My 2023 Year-End Portfolio Part 2
by elmads
<—–My 2023 Year-End Portfolio Part 1
Equity / Stock Portfolio Allocation — 43%
2023 has been a year of great performance for most of the equity asset class, with a 26% total return for the S&P 500 and 16–19% for the global equity index.
If you’ve just invested in an index fund that tracks the performance of the major indices worldwide, then you’ve done great as well.
Alternately, if you’ve invested in individual stocks, then you either have superseded the major equity indices return, achieved returns in line with the market, or performed poorly because not all individual stocks have the same performance as the index.
In my case, my individual stock portfolio has done poorly relative to the S&P 500 and Global Equity Index. Though I’ve made positive returns this year, it’s still not enough to keep up with the great performance of the major indices.
“It is what it is. I did my utmost best in allocating my investments and analysing my holdings, but from time to time, things don’t just go our way as we had hoped. Just like what I’ve said.
‘We can only control the effort, not the outcome’”.
— E.Madriñan, ELMads 2022 Investment Portfolio Performance (https://elmads.com/?p=9525)
The above quote is what I’ve written in my 2022 annual report. The market tanked in 2022, dying the equity asset class returns in red, including my portfolio at that time. Though in 2023 things have changed and have now been in the green, a brighter green to be exact, due to the wonderful year-end return. Yet, it was only a basic green for my portfolio.
The reality is that I’m not a great stock picker, but I’m doing my best to continue to improve myself, as this is a financial endeavour that I’ve chosen and always liked. Fail or succeed, it isn’t about that; it’s more about the love of the game.
I also have the same perspective with my running and writing endeavours; regardless of whether I’m at the top of my game or not, what’s important for me is my love for it and the pursuit of this never-ending self-improvement journey on my own chosen game in the different aspects of my life.
You’re not competing with anyone else but yourself, because you’re the only one who had all the exact same experiences in your life, the same DNA, upbringing, culture, strengths, and weaknesses. Therefore, your only rival is you—that damn feeble self of yours yesterday. Annihilate that weakling and supersede your past self.
The purpose of this portfolio allocation of mine is for my medium- to long-term aims. To be honest, this is my version of spending and learning. People love to purchase stuff and get a dopamine kick—a sense of happiness. That, for me, is investing—finding a treasure of a business that I could ride on for a very long time. It just so happens that my personality is not built to be a spender but a saver/investor type. In that way, I’m lucky to have the DNA in my individuality to be in sync with capitalism.
Equity Portfolio Holdings
My equity portfolio is divided into three investment brokerages.
Col Financial is for my Philippine equity holdings, which utilise the Philippine Peso.
Freetrade and Trading 212 are for my international holdings. The only reason I have two brokerages is because Trading212 offers stocks that are not in Freetrade. I planned to fully transfer my capital from Freetrade to Trading212. Unfortunately, for that to happen, I would need to sell all of my equity holdings in Freetrade and then transfer the proceeds to Trading 212.
But there are three problems with that process.
First, I will incur capital gains tax, and then buying back the same holdings I had in Freetrade after I’ve transferred my capital from Freetrade to Trading212 would just cost me additional fees. Remember that frequent buying and selling incurs fees, and you’re helping the broker make more money from the frequent transactions. That’s why I did not like trading because of this one simple fact.
Secondly, I bought most of my equity holdings at good valuations; there’s no point in selling them now and buying them again later, after the transfer of my capital to Trading 212.
Thirdly, I will just push my income tax higher. This is what some retail investors in the UK do not know about. Your interest income, capital gains, and dividend income are all considered income tax. If you’re not living in the UK, please check if this is also applicable in the country where you live.
The problem here is that if you’re a basic taxpayer (you’re paying a 20% tax rate if your gross income is between £12,571 and £50,270), then you sell your equity holdings that are not in a tax fee account (in the UK, SIPP and UK ISAs are the tax-free accounts), plus dividend income and interest income within a specific tax year. You might unknowingly hit the higher tax band that mandates you to pay 40% of your gross income as tax.
Let’s say, for example, that your gross income in the 2023–2024 tax year is £40,000, your dividend income within the same tax year is £2,000, your interest income is £1,000, and you sold your equity holdings, which gave you a capital gain of £13,000—considering that all nuances have already been deducted.
