2010 is the decade of growth again. Well, you can guess what I am betting on today. I am convinced the coming decade is going to be a roaring decade for value. If there was ever a time to invest in value stocks, it is now! This also means that different sectors of the market are treated very differently at the same time; for example, Japan versus US stocks.

I've come to realize this simple concept slowly over the lifetime of this blog, which is around 8 years. And consequently, I can easily see the reason behind active management's poor performance. After 2009, a lot of people started their own hedge funds. And their returns were phenomenal, even better than the high performance of the market overall. I am convinced these people realized that the way to have a successful fund is to start at a time when stock picking really is useful; i.e. when the market is depressed. That is time arbitrage. But in the last few years when the market is inflated, people who ran funds cannot put their portfolios into a defensive position even if they know the market is inflated. No investor who is paying high fees wants their money in cash. So the investors are implicitly forcing money managers to go headlong into a market that is inflated. So, these money managers oblige by taking more risk, whether they realize it or not. And now, we are seeing and we will see stories of money managers who were swimming naked as the tide comes down. As an example, I saw one manager of a small hedge fund whose equities are down 50% in the first quarter! And seeing the stocks in the portfolio, I think this is going to be a permanent loss. So what is that manager to do? I think the most prudent action is to close up shop, and hope that people will forget and start another fund later.

So, for brevity I will conclude this post here. This post is really the first half of an article regarding my current views, strategies and investments. My next post will follow up with the second half of the article, where I will describe what I have done in the last three months of market turmoil.

In the meantime, stay safe!

People, Let's get a Grip!

Happy Sunday everyone. I just had to get that out of the way!

The hysteria around where I am, is almost laughable. People are hoarding toilet paper like it will give them immunity to Coronavirus! So, get a grip!

So, I am thinking that if people hoard toilet paper as a gut reaction to a virus, then certainly everyday retail investors are capable of selling way beyond what the current situation calls for.

Unfortunately for me, I own a lot of lower-tier stocks, stocks that are in emerging markets and the cheaper stocks in developed markets. So my stocks have actually dropped farther than the market as a whole.

Below are four of my holdings. Notice that they all yield dividends way above average. All four of these companies have improved earnings. All four of these companies have increasing earnings. Tachibana Electech (8159:TSE) is in fact is a netnet. This means that it is worth more dead than alive! While I do realize that the coronavirus crisis will materially impact Tachibana Electech — the company issued a profit warning for the current quarter — nothing that happens this year should take 35% off the valuation!

	Lewis	Tachibana	Riken	EUPIC
Price	R 23.81	¥ 1248.00	¥ 1770.00	€ 3.38
Shares (M)	80.3	26	23.6	27.5
Earnings TTM	398.1	4422	3857	10.9
Marketcap (M)	R 1911.94 ($ 117.30)	¥ 32448.00 ($ 306.11)	¥ 41772.00 ($ 394.08)	€ 92.95 ($ 103.17)
ROE	8.3	6.3	8.3	8.3
PE	4.8	7.3	10.8	8.5
PTBV	0.43	0.46	0.96	0.79
Div Yield	10.46	3.85	2.2	3.85
Price / NCAV	-	0.73	1.36	-

I am posting this table to share and also to remind myself that we shouldn't pay attention to the markets because the fundamentals reflect the value of shares, not the market whims.

While we always suspect the market is due to get a shock that will cause a drop, where the shock comes from is near impossible to guess with any certainty. I never thought that when the 10 year run ends, the shock would come not from geopolitical or world economic events, but from a germ!

In 2009 when the world was suffering a financial meltdown, I read up on the great depression, and tried to draw parallels. I found there weren't that many similarities.

	Fatalities	% of World
1918 Flu	50 M	3
1958 Asian Flu	2 M	0.06
1962 Hong Kong Flu	50 M	0.03
2020 Coronavirus	10,000 so far	0.0001

Now in 2020, the world seemingly is going through a cataclysmic pandemic, I think it pays to read up on similar pandemics of recent history. The table here shows the most deadly flu outbreaks during the last 150 years when we've had sophisticated financial markets. In that time, I can safely say that these worldwide health crises have not had a negative impact on world economic growth. World War I and the 1918-1919 influenza pandemic did not prevent the roaring twenties. The two pandemics in the 50's and 60's did not affect Warren Buffett's generation in the least bit.

Sure, the world economic output could be reduced significantly because of the Coronavirus, but probably only for two quarters. China, the vanguard in this crises, is already starting to stabilize its new infection rates. I wouldn't be surprised if things go back to 3-6 months there. And my feeling is the lessons learned when this crises is over will spur new economic activity in the health care and infrastructure sector to prepare for the next one. Also, lost production can be recovered when the world consumer market returns back to normal.

But many in the world will not try to rationalize the situation and instead make a sport of hoarding toilet paper and other necessities. It is in our human nature to do something active when danger is lurking and is out of our control. And really there is no harm in doing so. However, the same mentality cannot apply to retail investing, because the market will be rational in the end.

Today, the S&P 500 is down 25% from the peak because of a germ. I think this is definitely the time to be contrarian like Baron Rothschild, who famously said: "Buy when there's blood in the streets, even if the blood is your own.".

My Views on IEH Corp

Hi all, in the last year since I've been mostly silent, I've received the most inquiries about IEH Corp (OTC:IEHC). I have attended a number of the annual shareholder meetings and today I am going to give an update on how I see things. Note: the text below are my impressions and opinions and recollection of conversations, take everything in here with a grain of salt. And with that out of the way, let's dive in.

My impression from the meetings generally aligns with the market perception. The company is hitting a very good spot and things are generally on the up and up. Just look at the last seven years' revenue numbers below.

