Friday File: What is the Real Money Portfolio? (Plus a few trades)

By Travis Johnson, Stock Gumshoe, August 24, 2018

Welcome to another Friday of earthly delights! We’ve had some new folks join our numbers in the past few months, so I thought I’d catch you up on the Real Money Portfolio and what it represents… and why I write about it for you. After that, I’ll catch you up on my thinking on a few of these stocks that have generated some news recently, and on a few new trades.

Sometimes people ask me what my investing philosophy is, and I don’t really have one… but I should at least be able to explain my thinking a little bit for you.

My overriding strategy is to try to build a long-term portfolio primarily dependent on two kinds of stocks: those that have sustainable competitive advantages in growing industries, where the business is real and growing and the possible growth over a long period of time can be remarkable (but the prices often seem very high); and those that have long-term potential to steadily compound earnings at a solid rate of return, and can be bought at reasonable prices.

Dramatic revenue and earnings growth is the engine that creates huge short-term gains in the market as new industries are created or new competitors emerge (and sometimes huge long-term gains, when that rare company that can dominate for decades emerges), but compounding, the ability of a company to reinvest its earnings into growing the business a little more each year (or sometimes a lot each year), is what gives me confidence in the sustainability of my portfolio, and what I hope to continue to rely on to create long-term portfolio growth.

The first group, the growth industry leaders, is what has been most popular in the market in recent years, so that’s a large part of the reason why my portfolio has done well — stocks like NVIDIA, Apple, Alphabet, Facebook and Amazon have sustainable competitive advantages, and they are dominant players in growing industries that have tended to be natural “winner take most” businesses, despite the tendency of technology stocks in the past to be brutalized by competitive pressures from new entrants… and the market has certainly noticed this, which is why most of them are pretty expensive at the moment.

The second group is not quite as much in favor, but certainly isn’t rashly undervalued right now — I’d put the insurance conglomerates in that group (Berkshire Hathaway, Markel), as well as the steady dividend growth stocks with solid and unsurprising businesses (Kennedy-Wilson, Medical Properties Trust, Starbucks, Hershey, etc.). These are the stocks that have the strongest likelihood of becoming “hold forever” investments, with either strong cash flow compounding for the business itself or, in the case of dividend payers, a great tailwind from compounding reinvested dividends. And some “growth” stocks and technology, and here I’m particularly thinking about Apple and Alphabet, are really morphing into compounding machines as they channel their cash flow into building new businesses (or, in Apple’s case, massive buybacks and dividend hikes).

And as I try to build positions in those stocks that I anticipate being able to own for many years, or even decades in some cases (though I do keep an eye on reasonable stop-loss triggers for downside protection, particularly in the “growth” stocks), I also speculate on interesting stories around the edges — smaller and riskier growth stocks that I think might be onto something bigger, and might grow into deserving their valuation, and special situations where I think stocks are simply misunderstood or valued improperly given their current earnings or dividends or growth potential. Sometimes I learn about these from teaser ads, sometimes just from screening ideas or watching the comings and goings of the market.

And then I get a little crazy with smaller “bets” that create a fair amount of churn in the portfolio, including options speculations, so if you follow my trading decisions week to week as I write about them, you’ll see that a fair number of the trades I do are with relatively small amounts of money.

When you look at the ten largest holdings in my Real Money Portfolio, the average holding period for those stocks so far is more than six years (it’s a wide range — the oldest holdings in that group are Berkshire and Alphabet/Google, both first bought in 2005, the newest is Five Below, which I first bought last December)… but the goal is portfolio building, not showing the best gains from an initial investment, and I’ve added to two of those positions in the past month and six of them in the past year. Many of these are very long-term holdings, but they’re not stagnant positions that I’m ignoring — they’re just stocks that I have a lot of confidence in, and I give them a lot of room to fluctuate and try to add to these positions when they are attractive and, more rarely, shave off some profits when they get bloated or my opinion changes meaningfully.