Adding all together will give you a total gross pay for the 2023–2024 tax year of £56,000, which is within the higher tax band of £50,271 to £125,140. Thus, you’ll be paying a 40% tax rate on all your income. Ouch! 😅
You won’t get away from taxes, but that doesn’t mean that you shouldn’t be strategizing to at least legally lessen the taxes that you pay by as much as possible. This is the reason why most investors should consider taking advantage of tax-free investment and savings accounts. Though I don’t use it on my individual stocks, I still use it with my index fund and pension fund portfolios.
“The only certain things in life are death and taxes!”
— Benjamin Franklin
Details of the Company shares I own in my Col Financial Broker Account
It’s my first time sharing this with everyone.
My portfolio holdings don’t actually mean anything, but they do mean everything to me. It reflects my own investment decision. Others may agree or disagree with it, but that’s not the point. The point is to be confident in what you do—not just blind confidence but backed with knowledge, skills, commitment, and humility.
In investing and in any financial endeavour, a person must always walk their talk. Invest where your conviction is.
Without further ado, I’ll share to you my 5 equity holdings in the Philippines.
1️⃣ Manila Electric Company (MER). Industry: Electric Utilities. Large Cap company — The Company holds a congressional franchise to construct, operate, and maintain an electric distribution system in the Philippines. The company operates through two segments, Power, and Other Services. It offers power to approximately 7.6 million industrial, commercial, and residential customers in 38 cities and 73 municipalities, including Metro Manila, and the provinces of Rizal, Cavite, and Bulacan, as well as parts of the provinces of Pampanga, Batangas, Laguna, and Quezon; distributes power to customers in Clark Special Economic Zone; and develops, finances, constructs, and operates solar-powered generation facilities, as well as owns coal and diesel-fired, and liquefied natural gas power plants. The company also provides electromechanical engineering, construction, consulting, and related manpower services; rail-related operations and maintenance services; insurance and re-insurance services; e-business development; power distribution management; and electric vehicle and charging infrastructure solutions. In addition, it offers engineering, procurement, and construction services; wastewater treatment services; telecommunication services; information technology and multi-media services; and construction and leasing of communication towers, and other infrastructure. Further, the company provides e-transaction, outsourced payment collection, and outsourced tillering, as well as engages in real estate, property management and leasing, and coal trading businesses. Manila Electric Company was founded in 1903 and is based in Pasig, the Philippines.
2️⃣ Globe Telecom, Inc. (GLO). Industry: Telecommunication Services. Large Cap company — The company provides telecommunications services to individual customers, small and medium-sized businesses, and corporate and enterprise clients in the Philippines. It operates through Mobile Communications Services and Wireline Communication Services segments. The company offers digital wireless communications services under the Globe Postpaid and Prepaid, and Touch Mobile brands; long distance communication or carrier services; broadband, as well as wireline voice and data communication services; and electronic payment and remittance services under the GCash brand. It provides value-added services, such as inbound and outbound short messaging, content downloading, mobile commerce, and other add-on services. The company also provides human capital management, business process, shared service support, Information technology and electronic, software development, IT system integration and consultancy, and advertising services. In addition, it offers marketing and distribution; data management; data center management; capital investment funds management; warehouse and logistics services; and support and shared services, as well as specific solutions for various industries. The company was incorporated in 1935 and is based in Taguig, the Philippines.
3️⃣ Synergy Grid & Development Phils., Inc. (SGP). Industry: Electric Utilities. Mid Cap company — The company provides transmission services across Luzon, Visayas, and Mindanao, the Philippines. The company was incorporated in 1970 and is headquartered in Pasig, the Philippines.
4️⃣ Union Bank of the Philippines (UBP). Industry: Banking. Mid Cap company — Together with its subsidiaries, provides commercial banking products and services in the Philippines. It operates through Consumer Banking, Corporate and Commercial Banking, and Treasury and Trust segments. The company offers savings, currency, checking, and investment accounts; time deposits; corporate and commercial banking, auto, mortgage, and quick loans; debit, credit, and prepaid cards; trust and investment products; bancassurance products; private banking services; funding and trading; remittance products and services; and mobile banking services. It also provides cash management services; SME banking solutions; wealth management; treasury and capital market products. In addition, the company offers life insurance products; and funds transfer facilities, as well as handles loans and other credit facilities; transactions in the financial markets covering foreign exchange and fixed income trading, and investments and derivatives products. Further, it provides securities and foreign currency brokerage services; data processing services; venture capital products; financial products marketing services; and estate planning solutions, as well as acts as a thrift banker and agent for insurance and financial products. The company serves retail, middle market, corporate, and institutional customers, as well as small and medium enterprises. The company was formerly known as Union Savings and Mortgage Bank and changed its name to Union Bank of the Philippines in January 1982. Union Bank of the Philippines was incorporated in 1968 and is headquartered in Pasig, the Philippines.