The CEO though, constantly reminds us that their customers are long-term customers and they are slow adopters. This means that it takes a long time to bag a new customer but when they do they stay as customers. A new customer must design in these hyperboloid connectors, and once they do they are hard to substitute.

So, sales improvement in this company take time. And one can expect more years of revenue increase. That said, there is also a limit to how much the company can sell. This is not a company making technological breakthroughs. Instead, it is a niche provider riding on society's increasing reliance on technology in more and more rough and extreme environments. Their technology is not new, in fact it is old enough to be out of patent protection.

Their main customers are the big drivers of our economy: defense, old and gas, commercial aerospace and the medical field. So long as the S&P 500 does well, so will the company, provided it can execute.

And execution is the main thing I am monitoring during my yearly visits. The company of course, has a very long history with a single family, the Offermans, as owner-operators. Recently, the fourth generation of the family has taken the helm. I am very pleased with this change. The current CEO, David Offerman, has taken the helm for three years. In that time, I just feel things look better to us shareholders. Firstly, the governance wasn't impressive, their non-executive board members did not even reside near the company and dialed into every board meeting. With some shareholder prodding, they have added more conventional and local people for board members.

The previous CEO, Michael Offerman, had also relied on a small-time accounting firm to do their books and inventory. This firm was replaced by a related accountant who was also a small operator. Last year, that accountant left. Incidentally, that second accountant attended the last shareholder meeting to tell everyone that it was all an amicable break. As I remember, he said that he liked the job but in the end he felt that he was too small to handle the task. And so, we are here today with a more traditional firm Marcum LLP as accountants.

Shareholders in past meetings have also expressed concerns when retained earning for grew several quarters as IEH had good numbers, but the value all just went to more inventory, instead of more cash. Furthermore, in the last meeting one shareholder pointed out that the company wrote off $400k in inventory for 2019, whereas was it was only $200k for 2018. So many shareholders are looking at the inventory and pressing for improvement.

On the positive side, in the last shareholder meeting I heard that the company was moving to SAP software. I also noticed the company hired a new, and much younger, controller. And the new controller just happens to specialize in SAP. I would expect that with this and the accounting changes we will see improvements in inventory controls and hence better margins.

So with the new CEO in this fourth year, I am watching for inventory levels and margins. My best scenario is that inventory stays flat and there are no significant write-offs, and margins continue to improve. The CEO used to be in charge of sales and clearly has done a great job in the sales department. By showing better control of inventory and margins he will be able to keep up the earnings growth. In the last seven years that I have owned this stock, I have seen annual EPS go from $0.63 to $2.15. Of course, as most people know, the unusual spike in sales last year was due to a single customer order. That customer had decided to switch to hyperboloid from a cheaper technology. But no single customer contributes more than 14% of revenue, so even if this customer cut off all future orders, the company is still growing at a goodly pace.

IEHC
Price	17.40
Shares (M)	2.32 (2.74 fully diluted)
Equity (M)	26.20
Earnings TTM	3.71
Marketcap (M)	40.60
ROE	14.1
PE	10.9
PTBV	1.55

The previous year spike also contributed significantly to operating margins. The operating margin for the last five years are 20%, 16%, 14%, 19% and 27% in 2019. Other than the previous year, the company has never achieved margins over 20%. If the company can be a bit more consistent and keep the margin say, at 23%. I would feel confident that things have really changed to take this company to the next level; the CEO has indicated that he wants to take the company back on to the Nasdaq someday.

And so, having weighted all these thoughts, I feel that the company at $17.40 today is about fairly priced. I know the stock was at a high of $25, reflecting the rich valuations of stocks everywhere. But I feel IEHC has to have another good year, maybe not as good as 2019, to deserve a price over $20. That said I did not sell at $25 because there is just too much upside. Like I said earlier, one really has to be patient with this stock. And if the stock drops under the $14 - $13 range, I definitely will start buying more. At $12, I would back up the truck!

My Annual Schedule of Investments

Happy New Year!

A whole year without a post! Well, it reflects my investing attitude in the year. I haven't traded much. I have added significantly to two positions: KCLI and PM. But probably for the time, I have not opened any new positions. PMI and MO - the two Philip Morrises - announced briefly that they were in talks to re-merge. But that got shot down quickly. I PMI bought just after the announcement when it was not well received. It dropped to $72 from $80 when I bought, now it is at $86.

For my holdings from a year ago, use this link.

Long Position	Category	Business	Holding Period
IEH Corp (IEHC)	US Microcap	Manufacturing	6 ½ yrs
Anthem (ANTM)	US Large cap	Health insurance	15 yrs
Kansas City Life (KCLI)	US smallcap	Life insurance	5 yrs
European Reliance (ATH:EUPIC)	Greek smallcap	Insurance	5 ½ yrs
Tachibana Eletech (TSE:8159)	Japanese smallcap	Electronic Distributor	6 ½ yrs
Seaboard Corp (SEB)	US Mid cap	Food Conglomerate	14 yrs
Senvest Capital (TSX:SEC)	Canadian smallcap	Investment Company	4 ½ yrs
Installux SA (PAR:Stal)	French microcap	Manufacturing	6 ½ yrs
Riken Keiki (TSE:7754)	Japanese smallcap	Manufacturing	6 ½ yrs
Pacific Healthcare (PFHO)	US Microcrap	Health insurance	5 yrs
Philip Morris Int. (PMI)	US Largecap	Tobacco	19 yrs
New Century Hong Kong (HK:0234)	Hong Kong smallcap	Hotel, cruise line	5 yrs
Bruce Fund (BRUFX)	Mutual fund	Mid-cap value	12 yrs
McRae Industries (MCRAA)	US Microcap	Footware	7 yrs
Lewis Group (JSE:LEW)	S Africa midcap	Furniture Retail	4 yrs
Short Position
S&P500 E-mini (CME:ES)	Index Futures		2 yr
Direxion S&P500 Bear (SPXS)	ETF	3x Inverse ETF	1 yr

Note this year I continue to hold two market short positions. They have been hemorrhaging money. I take solace in the fact that the higher they go, they more they are likely to make money.