So yes, the Real Money Portfolio is real money. It represents most of my family’s investments, and this portfolio matters to me… I’m assuming that my wife and I will retire someday, though hopefully not soon (I’m in my late 40s, I suspect Mrs. Gumshoe would say that it’s none of your beeswax how old she is), and our kids are going to want to go to college, and we’d like to help them with that. And, of course, we’d like to be filthy rich and be able to become philanthropists in our dotage, so making a lot of money on our investments would be helpful in that regard.

And because it’s real, I pay a lot more attention and manage it like a portfolio that needs to grow for the next 20 years, not just a list of ideas, and therefore I (hope to) make more rational decisions. I can’t “bet it all” on one risky stock, and I don’t have to be in all the hottest stocks or sectors so I can hope to look smart in any given week.

For a few years, after this service was launched because Stock Gumshoe readers were spontaneously sending me checks and I felt like I had to do something extra for those supporters, I posted an “Idea of the Month” for the Irregulars instead of just sharing what I’m doing with my portfolio… and that quickly got silly. I was writing up and analyzing stocks as interesting investments at the same moment that I was buying or selling different stocks with my own money, and that brought some clarity to me: Intellectual assessment of an investment is interesting and valuable, and being disinterested can provide some good perspective, but when it comes down to actually committing real money to an investment that you intend to hold for a long time, the thought process is very different… particularly in regard to risk. And good investment ideas don’t just automatically pop into your brain once a month — you know you have a good idea not because it’s the second Tuesday of the month, but because you decide to invest money in it.

Unlike with a paper portfolio, where the purpose is to try to impress you with good decisions I’ve made and to erase the mistakes by selling off all losing positions immediately, the purpose of this portfolio is to actually rise in value on the strength of my decisionmaking and intestinal fortitude (and, probably, some luck). Hopefully, I’ll continue to do reasonably well in building this portfolio, which I add new cash to each year, and hopefully that will help you as a reader — but I’m not putting together a list of stocks that I think will beat the market over 18 months or releasing a new “can’t miss” idea every other week, I’m trying to both grow a long-term portfolio and protect it from scary losses in the future.

It’s a tricky distinction. Thinking analytically about stocks and using a disciplined valuation will tell you one thing… but actually investing your money and following your research and instincts sometimes tells you something a little different. Sometimes it’s easy, and both the valuation work and your fortune-telling about the future give you the same answer, and in those cases perhaps it’s time to make bigger bets, but when they don’t you have to choose: Will you invest some in growth even though a lot of the best companies look very expensive, or will you focus only on waiting, with discipline, for your cheap stocks to arrive?

If you waited with discipline over the past five years, or even the past year or two, you missed out on a lot, so I try to keep some balance. I maintain an eye on the long term, and I continue to try to be disciplined in valuing the stocks I buy and spreading out purchases over time as I build positions… but I also recognize that the reason to invest in stocks for many of us is that we want to grow our money, and the way to grow your money most quickly has usually been by buying the stocks whose business is growing most quickly, so sometimes you have to pay more than Warren Buffett would like to get a piece of those future businesses.

What it comes down to is that the best investment strategies over the long term, in my experience, tend to be near-opposites: momentum growth, and deep value. Trying to do some of both makes sense, if you can handle the inner conflict and don’t mind arguing with yourself. Betting a portfolio on just high-growth momentum stocks, or just on downtrodden value stocks, can lead to ruin — but owning all kinds of stocks is one reasonable way for a stockpicker to try to beat the market and control risks.

And most of my largest errors have been of the “sell too soon” variety, which means I continue to remind myself that holding onto stocks that are doing reasonably well is usually the way to go — it’s important to be wary of real risk, which I define as the permanent loss of money, and to watch those stocks that could really lose meaningful value and not recover for years if sentiment turns just a little bit, but it’s more important to make sure that the daily sturm and drang of the market doesn’t lead you to trade in and out of your best companies very much. Trading short-term price movements is hard, and most of us will get it wrong most of the time, so bumping in and out of positions as the sands shift beneath you is the surest way to double (or more) the likelihood that you’ll make a mistake.