5️⃣ SSI Group, Inc. (SSI). Industry: Specialty Retail. Small Cap company — Together with its subsidiaries, operates as a specialty retailer in the Philippines. It offers a range of merchandise, including apparel, footwear, timepieces, jewellery and accessories, luggage, furniture, food and beverage, cosmetics, fast fashion, casual wear, home and décor, and beauty and personal care products. Large brands such as Coach, Jimmy Choo, Prada, Zara and Hermes to name a few. The company was formerly known as Casual Clothing Specialists, Inc. and changed its name to SSI Group, Inc. in July 2014. SSI Group, Inc. was founded in 1987 and is headquartered in Makati City, the Philippines.
📝 NOTE: Most of my holdings in the Philippines are large dividend paying companies.
Why Invest in the Philippines in 2024?
“‘Most multilateral organizations share this optimism as they expect the Philippines to be one of the fastest growing economies among the major economies in Asia in 2023 and 2024 even with recent revisions in economic projections,’ Diokno said.
‘The International Monetary Fund (IMF) sees that the Philippine economy will have the strongest growth relative to ASEAN-4, and Vietnam supported by an acceleration in public investment and improved external demand for the Philippines’ exports, after the country has withstood a confluence of shocks through its appropriate policy response and recent implementation of key structural reforms to stimulate exports, spur foreign investment, and raise growth potential,’”
—Benjamin Diokno is currently a full-time member of the Monetary Board and was the former secretary of the Department of Finance in the Philippines. https://pco.gov.ph/news_releases/ph-to-do-even-better-in-2024-after-performing-well-last-year-says-finance-secretary-diokno/
📣 https://elmads.com/?p=2510 — What are Dividends?
Details of the company shares I own in my Freetrade/Trading 212 accounts
1️⃣ S&P Global Inc., together with its subsidiaries, provides credit ratings, benchmarks, analytics, and workflow solutions in the global capital, commodity, and automotive markets. It operates through six segments: S&P Global Ratings, S&P Dow Jones Indices, S&P Global Commodity Insights, S&P Global Market Intelligence, S&P Global Mobility, and S&P Global Engineering Solutions. The S&P Global Ratings segment operates as an independent provider of credit ratings, research, and analytics, offering investors and other market participants information, ratings, and benchmarks. The S&P Dow Jones Indices segment is an index provider that maintains various valuation and index benchmarks for investment advisors, wealth managers, and institutional investors. The S&P Global Commodity Insights segment provides information and benchmark prices for the commodity and energy markets. The S&P Global Market Intelligence segment offers multi-asset-class data and analytics integrated with purpose-built workflow solutions. This segment offers Desktop, a product suite that provides data, analytics, and third-party research; Data and Advisory Solutions for research, reference data, market data, derived analytics, and valuation services; Enterprise Solutions, software and workflow solutions; and Credit & Risk Solutions for selling Ratings’ credit ratings and related data and research. The S&P Global Mobility segment provides solutions serving the full automotive value chain, including vehicle manufacturers (OEMs), automotive suppliers, mobility service providers, retailers, consumers, and finance and insurance companies. The S&P Global Engineering Solutions segment offers engineering standards and related technical knowledge, including product design to provide information and insight to design products, optimize engineering projects and outcomes, solve technical problems, and address complex supply chain issues. S&P Global Inc. was founded in 1860 and is headquartered in New York, New York.