To me, the US public markets are just too mature and saturated. In the coming decade or two it will only yield around 3-5%. I think people look back to the good old days when value investors prospered, like in the 50s to the 90s. This was a time when investing isn't as hot a thing as it is now. In the coming years I believe money will chase other areas, like foreign markets, developing markets, and private equity.

Despite not much activity on my part, there are still some things that I'd like to post but just didn't have the time. Things I would have like to write about are:

• Adrenna Property Group screwing the small minority shareholders like me royally.
• New Century Group HK majority shareholders extracting HK$497M (US$63M) cash from the company.
• IEH stock, revenue and profits did great. But the CEO also got a generous option package that could give shareholders 10% dilution.
• My chess sucks. But playing chess is serving it's purpose. It has distracted my overactive mind from making impulsive moves with my porfolio.

Happy new year and may 2020 be a happy and prosperous year.

My Annual Schedule of Investments

Merry Christmas and happy new year!

Another year has come to an end and again it is time to list my largest holdings. This year I also disclose the approximate time that I have held the oldest shares in these holdings. A lot of these stocks I have bought and sold repeatedly over the years. So, although you may see a chart has risen spectacularly through my holding period, I probably did not profit as much as you think because I may have reduced a position before the best times or increased a position too late to catch all the upside. Nonetheless, I find the holding period information very useful to put a perspective on my investment strategy through the years. For example, it has made me much more forgiving of my mistakes. I have been kicking myself for reducing some positions before some great gains (IEHC). But I see now that I also had the wherewithal to hold on to some stocks for over a decade, which turned out to be great calls.

For my holdings from a year ago, use this link.

Long Position	Category	Business	Holding Period
Anthem (ANTM)	US Large cap	Health insurance	14 yrs
Kansas City Life (KCLI)	US smallcap	Life insurance	4 yrs
IEH Corp (IEHC)	US Microcap	Manufacturing	5.5 yrs
European Reliance (ATH:EUPIC)	Greek smallcap	Insurance	4.5 yrs
Tachibana Eletech (TSE:8159)	Japanese smallcap	Electronic Distributor	5.5 yrs
Senvest Capital (TSX:SEC)	Canadian smallcap	Investment Company	3.5 yrs
Seaboard Corp (SEB)	US Mid cap	Food Conglomerate	13 yrs
Installux SA	French microcap	Manufacturing	5.5 yrs
New Century Hong Kong (HK:0234)	Hong Kong smallcap	Hotel, cruise line	4 yrs
Riken Keiki (TSE:7754)	Japanese smallcap	Manufacturing	5.5 yrs
Pacific Healthcare (PFHO)	US Microcrap	Health insurance	4 yrs
Karelia Tobacco (ATH:KARE)	Greek smallcap	Cigarettes	4 yrs
McRea Industries (MCRAA)	US Microcap	Footwear	6 yrs
Bruce Fund (BRUFX)	Mutual fund	Mid-cap value	11 yrs
Short Position
S&P500 E-mini (CME:ES)	Index Futures		1 yr
Direxion S&P500 Bear (SPXS)	ETF	3x Inverse ETF	1 mon

Note this year I also listed my first two significant short positions. I explained in previous posts why I am bearish on the US market, and to a lesser extent, the whole world.

And finally, I should mention that I opened a large position in Folli Follie (OTC:FLLIY) late last year. I did not do a writeup because I cut corners and didn't do enough of my own research. I was going to get around to it. But before I could, everything went south for this Greek company. The world found out that the company founders and insiders have been committing massive fraud. Nine insiders have been fined already and they are currently facing fraud and money laundering charges. I hope they go to jail and pay restitution to the innocent shareholders like me. The stocks I still own are down 85%! That's all I can say for now. The loss is probably my biggest ever and dwelling too deeply can serve no constructive purpose.

But let's hope that next year brings us all better results! cheers!

Why I Shorted the S&P500

The S&P 500 now has returned around 0% this year-to-date. This is Trump's second year in office and the euphoria from his economic policy changes has worn off. As I mentioned throughout much of the year I have had a significant short position on the S&P 500 index. So I have luckily come out slightly ahead in this position. So effectively I am running a long-short portfolio. Counting only my long positions, I am very much at less than 100% invested in stocks. And counting the short position, I am at even less exposed to the market. So, the purpose of the short is to remove my exposure to stocks since my primary market, the S&P 500, is way way overpriced. In this way I can still play the stock picking game while at the same time shield myself from the correction that I feel is just around the corner.

I have seen two major US corrections and I have come to realize, by living in the US, that the euphoria for the markets is bound to come once or even twice every generation. I am seeing another case now. The US is simply at an unsustainable level. My reason for this is grounded on the principle that a stock investment should be based on the value of the company. And this value is the present value of all future cash flows. This is a basic value investing principle.

So the S&P500 index should be priced at the present value of the cash flows from of its constituent companies. The latest TTM earnings of the S&P 500 is only 122 whereas the index is at around 2700 today. That means the entire index is trading at PE of 22! This is way over the normal traditional range of 15. And 15 is being very generous. I want to use this latter PE multiple to help get an estimate of the potential return of the S&P500 over the near future, say 10 years.

