I apologize for the lack of reports this summer. I told myself if this ever starts feeling like a chore, I’d take a break, so between that and being busy with work and college essays, very little research has been done. My personal portfolio has not provided any incentive either.
My Personal Portfolio
In the C2 Capital Literary Universe, I had previously mentioned that I wrote “The Importance of Being Idle” to provide myself with much needed confirmation bias in regards to restructuring my portfolio. Luckily, that worked, and my portfolio is concentrated into 5 of my best ideas, which should all return >20% annually for the next several years. For better or worse, it's very difficult to find any company that is worth spending any time on.
With such a high hurdle rate, the vast majority of US listed names are taken out of my investable universe (there are some exceptions which I will touch on later). This obviously pushes me into “emerging markets” where the information is very difficult to find. For example, I had spent a lot of time looking at a Chinese company, LONGI, but had to give up due to the lack of reliable information. The high level thesis is very simple: the photovoltaic industry will grow at above market rates for almost the next decade, and if LONGI can continue to take market share, it's easy to see >20% returns. The renewable energy industry is the closest thing I can call to a circle of competence so I was optimistic. Unfortunately, outside of the annual reports, that provided no useful information, there was nothing on the company. For certain people the lack of information can be offset with a lower position size in the portfolio; however, with a 5 stock portfolio, I can’t really do that. This is an unforeseen downside of running so concentrated. Errors of omission will continue to be an issue for me. If anyone can find any good information on LONGI please send it over.
In some sense I feel that I have gotten lazier, but with investing that is often good. Although it's been a very small period of time, my portfolio has not changed much if at all this year. The only meaningful change was rolling a previous holding into PDD. So far so good, but we shall see how low I can get my portfolio churn over a more meaningful stretch of time.
Meta, Box Theory, and Selling
Meta was the exception that I had mentioned above. The thesis played out very well, but I’m more interested in the time period around when I sold. Given that I did not think Meta could compound earnings at a high enough rate to warrant a long term position, I had a set exit price of around $220 per share. This seemed reasonable as it was a slight discount to fair value, but nothing crazy. My entire position was dumped somewhere around $210 and Meta’s stock kept climbing, peaking around $300. I mention this because I would like to think through the idea that momentum should be accounted for when exiting a position.
Technical analysis, momentum trading, and the like were, and largely still are, witchcraft to me. However, I’ve come around to the idea that they are often self fulfilling prophecies largely caused by the increasing number of retail investors, HFT, and people dedicated to this sort of trading. The issue is, for a value investor, how does one incorporate this into selling a position? Had I seen the extreme positive momentum of Meta’s rise, maybe I would have set my exit price higher. Of course momentum is positive until it becomes negative, so banking on this momentum could potentially be dangerous. Although perhaps there is a way to mitigate this risk.
A few years ago I read “How I Made $2,000,000 In The Stock Market” by a former Hungarian dancer, Nicolas Darvis. In the book, he outlines his trading strategy, now called the “Darvas Box Theory”, which consists mostly of just drawing boxes. Darvis would draw boxes along high and low prices of a stock and once the stock broke through the top of the box, a new one would be drawn. If the stock price fell through the bottom of the box, he would exit with a trailing stop loss. My explanation is poor, so I suggest buying the book, it's a short read. If this strategy were to be done naked, the trailing stop loss could cause a cash bleed if a series of these fails in a row, but if you have already made 2x or 3x your money, you don’t exactly have to worry about that. It may be worth looking into how the Box Theory would work with existing traditional value stocks.
With Meta, I can’t say if this would have been effective, as I don’t remember all of the Box Theory, nor would I be able to monitor the stock price during the day to sell my position (as I wouldn’t buy into the stock with a stop loss), but it is certainly interesting to consider. Meta’s price never fell drastically during its rise from $90 to $300 or from $200 to $300, so it may be reasonable to assume the Box Theory could have added several hundred or even thousand basis points to returns. And if Meta’s price hit $200 and slid back down to $180, the stop loss would kick me out of the position and, while returns would be lower, it's still effectively a 2x. I will be looking into this a bit more now.
So PDD killed earnings. “Killed” is probably putting it lightly. Total revenue grew >60%, Duo Duo Duo Grocery grew revenue by >100%, and net income reached $1.8b for the quarter. My biggest bear point now is that they’re cooking the books. I'm not really sure what else to say. I’d be shaking if I were Alibaba right now. People were celebrating their meager revenue growth, meanwhile, their competitor, with 20% market share, is growing >60%. This is going to be a really really really fun company to hold.
Mo-Bruk has been quite the bore. While I had thought the core business would continue to grow, it seems like most of that was really from the ecobombs. What’s most concerning is that in their most recent earnings presentation, there is no mention of ecobombs at all. I am going to reach out to management about this and give them until the end of the year to complete an acquisition. If they give me a bad answer regarding the ecobombs or don’t complete any acquisitions, I’ll be stepping out of my position. Management has stated that they’re in negotiations with a company and expect a possible transaction in Q4. The potential merger is with a company I had alluded to in my write up. They clean the seafloor in the North and Baltic seas to allow for the construction of offshore wind farms. There are still numerous bombs and other explosives off the coast of the central European countries from the World Wars, so this company has carved out a nice niche. As I mentioned, I’ll be waiting to the end of this financial year, and if nothing gets done, I will be exiting my Mo-Bruk position.
This is a very short post, largely because I don’t have many new things to say. I can’t comment on when a new write up will come out either given all the stuff I have on my plate at the moment. In the meantime, some of my older posts are still relevant and worth a look (besides Vulcan Materials, that was a bad write up).