Industry: Capital Markets
2️⃣ Focusrite plc develops and markets hardware and software products primarily for audio professionals and amateur musicians in North America, Europe, the Middle East, Africa, and internationally. It operates through Focusrite, Novation, ADAM Audio, Martin Audio, and Sequential segments. The company provides audio interface and other products for musicians under the Focusrite and Focusrite Pro brands; and products that are used in the creation of electronic music using synthesizers, grooveboxes, controllers, and software and apps under the Novation and Ampify brands. It also manufactures and distributes professional monitoring and loudspeaker technology under the ADAM Audio brand; performance ready systems for auditoriums under the Martin Audio brand; and analogue synthesizers under the Sequential brand. The company sells its products through distributors, retailers, and system integrators, as well as directly to end users through its e-commerce platform and in-app software. Focusrite plc was founded in 1985 and is headquartered in High Wycombe, the United Kingdom. Industry: Household Durables
3️⃣ Bank of America Corporation, through its subsidiaries, provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. Its Consumer Banking segment offers traditional and money market savings accounts, certificates of deposit and IRAs, noninterest-and interest-bearing checking accounts, and investment accounts and products; and credit and debit cards, residential mortgages, and home equity loans, as well as direct and indirect loans, such as automotive, recreational vehicle, and consumer personal loans. The company’s Global Wealth & Investment Management segment offers investment management, brokerage, banking, and trust and retirement products and services; and wealth management solutions, as well as customized solutions, including specialty asset management services. Its Global Banking segment provides lending products and services, including commercial loans, leases, commitment facilities, trade finance, and commercial real estate and asset-based lending; treasury solutions, such as treasury management, foreign exchange, and short-term investing options and merchant services; working capital management solutions; and debt and equity underwriting and distribution, and merger-related and other advisory services. The company’s Global Markets segment offers market-making, financing, securities clearing, settlement, and custody services, as well as risk management products using interest rate, equity, credit, currency and commodity derivatives, foreign exchange, fixed-income, and mortgage-related products. The company was founded in 1784 and is based in Charlotte, North Carolina.
Industry: Banks
4️⃣ Somero Enterprises, Inc., together with its subsidiaries, designs, assembles, remanufactures, sells, and distributes concrete leveling, contouring, and placing equipment worldwide. The company offers lightweight, ride-on, boom, and stationary screeds; and materials and concrete placement equipment comprising broom + cure machine, line-pulling and -placing system, and topping spreaders. It also provides related parts and accessories, software packages, and training services. The company’s equipment is used to place and screed the concrete slab in various building types, including floors in multi-story buildings; and used in the construction of warehouses, assembly plants, exterior paving, parking structures, retail centers, and other commercial construction projects. The company markets and sells its products primarily to small, medium, and large concrete contractors, as well as to self-performing general contractors. The company was founded in 1985 and is headquartered in Fort Myers, Florida.
Industry: Machinery
5️⃣ Canadian Pacific Kansas City Limited, together with its subsidiaries, owns and operates a transcontinental freight railway in Canada and the United States. The company transports bulk commodities, including grain, coal, potash, fertilizers, and sulphur; and merchandise freight, such as energy, chemicals and plastics, metals, minerals and consumer, automotive, and forest products. It transports intermodal traffic comprising retail goods in overseas containers. The company offers rail and intermodal transportation services through a network of approximately 13,000 miles serving business centers in Quebec and British Columbia, Canada; and the United States Northeast and Midwest regions. Canadian Pacific Kansas City Limited is headquartered in Calgary, Canada.
Industry: Ground Transportation
6️⃣ Canadian National Railway Company, together with its subsidiaries, engages in rail and related transportation business. The company offers rail services, which include equipment, custom brokage services, transloading and distribution, business development and real estate, and private car storage services; and intermodal services including temperature controlled cargo, port partnership, transloading and distribution, logistic parks, customs brokerage, trucking, and moving grains in containers. It also provides trucking services, such as door-to-door services, import and export dray, interline services, and specialized services comprising flatbed trucks, on-deck mobile transport trays, expedited and temperature controlled cargo, and permit/overweight services; and supply chain services. In addition, it serves automotive, coal, fertilizers, temperature controlled cargo, forest products, dimensional, grain, metal and minerals, petroleum and chemicals, and consumer goods applications. Further, the company operates a network of 20,000 route miles of track and shipping Canada and the United States. Canadian National Railway Company was incorporated in 1919 and is headquartered in Montreal, Canada.
Industry: Ground Transportation
7️⃣ Greggs plc operates as a food-on-the-go retailer in the United Kingdom. It offers a range of fresh and frozen bakery products, sandwiches, and drinks. The company sells products to franchise and wholesale partners for sale in their own outlets. It is also involved in the property holding, non-trading, and trustee businesses. The company also operates through its own shops. Greggs plc was founded in 1939 and is headquartered in Newcastle upon Tyne, the United Kingdom.