The future cash flows of a stock, which reflects the value, is somewhat reflected by the earnings of that stock. If the earnings grow by a certain percentage every year, then the value of the stock should grow by that amount also. I will be generous and say that the S&P500 will grow earnings by 5%. I will also be generous and say that the S&P500 will yield 2%. Therefore, from just this data, we can see that the S&P500 will return around 7%. Not bad but not great either considering I keep hearing returns have traditionally been around 10-12%.

But there is still a flip side to the investing reality: the index is at a very high PE multiple now. It must return to more normal levels. Say it returns to a more traditional, albeit still elevated, level of 15. That means for the same earnings, the stock prices will have to drop to 68% of the elevated level! If this happens in 10yrs that is an annual drop of 2.5%. That is a lot considering that the return I just derived was only 7%.

And wait, it gets worse.

All investors will constantly face three impediments: inflation, taxes and fees. So far, I have not mentioned them in calculating returns. Firstly, there is inflation. Inflation is a fact of life and is often ignored when talking about returns. The reason for this is that inflation varies from year to year and to simplify discussion, we talk in terms of nominal returns. Nominal returns are the opposite of real returns which factor in inflation. The 10-12% return commonly touted is always the nominal amount.

The second impediment is taxes. We can avoid this temporarily by investing in tax-sheltered retirement accounts, but there is a limit to how much we can put in such accounts. We can also reduce it by holding stocks for a long time, if not forever. And there must be many other creative ways of avoiding it, for example by cheating on taxes. Because of this variability, I will only look at dividends, which is forcibly taxed. Suppose the tax rate on dividends is 30% and suppose that half of one's portfolio is not tax sheltered. Then using the 2% dividend number, we will pay 0.3% of our portfolio into taxes.

Earnings growth	+5%
Dividend yield	+2%
PE shrinkage	-2.5%
Expenses	-0.2%
Taxes on dividends	-0.3%
Net return	4%
10 yr net return	48%

Thirdly, there is the fees. This is the most manageable impediment. How much one saves depends on how much effort one expends. I depend on myself for all my financial decisions, I hardly own any funds or ETFs. Therefore, the only fees I pay are transaction fees, currency exchange fees and travel costs to visit companies. All this I estimate is only 0.2% of my portfolio. And subtracting all this up gives me a net return of 4% per annum or 48% per decade. See table. I bet this will be an incredibly low number compared to the average retail investor's expectations. In the long term, stock prices will be grounded by the PE ratio. When the current euphoria subsides and reality sets in, the mood of the market will probably cause prices to fall significantly below the 4% estimate, maybe it could even turn negative at the end of ten years! In the given calculations, I said that the PE shrinkage from 22 to 15 would reduce returns by 2.5%. If the PE goes from 22 to 11.5, the nominal return would not be 4% but 0%!

It is easy to see why I shorted the S&P500.

Portfolio Update

This blog is so devoid of recent entries that I felt compelled recently to post something, anything. Fortunately I have a lot of odds and ends I can update on my portfolio and the market in general.

After riding high under Trump for a year, I am convinced the US market cannot go any higher. The Shiller PE ratio is at a mind boggling 32.3! That is higher than anytime before the great depression and is only surpassed by the dot-com bubble in 2000. On the other hand, I have holdings that are still reasonably valued overseas and even some in the US. Plus I hate paying capital gains taxes. So, instead of selling a lot I settled on hedging the US market. After all, this is a perfect time to short the US market if I am convinced it cannot go any higher.

I hedged the US market by shorting the S&P500 mini futures. Each of these futures is a contract to buy or sell a contract that will pay out $50 times the S&P 500 index on the delivery date. So suppose on the contract expiry the S&P500 is 2700. Then the contract would conceptually pay out $135,000. In reality the contract settles financially everyday, so the original purchase amount and the settlement payout do not happen but instead the delta in the value of the contract is debited or credited at the close of each trading day. So far I am turning a profit shorting the mini futures. However, I really prefer that were not the case, as each gain means an overall downward bias in my portfolio. But it only confirms my belief that the market cannot go any higher.

 A Prussian general once said that "No battle plan survives first contact with the enemy". I feel that way looking back at my first merger arbitrage situation , between Anthem and Cigna. As it turned out, all the forecasts about its chances of success were too optimistic. The merger fell apart after various state governments voiced objections and sued to block it. Despite this, I fell into the golden period for managed care organizations and both companies rose handsomely. I have since sold my Cigna shares. So the moral of this story is that with careful thought and due diligence, even if I am wrong in my predictions, I can still come out ahead. The S&P 500 hedge is another play from this same playbook.

In addition to the hedge I have also reduced my exposure to US companies whenever he opportunity arose. This was the case with IEHC and Senvest.

While the S&P 500 and my US holdings have done wonderfully since Trump's presidency. My international holdings are a mixed bag There have been laggards such as Lewis Group of South Africa. And there are some wonderful stocks, such as Installux, European Reliance, Tachibana Eletech and Riken Keiki. I have listed the basic metrics of some of my international holdings below.