But that doesn’t mean you have to just sit still with all positions all the time. Because I write mostly about real money trades I’ve made or am considering, I end up “thinking with my money” sometimes in making tiny bets… and I include a lot of tiny speculations in the Real Money Portfolio, particularly on the option side, so that lower half of the portfolio also shows you what I do when I don’t have a big idea that I want to commit a lot of money to.

The little options positions I dabble in, in particular, are likely to fail more than half the time and lose 100% of their value when that happens, but when they work out well it can be extraordinary and generate 1,000%-10,000% gains. So far, my closed or expired derivatives speculations have averaged out to just over a 100% return since January of 2017, but that’s during a very strong market — and only about a quarter of those speculations have lost 100%, which is better than is likely to be typical for me. About half of my open option/warrant speculations are in the red, with a paper profit for those positions on average of about 25% right now, though a lot of those will expire worthless and I’m not sure where it will end.

But thanks to the bull market and a bit of luck, and hopefully some skill, about half of the profit from closed trades over the past year and a half has been generated from those derivatives speculations, and most of that profit has been channeled back into promising equities. That’s partly because I don’t close a lot of equity trades, since my bias with most of my equity positions is to growing those holdings when I can, but options and warrant speculations are inherently time-limited and they don’t lend themselves to multi-year holding periods very often — so opening and closing option speculations accounts for a lot of the “action” in my portfolio, though it’s not a large portion of the portfolio.

Right now, my open options and warrants speculations total up at just under 3% of my individual equity portfolio, and that’s at the top of the range that’s typical (and comfortable) for me. Some of those are little exploratory tastes that will turn into meaningful equity positions over time — that’s how I initially built positions in both NVIDIA and Shopify, for example, when I was too scared of the valuation to commit to buying the stock at first — and some will just be trades that either generate a profit or a loss, and I know, as a group, that they won’t do irreparable harm to my portfolio even if they all go to zero.

Most recently, for example, I closed out my option position on Match.com (MTCH) — that was a momentum name that took a big dip earlier this year that I thought was overdone, and I expected the shares to recover and that investor sentiment would grow rosier again at some point this year, so I speculated on that with some way-out-of-the-money call options. I don’t particularly want to own Match shares long-term, at least not now and at these prices, and I don’t have a strong understanding of the company or its long-term prospects… so when the stock bounced back and provided a good profit, and I didn’t see a likelihood of another 50% gain by this winter, I sold. A nice profit on a tiny position, and now it’s gone and out of my portfolio and out of my head… though Match gets teased so often, particularly by David Gardner at the Motley Fool, that I might write about it again before too long, you never know.

Likewise, I entered another call option position on an individual stock this week in Blackberry (BB). That’s not a stock I have a high degree of conviction on, but I think there’s a decent chance that it might grow surprisingly strongly on the back of its security businesses, and a bet on the stock doubling in the next year and a half was cheap because the shares are a little beaten down right now. This is a fairly typical kind of options speculation for me — when stocks in growth industries are not currently showing dramatic growth, you can bet on potential growth without much money… that’s what led to my very successful speculation on Intel last year when analysts had given up on them ever growing again, for example.

It might not work, but it doesn’t cost much and these kinds of trades, in companies that have some core strength but don’t get much “growth” enthusiasm, can work out very well if the growth emerges stronger than expected… and when that’s my strategy, I err on the side of going long-term to give me a better chance of being right eventually, so here I have about a year and a half for that story to play out.

In many ways this isn’t very useful information for you, because I’m essentially gambling with a couple dozen tiny positions that are often below 0.1% of the portfolio, often extremely low-cost options speculations that are way “out of the money” and considered foolish by professional options traders, but these positions also keep me in touch with a lot of interesting stocks and provide some outlet for risk-taking when I don’t feel comfortable risking a lot of actual capital… and, well, on balance they’ve worked out for me over the years, and I think being open about these smaller positions is useful.