Industry: Hotels, Restaurants and Leisure
8️⃣ Cake Box Holdings Plc, together with its subsidiaries, engages in the retail of fresh cream cakes in the United Kingdom. It offers cakes by celebration, cakes by design, and seasonal cakes, as well as wedding cakes. The company engages in the property rental activities. Cake Box Holdings Plc was founded in 2008 and is headquartered in London, the United Kingdom.
Industry: Consumer Staples Distribution and Retail
📝 NOTE: I embody and practice the school of value investing with the growth at a reasonable price concept with this portfolio.
Terry Smith’s Six Ratios
The image above was taken from Fundsmith’s 2023 annual letter to shareholders. See the link provided. https://www.fundsmith.co.uk/media/31plodnq/2023-fef-annual-letter-to-shareholders.pdf
There are a lot of ratios used in the investment world, and each has its own advantage and disadvantages. What makes Terry Smith’s six ratio popular is his own investment performance and most notably his investment Philosophy.
Who is Terry Smith?
Terry Smith is a British fund manager and the founder of Fundsmith LLP, an investment management firm. He is known for his straightforward and focused investment philosophy, which centres around long-term investments in high-quality, resilient businesses. Born on May 29, 1953, Smith has had a notable career in the financial industry to the extent that he is Dubbed Britain’s Warren Buffett, Terry Smith has surely earned his namesake. And since he started his fund in 2010, he has consistently outperformed his benchmark index (MSCI World Index), returning 478 per cent to his investors.
Six Ratios on a Nutshell
Gross Margins, and Operating Margins are measurements of a business’ profitability.
Leverage and interest cover ratios are measurements of a company’s financial stability to cover their financial responsibilities specifically their debt.
Cash conversion: While profitability is key to Terry Smith’s approach, firms also need to be able to turn it into cash regularly and effectively. He therefore likes to monitor the relationship between operating profit and operating cash flow – the closer the two numbers, the better. And both need to be positive in Terry Smith’s world.
I’ve made blogs regarding investment ratios commonly used in the investment world. I’ll link them down below.
PRICE TO EARNINGS 👇
📣 https://elmads.com/?p=3672 – Relative Valuation – The Price-to-Earnings Ratio “Part 1”
📣 https://elmads.com/?p=3683 – Relative Valuation – The Price-to-Earnings Ratio “Part 2”
PRICE TO BOOK 👇
📣 https://elmads.com/?p=3819 – Relative Valuation – The Price-to-Book Ratio
📣 https://elmads.com/?p=3843 – Relative Valuation – The Price-to-Tangible Book Ratio
LIQUIDITY & DEBT 👇
📣 https://elmads.com/?p=6837 – Fundamental Analysis – Liquidity & Debt Metrics Part 1
📣 https://elmads.com/?p=6946 – Fundamental Analysis – Liquidity & Debt Metrics Part 2
And my two personal favourite ratios of them all.
📣 https://elmads.com/?p=7019 – Return on Equity
📣 https://elmads.com/?p=8657 – Return on Invested Capital
Applying Terry Smith’s Six Ratios to My Portfolio
The image above shows my portfolio performance based on the weighted average of the company shares I own and using Terry Smith’s six ratios. The information is based on fiscal year 2022.
The reason why I haven’t used the 2023 data yet is because the 2023 annual reports are not out yet for most of the company shares I own.
📝NOTE: Terry Smith uses return on capital employed (ROCE) with his six ratios, which is also almost the same as return on invested capital (ROIC). I’m used to using the latter rather than the former, which is why I replaced ROCE with ROIC on the chart above. Both of these two metrics show the management’s ability to convert assets into cash returns.
The outliers above are the two banks in my equity portfolio: Bank of America (BAC) and Union Bank of the Philippines (UBP). The majority of Terry Smith’s ratios don’t work with the banking industry because banks have a business model that is different from other industries. Net interest margins, capital ratios, and loan portfolio ratios are some of the most looked-at ratios in banking.
You can do one with your portfolio as well. You first have to find the six ratios for each of your company holdings, then do a weighted average calculation to arrive at your overall portfolio of six ratios. I can give you a hand with that if you want. Just send me a DM.
The fundamentals of the companies I own some shares of are, for me, sound and resilient. That said, if someone asks me which equity holding gives me a feeling of uncertainty and doubt, I would say it is Globe Telecommunications (GLO) and Synergy Grid and Development Inc. (SGP).