	Tachibana	Riken	EUPIC	Installux	Lewis	CMH
Price	¥ 2028.00	¥ 2504.00	€ 3.47	€ 415.00	R 31.20	R 27.50
Marketcap ($Mil)	¥ 51105.60 ($ 461.66)	¥ 58092.80 ($ 524.78)	€ 95.43 ($ 110.79)	€ 125.83 ($ 146.09)	R 2602.08 ($ 190)	R 2057.00 ($ 150.2 )
ROE %	6.4	11.2	13.8	9.7	4.8	35.6
PE	13.1	14.1	6	14.5	9.9	8.3
PTBV	0.84	1.67	0.94	1.39	0.49	2.97
Div Yield %	1.97	1.2	3.46	1.93	6.41	5.85

Note that all these companies, with the exception of CMH of South Africa, all have very little debt. The companies whose stock appreciated significantly did so with a combination of increased profits and multiple expansion. I am still waiting for that to happen in my South African stocks. I have not wavered in my belief that the long term future of world economy is in the emerging markets. But in the meantime while I wait, they are yielding 6%.

Why I Bought Adrenna Properties

Once in a while a company a catches my eye because of its performance relative to price. But the company ownership structure makes it not feasible to buy. I remember one German company I saw once with very attractive returns relative to stock price, but it is 99% owned by a single entity. So I didn't want to buy because the price does not reflect the fundamentals but whatever a few small retailers value.

Recently I found Adrenna Property Group (ANA:JSE). Adrenna is a South African Property investment company. Its properties are business and residential held for rent buildings in the Cape Town area. Cape Town is the capital of South Africa and is a relatively affluent city in South Africa.

The whole Adrenna story started in 1999 when the Quyn Group first listed on the Johannesburg Stock Exchange in 1999. At first it was a recruitment and outsourcing company. Then Quyn acquired the Colliers group of companies in South Africa and changed its name to Colliers South Africa Holdings Limited. Initially the combined company struggled and decided to delist in 2004. Later, after some major restructuring and some decent results, the company changed its name to Adrenna Property Group Limited in February 2012, and it relisted on the JSE.

From that time onwards, the Adrenna has steadily improved its results. And that caught my eye. The following shows the results in the years following the relisting. All monies are in units of millions. Note that the company has consistently reduced debt while increasing equity through fair value appreciation. The capitalization rate is the net operating income before interest and revaluation divided by the property value.

 

	TTM	2017	2016	2015	2014	2013
Price	R 1.00	R 1.55	R 0.65	R 1.45	R 0.80	R 0.40
Shares	55.9	55.9	55.9	55.9	55.9	55.9
Equity	151.1	146.5	125.4	117.6	110.1	98.2
Earnings TTM	19.5	21.1	7.9	7.8	12.2	10.5
Marketcap	R 55.90 ($ 4.58)	R 86.64 ($ 7.10)	R 36.34 ($ 2.98)	R 81.05 ($ 6.64)	R 44.72 ($ 3.67)	R 22.36 ($ 1.83)
ROE	12.9	14.4	6.3	6.6	11.1	10.7
PE	2.9	4.1	4.6	10.4	3.7	2.1
PTBV	0.39	0.62	0.3	0.73	0.43	0.24
Div Yield	0	0	0	0	0	0
BVPS	2.7	2.62	2.24	2.1	1.97	1.76
Debt	0.4	0.37	0.52	0.53	0.63	0.84
Cap Rate (%)	8.2	7	6.7	4.8	6	6.4

The company actually has high earnings through fair value reappraisal. So beware when looking at the incredible PE numbers!

The company's cash flow mostly pays for expenses and interest on debt.  South Africa is a country with high inflation and therefore interest rates are also high. The company's operating income is 2.5 times interest expense. This ratio is a bit lower than I'd like but it is still acceptable.

So Adrenna looks very cheap, but is there a catch? And indeed, there is a problem when investing in Adrenna. That problem is the company's market cap. The company's five largest shareholders own 72% of the company. They include two board member and affiliated entities. This is encouraging in that the board has aligned interests with the average shareholder but it also means there is very little float, possibly much less than USD $1 million. Still I have built as large a position as possible without excessively moving the stock price. Hence, I regard my position in Adrenna as only a trial run of my investment approach because this is not a stock I can buy in size.

Latest Earnings from Four Holdings

I usually write about my investments' latest financial results once or even twice a year. Recently I haven't done that. So, I will catch up on four of these today.

McRea Industries is a shoe company that sells military footware, industrial footware, and ladies luxury cowboy boots. The company occupies a niche in the military footware space because US military boots must be made by US companies. So, McRea has a North Carolina manufacturing plant devoted to supplying the US military with boots. The rest of the company's manufacturing is in Asia. Obviously, Asia can manufacture footware cheaper than any American company. These boots include women's luxury cowboy boots, industrial footware and even military boots that soldiers can purchase as spares.

McRea's sales has been flat and its mix of military to luxury boots has tilted to military in recent years. This is bad news because the military boots have lower margin. The overall sales of the company has been $104 to $108 M for the last 3 years. So it is basically flat. And the net earnings is down to $5M from $6.6M 2 years ago.

	MCRAA	SEB	PFHO	Installux
Price	34	4350	13.45	€ 415.00
Marketcap (M)	81.6	5089.5	10.76	€ 125.83 ($ 148.60)
ROE (%)	6.9	9.6	14.3	11.2
PE	16	15.6	11.7	12.9
PTBV	1.14	1.5	1.67	1.45
Div Yield (%)	1.53	0.1	0	1.93
Price/NCAV	1.27	2.18	1.71	1.97

The table on the right gives the financial metrics for McRea (MCRAA) and three other companies. The company has had a recent run-up which I cannot really understand because the fundamentals have not changed. The only plausible explanation is the general change in sentiment towards tiny microcaps in our long powerful bull market. But overall, my opinion is that this company is quite fairly valued for a shoe company.

The way I see it, the company can only increase its earnings if it increases margins and efficiency in the military boot segment. And it appears to be doing that. Last year the company had $27M of inventory and this year it is only $18M. This helped to increase its cash position from $16M to $28M yoy.