I usually only include the most recent few months when I update the Real Money Portfolio sale log for you (those sales are listed below the portfolio holdings, with the most recent at the top), but this week I opened up the whole thing in case you want to get an idea of the number of those odd little speculative bets. It takes a lot of swings to get big gains, and a lot of risk, so I do have to keep reminding myself to keep an eye on exactly how much of my portfolio is at risk in these trades.

And, as I often mention, these smaller speculations do something else: They satisfy my inner urge to gamble on ideas or expected catalysts or shorter-term “hunches,” for lack of a better word, and that serves to keep me from making riskier bets with larger chunks of my portfolio. I might buy a lottery ticket every now and then, or spend an evening playing blackjack at a casino, but I’d never buy 1,000 lottery tickets or bring a credit card to the casino. Much of investing success relies on understanding yourself and how to manage your own impulses.

So what does that all mean in terms of portfolio performance? Is this a portfolio worth following if you’re not me, and it’s not your money?

Well, for this year to date my total portfolio, including the half of it that’s in broad mutual funds or ETFs, is up 10.2% versus the S&P 500’s 8.5% (dividends included). Excluding those mutual funds, my individual equity portfolio would be up about 12%. So I’m not blowing anyone’s socks off, but beating the market is nice… and I’m particularly pleased when I can keep up with or beat the market while still holding some meaningful hedges — more than 10% of the portfolio is in things that I would expect to do well when the market does poorly or we hit a crisis, like gold royalty companies and a put position on the S&P and the occasional short position, and close to another 10% is in cash, so I still feel like I have some downside protection and some cash that I can use if we hit a real correction in the market… and it’s not hurting my overall performance. That’s similar to my performance in 2017, by the way, though I have no idea how things will shake out in the next bear market.

So that’s my general strategy, an explanation of what the Real Money Portfolio is and how I build it and maintain it… what’s been happening this week?

*****

As noted above, I sold my option speculation on Match (MTCH), and bought a new position in Blackberry (BB) calls. I also again rejiggered a bit of my short equity/long warrants position in Stellar Acquisition (STLR), a SPAC that’s trying to buy Phunware (I’ve been tinkering with this position for some time, as shares became available for shorting and then were pulled back, then made available again, but with no real realized profit or loss to date).

Along the same vein, I also took advantage of a huge embedded profit that was skewing the risk/return potential in my Estre Ambiental (ESTR) short equity/long warrants trade, closing out half of the short position and selling a similar portion of the warrants. They have not reported recently, so though my expectation is for continued weakness in the near term, given the weakness of the Brazilian currency, I had a fair amount of “paper profit” to lose if the stock popped by just 10-20% on any good news, as is always possible with an illiquid stock. I’ll maintain the rest of the position for now — the cost of shorting is low, and I’ve got enough taken in cash profit to salve any wounds if the trade turns against me, and not many ways in which I can really lose on this position.

*****

Premier (PINC) reported blowout earnings but did not raise its forecast for the current quarter (that would be a “beat” but no “raise,” in CNBC-speak), and still generated a huge pop for what I think of as a “value” stock. The shares still trade at a forward PE of just under 15, so it’s not expensive… but it’s also not likely to go straight up, which is why I’ve resisted piling on after my initial position (and have therefore missed out on some gains). Given the strong visibility of cash flow and earnings, and the decent amount of growth projected, I did decide this week, finally, to add slightly to my holdings at these higher prices.

I’m not going to go in with a huge buy here after a 15% jump in the share price after earnings, especially when the whole health care sector is hitting new highs, but that jump in price held pretty well for a couple days after earnings, without much of a “sell the news” reaction, and that’s a bit comforting, particularly given that the shares still trade at a discount to the broader market… so I added about a third to my investment (bringing my average cost basis up to $35). PINC is still a very small stock (market cap $2 billion), growing through small acquisitions and by bringing on new hospital/health system partners and expanding their business with their existing clients (many of which are also owners of this company, which used to be a private cooperative). The core business of supply chain management is strong, giving them a steady business in bulk purchases for their members that’s unlikely to fluctuate too much, but the data and predictive health side of the business is still where the big future I imagine for Premier is possible — we all want better outcomes for less money from our healthcare providers, and I think Premier is pretty uniquely suited to try and test and analyze ways to build more efficiency into health care, and to get new clients to buy more of their services as they build more intelligence into the system.