Debt Trap
Globe has been in my Col Financial portfolio since 2020. I love companies that are at the helm of their industry, and Globe is one of the telecommunication duopolies in the Philippines. I chose Globe over its rival PLDT mainly because of GCash, betting on its potential exponential growth that can become a large part of Globe’s revenues in the future.
What I worry about with Globe is its debt; it’s massive at 189% of their total equity—almost double—as shown in its leverage portion in the above image. Having large amounts of debt can eat into a company’s profitability and cash conversion, mainly because they’ll need to pay higher interest payments on their debt.
Let me bring this to personal finance. Let’s say you have a total debt of £3,000 with a monthly interest payment of 5% for 6 months. This means you’ll be paying 150 each month for six months.
Compare that to having a total debt of £1,000 with a monthly interest payment of 5% for 6 months. That’s a £50 monthly payment for six months.
The former scenario will take a larger chunk of your monthly income than the latter scenario. The same principle applies to businesses.
It’s not just Globe; PLDT also has the same debt problem. The reason why both companies are starting to have this large amount of debt is because they’re capital-intensive businesses that require large amounts of money to maintain their property plant and equipment in an era where telecommunications needs to be updated to 5G, which again requires more tower sites, improved internet connections and speed, and keeping up with the demand for it.
Their net income cannot keep up with the required capital for expansion and maintenance expenses. In fiscal year 2022, Globe Telecom generated an operating income worth 62.9 billion Philippine pesos, but their total capital expenditure (both for maintenance and business expansion purposes) was worth 98 billion Philippine pesos.
62.9 billion pesos minus 98 billion pesos is -35.1 billion pesos.
For them to be able to finance the shortfall of 35.1 billion pesos, they either need to use the business’ own cash, raise capital via equity financing, or take on debt. And most of them prefer to take on debt, thus the ballooning debt amounts of these two duopolies.
To learn more about ways to raise capital and the dynamic relationship between capital markets and their investors, see my blog titled:
Globe has been trying to lower their total debt to stabilise their cash flow. Currently, the Philippine Telecommunications Industry is in the heavy investment phase, which either will result in a good return on investment in the future or not, depending on the company’s investment strategy and decisions. We will know in the years to come.
As of the moment, I’m waiting for Globe’s 2023 annual report, and I will zero in on their total debt numbers and their plans to further minimise their debts.
Caught in a Political Storm
In conjunction, I have exactly the same concerns with my Synergy Grid & Development Phils., Inc. (SGP) equity holding. It’s its debt with a cherry on top, sarcastically speaking. You see, other than its debt, SGP is currently in the corsairs of Philippine politics.
This equity holding is a bit complex in terms of ownership because, as you see, NGCP is a private company with three major owners and shareholders. Henry Sy Jr. and Robert Coyiuto Jr., two business tycoons from the Philippines, control 60% of NGCP via SGP Holdings, and the remaining 40% is owned by the State Grid Corp. of China.
Yes, you read it right: 40% of NGCP is owned by the state grid of China. Can you see now the connection why NGCP, including SGP, is in the eye of Philippine politics?
The fact that China still has 40% ownership of NGCP poses a national risk for the Philippines. Then you add the two Filipino Tycoons who have the remaining stake in NGCP via SGP and the possibility of their business and political rivals trying to lobby for a review and change of NGCP’s concession agreement and ultimately, its 25-year legislative franchise.
The 14th Philippine Congress granted NGCP a 25-year legislative franchise last 2008—which will end in 2034—to manage and operate power transmission facilities across the country, which was signed into law by then-former president Gloria Macapagal-Arroyo.
My initial conviction was that the company, NGCP, has a long legislative franchise with the government, which gives it stability both as a business and in terms of its cash flows regardless of its debt. The trouble I see today is politics; things can go out of hand and significantly impact the company, either for good or bad. My plan is just to continue to wait and see what will unfold in the next few months or a year.
A Decline in Earnings
The only company that had a year-on-year decrease in earnings from fiscal year 2022 to 2023 is Focusrite PLC (TUNE). It has been in waters due to several headwinds, as indicated in their 2023 annual report.
Revenue and operating income decreased by 2.9% and 15.3%, respectively.
“Current market conditions for our Content Creation division remain difficult and our revenue year to date has been impacted by a degree of sales channel de-stocking. However, underlying demand for our products, as evidenced by customer registrations, remains satisfactory. Performance in our Audio Reproduction division remains strong.