Seaboard Corp (SEB) is a food conglomerate that I have owned for over 15 years. I have always seen it trade at about 10x earnings. But in this bull market it has jumped to 15.6x. The company's management has proven itself to be disciplined and shrewd capital allocators. But it is still a commodity producer. The company currently still drives 75% of the operating income from pork. We have had food deflation for the last several years. But pork has actually benefited as the cost of feed (i.e., corn) has dropped much more than the cost of pork products, hence the decent earnings in recent years. But commodities are always cyclical and things can and will turn. I just don't see how this stock can go any higher.

Pacific Healthcare Organization (PFHO) is in a two-year recovery after losing Amtrust, a huge customer in 2015. Thus far it is doing just fine, earning about $0.30 a quarter for the last three quarters. And it has a great balance sheet, with $7 per share in cash and no debt!

And last but not least on my list today is Installux (PAR:STAL) . Installux has been a star performer in my portfolio. In the five years that I have owned it, the French maker of aluminum building products has increased sales marginally. But profit has increased by about 9% per year in those years because of increased gross margins and increased profit margins. The company's metrics are still quite good and it has € 130 per share cash and no debt.

Calculating Lifetime Returns Using XIRR

I feel that one big purpose of the many investing forums, blogs and financial articles is to bring basic financial information to the masses. Consequently there can be a lot of repetition of information. In this post, I will describe a useful financial tool that is known to seasoned investors. So, this post is for those who may not be familiar the topic.

In the investment world we need a simple way to measure the performance of a portfolio. People in finance often refer to it as the compound annual growth rate (CAGR). This is for example very important measure when a investor chooses his mutual fund. From my experience almost all investors look at the 1, 3, 5 and 10 year CAGR that are mandatory in all official fund reports.

The definition of a CAGR is easy to understand in the mutual fund literature. They describe the growth of a $10,000 investment in a fund from, say, 5 years ago to today and calculate the average annual return of that investment assuming all distributions are reinvested. This CAGR is the equivalent annual interest of a daily compounded savings bank account over the same 5 year period.

For example, as of their annual report ending June 30, 2016 the Bruce Fund reported a CAGR with dividends and distributions reinvested of 9.7%. This means that a $10,000 investment fives years ago would be worth $15,866 on June 30, 2016 because 1.097⁵ is 15866.

So far so good, but real-life investors have cashflows in and out of their investment portfolios. How does one find a CAGR of their portfolio to see how they are performing as their own portfolio manager? To do this we need a clear definition of the CAGR of a portfolio with arbitrary cashflow. I see my own CAGR as given above. It is the the equivalent annual interest of a daily compounded savings bank account over the period in question given that the hypothetical bank account receives the same cashflows as my real portfolio account.

I find this result extremely useful because it tells me how much return I will need if I save diligently and I have some retirement goal in mind. For example, suppose I am 60 years old and I want to retire at 65. Over the next 5 years I will contribute $20,000/year to my retirement fund. My retirement fund now has $200,000 and I want to have $400,000 at 65. What return do I need?

The answer is simple using the xirr() function available in all spreadsheet programs such as MS Excel. The xirr() describes the returns given cashflows. The following is the way to enter the data.

• Each cashflow entry should have a date and an amount in one row.
• Each cash flow entry into the retirement amount should be a negative amount.
• Each cash flow entry out of the account should be a positive. 
• The final entry should be a withdrawal of the remaining balance on the account.

So in the above example, assuming that I begin on 4/15/2017 at the age of 60 my initial account balance is $200,000. And on each anniversary I add $20,000. Then on the 5th anniversary, my account has a $400,000 balance. The cashflow entries are entered in order each on a row. As shown below. The xirr() function takes two parameters. One is the region containing the dates of the cashflows, and the other is the amount of the cash flows. I entered the following in my example: =xirr(a1:a7,b1:b7).

And the xirr result is 8.55% in the example shown in yellow.

	A	B
1	4/15/2017	-200000
2	4/15/2018	-20000
3	4/15/2019	-20000
4	4/15/2020	-20000
5	4/15/2021	-20000
6	4/15/2022	400000
7
8	XIRR:	8.55%

The xirr() function can also tell me how much money I will have at retirement given that I can achieve some return. In the above example, I can calculate how much I can have if I can improve my returns to 10%. To do so, I would simply replace different values for the final withdrawal until the xirr value is 10%. The current final withdrawal value in this case is 400,000.

Note that the values of deposits and withdrawals can be any amount and at any time.

Knowing the CAGR for all cashflows is an extremely tool that can answer what a return really translates to in terms of wealth. And it can also be extended to compare the value of future cash streams such as annuities or defined benefit plan such as social security. In doing so, this tool gives the average consumer an objective way to compare different types of retirement products. It can make more clear many financial products that, I feel, are designed to obfuscate the and confuse the consumer through complexity.

I hope you will find this as useful as I do.

My 6th Annual Schedule of Investments

So five years on, I am still posting. On each anniversary of my blog I list my dozen or so largest holdings. See this link for my past year holdings.