*****

Yatra Online (YTRA) has been performing very poorly of late, this is another SPAC-funded company on which I bought warrants, mostly because of the unusual opportunity to get 5-year warrants on a small stock in a growth sector in a fast-growing economy (Yatra is an online travel agency in India, similar to Priceline or Ctrip, though far smaller). Growth this quarter was very similar to leader MakeMyTrip (MMYT), it’s far larger Indian competitor — Yatra was slightly stronger, but not enough so that they’re really taking share, both companies are just growing along with the market… and the market is growing very fast as Indians take to vacationing and travel more each year, but the competition that has kept these companies and their competitors from being profitable for a decade remains cutthroat, continuing their long tradition of not making money… and the Indian rupee is still weak.

I want a substantial exposure to India over the next decade, but wouldn’t bet huge on YTRA right now — I’m still holding on to my “free” warrants (as with many leveraged/speculative positions, I sold enough during the good times to take my initial investment off the table and guarantee a small profit, and “let it ride” with the rest), but would likely instead buy more shares of Fairfax India (FIH-U.TO, FFXDF) if I wanted to boost my Indian exposure at the moment.

*****

And I’ll close with a reader question I answered recently, which I think might be of some interest to others. It’s a good question, though, as you’ll see below, probably a boring answer:

“I’d like to have advise from investors more experienced and smarter than me.

“The question is where to safely park cash , with minimal risk and get at least some return enough to offset inflation.

“We have a little cash that we like to get some return with minimal risk.”

Here’s how I answered this reader, and you’re always welcome to jump onto that discussion thread and suggest your own ideas:

Prepare to be bored:

If you’re in the US and are talking about a relatively small amount that you can tie up for a few months, I like US savings bonds — specifically the I-Bonds which offer inflation protection for small savers (maximum is $10,000 per year per person). They reset for inflation every six months and will keep up with the CPI, plus a little bit, and therefore yield a lot more than any standard savings account or money market account right now, and more than most CDs that have less than a 5-year tie-up.

Current total annual yield for I-bonds purchased before October is 2.52%, which is paid for the first six months you hold that bond, the rate will be reset again in November for the next 6-month period, based on whatever the CPI calculation is at that time (most likely it will be higher, since inflation is currently higher than it was in April when the rate was last set). The current fixed rate for bonds bought right now is 0.3% annually — that means they will pay 0.3% over their calculated inflation rate (which was about 2.2% when they last updated it in the sprint). The fixed rate stays in place for as long as you own that bond, but the inflation adjustment changes every six months. Sometimes the fixed rate offered is 0, as when inflation was essentially nonexistent for a couple years and interest rates were in the basement, but it’s been above zero for a while now.

So that’s my first choice for savings in a low-return world, though if you need more access to your money or need to allocate more than $10,000 you can also come close to keeping up with inflation with an online bank account — online money market accounts can get you 2% from a lot of different banks right now, far higher than the typical savings account from a local bank is likely to be, and those rates should also rise as the Fed Funds Rate rises, with a little delay (banks raise the rates they pay as slowly as they can get away with). Beyond that you’re taking more risk, whether with a short-term bond fund or something riskier still, without the backing of FDIC insurance or the direct backing of the government for savings bonds, and taking some chance that you could lose a meaningful amount of your capital in a short period of time if rates adjust sharply.