Position	Category	Business
Senvest Capital (TSX:SEC)	Canadian Smallcap	Investment Company
Anthem (ANTM)	US Large cap	Health insurance
Seaboard Corp (SEB)	US Mid cap	Food Conglomerate
Installux SA	French microcap	Manufacturing
Tachibana Eletech (TSE:8159)	Japanese Smallcap	Electronic Distributor
European Reliance (ATH:EUPIC)	Greek smallcap	Insurance
IEH Corp (IEHC)	US Microcap	Manufacturing
Kansas City Life (KCLI)	US Small cap	Life insurance
Riken Keiki (TSE:7754)	Japanese smallcap	Manufacturing
McRea Industries (MCRAA)	US Microcap	Footwear
New Century Hong Kong (HK:0234)	Hong Kong Small cap	Hotel, cruise line
Pacific Healthcare Organization (PFHO)	US Microcrap	Health insurance
Bruce Fund (BRUFX)	Mutual fund	Mid-cap value

I am posting less now because I have been busy with other things and because I have less new things to say. I also don't have much to comment on my holdings. I have not found anything new in the last two years. The above table is basically a reshuffling of my past year holdings because of changes in their value and, to a lesser extent, some trades. In particular, I have sold a chunk of Mcrae and PFHO. I sold Mcrae because the company hasn't grown sales much and their stock experienced a recent spike. PFHO I sold at $10 after buying a bunch below $10. Of course I regret that one as it is now almost $15. But I remind myself that in a bull market, every sell you make is a regret in the short term. In the long term, well that's another story.

Anne Scheiber, the Secret Millionaire

I first heard of Anne Scheiber from a magazine article about her in 1995, shortly after she passed away aged 101. Anne Scheiber was the first example I have heard of a hidden millionaire.  Hidden millionaires are low profile people who grew up in average circumstances and did not rise up very high in their careers, who lived very ordinary frugal lives. They are the sort that others never expect to be rich. But when they die, people with something to do with their estate are surprised to find out they were multimillionaires.

Scheiber died with a $22M fortune.

Because Scheiber was low profile and did not have any close relations, there isn't a lot known about her century of life. She got attention in the news because she donated her fortune to the Yeshiva school to help women like her. The school had never heard of her. What is known is that she spent her entire working life as a IRS auditor. She was great at weeding out corporate tax cheats. But despite her contributions, she never got promoted at the IRS. After she retired in the 1940's she lived a simple life in New York until her death. According to the article, she learned from years of auditing that the wealthy all invested. And that inspired her to focus on investing in retirement.  The articles described Scheiber as a miser and a recluse.

The part of the story that estimates her returns gets a bit fuzzy. The story is that she started with only $5000 in retirement and turned it into $22M which would give her a 17.5% rate of return!  That beats the like of Walter Schloss!  But after digging around in Wikipedia, I read that she probably started out with much more at retirement. And her return was probably around 13%. Her return is still phenomenal because out-strips the US market by about one percentage point. Incidentally, that's exactly the type of returns I want. Her investment style is the Warren Buffett style of buying quality companies and holding for the long term, like a lifetime!

I read about her before I had ever invested. And that article had a tremendous influence on my thinking towards investment. It helped me to start early down the investment path. Although value investing and stock picking didn't come until much much later.

I've thought about her many times since I first read about her, and my burning question is whether she was happy in her retirement years while she was accumulating her secret millions. My best guess is that she felt a tremendous sense of purpose and it was that purpose more than anything else that helped her to live to such a ripe old age.

Although Scheiber was the first secret millionaire I've heard of, she is not the only one. Every once in a while I hear of others. Like Ron Read of Vermont who was a veteran and who worked as a janitor and gas station attendant. He died at 92 worth $8 M. And I am sure there are many more that we have never heard of.

What is The Point of All This?

I own several brokerage accounts with different discount financial companies. And I occasionally get calls from them seeking to build a relationship with me so that they can sell me some service. The first step in the conversation is to ask me about my financial goals. And I have trouble articulating it. I say something to the effect of trying to make as much money as possible. I don't mention the goal is to spend it to achieve some lifestyle. I instead say the money is the goal in and of itself.

For those who think this may seem like a strange answer, to me it is very similar to a person working towards a master title in chess. I do admit that unlike chess, building a nest egg does have the added benefit of providing retirement security. But considering that I live frugally and my savings are performing at or better than the market, I will probably have more than what I need in retirement. So working hard at investments at this stage for me must have more purpose than simply retirement security. So I say making money is the end in itself.

So working hard towards financial success over a lifetime should produce more money than one needs, if that person is frugal. Today I am going to describe how I think it can be done relatively easily. And what are the risks that can derail that.

Survival = Success

In this endeavor, the first thing to keep in mind is that it is a long road and to survive is to succeed. The one thing that can derail success is to have a loss and a lesson that one does not recover from. Even if one can theoretically recover a big loss over a lifetime, the psychological damage may discourage and/or prevent one from doing so. This is what others often call looking after the downside. And to me that means first and foremost, diversification. Diversification means spreading the risk across industries across asset classes and across geographies. A second useful thing is to have reasonable expectations. I have read the writings of various young investors in the blogsphere and I often sense an implied goal of 20% returns.

But in a lifetime achieving such returns on average would make that person one in a million! To get an idea how awesome 20% is, consider a 30 year old who has studied valued investing and who has some kind of a lasting edge. If that person has USD$100K and can save around $18 K per year (that's the limit for 401k retirement contributions) then that person will have $20M by age 60. That is very unlikely. I have never heard of a person who is worth $20M who didn't start out with a large capital base and who didn't work in finance or run a business but simply saved and had phenomenal returns. Instead the goal should be to simply match the market and possibly add one or two percent. So if the market does 8% for the next 30 years, then the target should be 10%. In the above scenario that 30 year old will have $1.8M at age 60. That's a huge difference, but it is also much more realistic.

Think Different

To get above average returns, I think it is necessary to have a different world-view than the greater investing community. That may seem so obvious that it needn't be said. But the actions and mood of the retail investment community seems to indicate people don't know it or forget it.

To make above average return in the market one must think differently from most people because the money made that is above average must come from others. And it is concentrated in a few; think of all the rich like the top 1%. They own a disproportionate amount of the wealth. So the rich minority make above average returns from the majority.

And surprisingly it is not hard to see errors in thought that many people make. It just takes work and practice to think differently. I can point out a few example off the top of my head.

A persistent theme in American politics is that life is getting no better or worse for the current generation than the previous. But that just flies in the face of facts. People think crime is up in this generation compared to the last. In fact, once on TV, the former House speaker Newt Gingrich did not dispute the fact that crime is down but said that it is a problem that people think US crime rate is up. I thought the job of a government entity or company is to achieve something for an end, not make you think that it is achieving something without actually doing it. Here thinking differently is echoing what Warren Buffett has been preaching: that the opportunities and life in the US has never been better.

The last US election dramatically demonstrated common faulty thinking in many ways. One reason people voted for Trump despite so much of his nonsense is that the voters simply wanted change. But society is a fragile institution, change for the sake of change will almost certainly be negative. Just look at history. Many decent societies were made a wreck by flashy orators without substance. I can think of Nassar of Egypt, the Perons of Argentina, Castro of Cuba, and on and on. These people can initially create a sense of euphoria in the general population. But their people's lot hardly gets better. And eventually that fact becomes obvious because the new leaders have taken whatever is right in their society and replaced it with something that is not well thought out and clearly worse.

So far my examples have been about politics, but it is just as applicable in investing. Take Japan for example. The common narrative is that Japan is a greying xenophobic country that restricts immigration. But it is a culture that has been very successful in the past, and they just have a labour shortage because of a low domestic reproductive rate. But I have never heard anyone mention any other way to describe the Japanese mentality. In twenty or thirty years, I believe it is possible that Japan will be forced into allowing some limited forms of immigration to replenish the population. The countries wealth and success can easily bring in as much cheap labour as needed. For example, Japan can allow a few million Chinese or Koreans legal immigration status for periods of five to then years. That can easily revive the economy when they find they have no choice. I am not saying this scenario is a certainty. But I am saying that I have not heard anyone even contemplating such a thing. The uniformity of thought in the investing community towards Japan is palpable. In my opinion, that creates a mispricing of Japanese equities in general and that is why I invest in Japan.

Be Objective

For most of us who are part of mainstream society, we are conditioned to interact harmoniously with others. That is a necessary condition to be successful in our communities and organizations. The way we are taught as children illustrates this point. Many of us have heard the saying, "it's not what you say that matters, but how you say it". I believe, in the business world, the best way to get success requires the following mix. The soft skills are personal attributes that allow someone to interact effectively and harmoniously with other people.

I do not espouse the correctness of efficiency of the way the world works; it just is what it is. But I do know that I am relatively poor in the soft skills department. And I know I can get more reward for my effort by utilizing my skills a pure technical setting, like personal investing. To invest in one stock in one's personal portfolio requires the following mix. Note there is no use for soft skills.

However, this pie chart is hardly encouraging because it shows that a large component of success in picking one stock is still out of our control. It is luck. But if we buy a basket of relatively uncorrelated stocks and waiting long enough, say five years. Then the odds of success in the whole will have the following mix.

This is so because of the law of large numbers in probability theory. As the number of samples increases, the actual ratio of outcomes will converge on the theoretical, or expected, ratio of outcomes. Take a coin toss as an example. The theoretical number of heads and tails should be 50%. However, one toss, or sample, will result in either 100% heads or 0% heads. That is hardly the theoretical result. However, in the total of 100 tosses, the result will be something like 46 out of 100. The 46% result is very close to the theoretical 50% theoretical result. In simple terms, the more the samples taken, the less luck plays in the experiment.

But using one's technical skills to make investing decisions is not so simple. It requires constant vigilance. This is hard because it is very difficult to think objectively in our world. So much of what we perceive is based on subjective biases. Suppose an employee is given a point of view that he feels is wrong, but which is the view of his boss. Does the employee oppose his boss? Many times an employee doesn't because what he wants is not the success of the task or the company at hand, but it is his own personal success within the company. To do that requires being a "yes man". And when a person thinks like this often enough, I believe that person begins to believe that the expedient view is the truth. This kind of subjective mindset can corrupt our minds and has no place in personal investing. This is one of the reason's why the many people have trouble getting good returns picking his own stocks. Because they are not used to thinking this way.

I can think of many examples in the investing world where a lack of objectivity has been costly. Theranos is/was a thirteen year old private company claiming to be on the cusp of revolutionizing the blood testing world. The house of cards came tumbling down last year amidst revelations by the Wall Street Journals that the company did not do anything close to what they were claiming. Then came the soul searching. The medical and investment community were scratching their heads wondering how did they let such a scandal happen. In this video , Harvard Professor Bill George was asked if the "golden-girl" CEO Elizabeth Holmes got a pass on the scrutiny because she was a woman, and he said "..... I would like to see a lot more women successful women..... we all drank the kool-aid......". My opinion is yes, she definitely got a pass because she was a young attractive white woman in a world dominated by middle aged white men. You can see her photo below and judge for yourself.

Theranos CEO Elizabeth Holmes

As a result of this scandal reputations were destroyed, tens thousands of blood tests were recalled, and millions in investors money were flushed down the toilet. Theranos is a very poignant reminder to be very vigilant, skeptical and objective when it comes to one's own investment dollars!

Successful investing of course requires understanding of businesses, economic cycles and value/growth principles. These are technical skills described throughout this blog, in the media, in business schools and in books. But the knowledge I have pointed out here are those that I found extremely useful but which are not so well emphasized elsewhere. This knowledge is difficult to grasp, easy to forget, and can make a huge different in one's investment results.