Browse Bankrate.com to see what’s on offer — to beat inflation at the current 2.9% CPI rate without risk of loss, you’ll have to tie up your money in a CD for about five years — I consider I-bonds to be a good alternative to CDs, since I-bonds can be bought in small increments and your investment is only tied up for 3 months (if you set up a rolling savings amount of, say, $100 a month or something, then you can’t redeem the bonds you’ve bought in the most recent three months — but anything older than that you can sell anytime).

Current I-bond info is at https://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm if you’d like more detail. Savings bonds are entirely electronic now, you can buy them online direct from the government in almost any amount, through TreasuryDirect — the transactions are a little slower than you’d get with a bank account, and the website a bit more cumbersome, but the process is similar to opening an online savings account or CD.

And with that, dear friends, I’ll leave you to your weekend. Feel free to let the questions fly. We’re heading into our last week of Stock Gumshoe’s summer slow period, so we’ll soon be back to our “almost every day” schedule in September… thanks for sticking with us, for reading my blather, and for making Stock Gumshoe a wonderful place to think and work.

Irregulars Quick Take Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)

13
Share your thoughts...

avatar
9 Comment threads
4 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
10 Comment authors
Travis Johnson, Stock GumshoeLannascraigjconradbackofficeJohn Collins Recent comment authors

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Pat
Guest
Pat

Thanks for writing Travis

clifftconley
Member
👍8
clifftconley

Thanks for sharing Travis. I like your process. I also try to keep a keen eye on the percentage by asset, sector and risk factor for each segment of my total portfolio. Have a great weekend.

Add a Topic
1340
rgalvin
Member
👍8
rgalvin

Thanks Travis for the open and honest share…You either validate my thinking or challenge it. Both are very useful. Our age difference makes me more interest in value investing then growth but would love to hear from time to time your thoughts on value investments.

Lannas
Member
👍851
Lannas

Travis, $EBIX long, has a growing presents in India. You make want to take a look at them. Founder and CEO is Indian and knows the culture. Related news https://finance.yahoo.com/news/ebix-acquires-two-leading-travel-115610936.html

Add a Topic
247
eltampa
Member
👍4
eltampa

Travis, thanks for sharing the Real Money Portfolio tabulation. I have a question regarding the entry on Line 101, which is a tabulation for sale of Social Capital Hedosophia Units (IPOAU). It shows a sell price of $10.56, a purchase price of $12.37, and profit of 2.42%. I’m not following the math here. I realize that there were some warrants involved, so assume that may be a factor. I have a particular interest in understanding this entry as I am considering a similar sale of my IPOAU. Could you clarify the accounting involved?

Add a Topic
6091
Add a Topic
3229
Martin
Irregular
👍133

I guess how you treat your portfolio is dependent on a lot of factors, for you it’s looking at long term appreciation and we would all like that, but that said lets factor in some other issues. For example I’m a good 20 years+ older than you and the prospect of a stock appreciating over a number of years does not appeal to me. Before I continue also let me state that my portfolios are not necessary for me to live comfortably. So to sleep with out worries I trade only during the week and end up each week with… Read more »

Add a Topic
6256
Add a Topic
5971
Add a Topic
372
backoffice
Member
👍319

Martin, I’m 62 and looking to make enough to keep ahead. How do you deal with the taxes with short term gains?

Add a Topic
899
craigjconrad
Member
👍5
craigjconrad

I can’t speak for others, but I do my trading in my Roth account, where taxes are never an issue. I did a roll-over from my 401K when I retired, took the tax hit all at once and no longer worry about it. As a significant side benefit, it allows my MAGI to stay low (as opposed to taking 401K withdrawals in future years) so that I qualify for the hefty Premium Tax Credit (PTC) for my exchange-purchased ACA health insurance (until I start Medicare, of course). For me, this made paying the taxes all at once a good financial… Read more »

Add a Topic
882
John Collins
Guest
John Collins

I just bought some BB calls too on the hope they are doing the intelligent for driver less cars
John Collins

Lannas
Member
👍851
Lannas

$EBIX long, growing presents in India
https://finance.yahoo.com/news/ebix-acquires-miles-software-leading-125730736.html

Add a Topic
247