—Tim Carroll, Focusrite PLC CEO, https://otp.investis.com/clients/uk/focusrite/rns/regulatory-story.aspx?cid=988&newsid=1735861
Whilst we remain mindful of the significant global economic and political challenges, as well as ongoing cost pressure in the supply chain, we have successfully built our inventory positions back to more normalised levels and have robust plans for future component supplies as well. With key new products launched towards the end of FY23 and more introductions planned for the year ahead, we remain confident in the organic growth potential of existing brands. Additionally, with the benefit of our cash generation, the Group has demonstrated its ability to execute on our proactive M&A strategy, carefully considering acquisitions that not only enhance earnings but also expand our market potential, increase our R&D capabilities, and contribute both scale and dynamism to our business.“
Buy good companies, Don’t Over Pay and Do Nothing
Overall, I don’t plan to sell any of my equity holdings unless the initial thesis of why I bought the business changes. For example, if Canadian Pacific earnings decline in the upcoming years despite its merger with Kansas City Southern Railway Corporation, which expanded the train line of the business operations, then I might consider selling my shares as it deviates from my main story of why I bought shares of the company in the first place.
The merger of the two railway companies likely adds market share. To show you the extent of the additional market shares, see the image below.
It would not make sense for the company to have declining earnings despite the additional train line. My investment thesis is that the increase in profitability would not just come from the additional railway market share due to its merger but also from the change in production of some global businesses. From China to the US due to the recent supply chain problems.
If more US companies start to manufacture some, if not all, of their products on US soil, then the transportation industry, including railways, will see an increase in demand and, in turn, profitability.
If my analysis pans out, then the stock price I paid for Canadian Pacific is indeed undervalued to its future potential cash flows.
In investing, your investments reflect your ideals and philosophy, not what you say you believe in or will do. Like I always say, walk the talk.
Cash Allocation in My Equity Portfolio Strategy
My cash allocation of 14% in my equity portfolio will continue to increase over time if I continue to not find any good investments in the upcoming months or years.
I do hope it won’t take years, or else I might feel the pressure to deploy cash. If it comes to that point, I might allocate some of it to my equity index fund portfolio in a cost-averaging manner. Till that happens, I’ll just continue to ramp up on my cash allocation and place it in an interest-income yielding, easy-access account so that it can still make me some money even if it is just sitting idle.
“The big money is not in the buying and the selling, but in the waiting… Be Very Patient, but aggressive when it’s time”
— Charlie Munger
Alternative Investment Allocation — 4 %
When people hear the word alternative asset investments, what comes to mind are usually collectibles that go up in price. That’s what I thought as well, but that’s only a portion of what it really meant.
Alternative assets consist of different kinds of investments that are outside the traditional investment assets (stocks, bonds and cash) and also the securitized assets.
They tend to be more illiquid compared to their traditional asset cousins; this is because they have fewer regulations from the government. Traditional asset classes, on the other hand, are recognised by the government, companies, and institutions as legitimate and well-regulated investment vehicles used to raise capital, which also helps circulate the money within the financial system.
Alternative assets namely private equity, hedge funds, private debt, real property, hard commodity, cryptocurrency and lastly collectibles.
I’ve written about it in detail in my blog, titled https://elmads.com/?p=5665 — The Alternative Assets
10% Maximum Capacity for My Alternative Investment Allocation
I’ve allocated 4% of my 2023-year-end net worth portfolio for alternative investments. It comprises two categories: cryptocurrency (only Bitcoin) and Lego sets.
My maximum percentage allocation for my alternative investments is 10%. Where did I get that number? from the barbel method of Nassim Taleb.
To become antifragile, you need to take smart risks, and as per Nasim Taleb, it’s through doing the Barbel Technique.
It combines a hyper-conservative approach (preferably 90%–95%) with very risky methods (approximately 5%–10%). It protects us from irreversible harm in the event of a failure while allowing us to benefit from the upside of taking smart risks.
For instance:
💰In Finance/Investing. 90% in a high-yield savings account and 10% in stocks or cryptocurrency.
📝NOTE: It seems counterintuitive for me to use this example, as I’m more heavily invested in equity and index funds than in a high-yielding savings account. That said, I am still applying the Barbel method, where I’ve adjusted its concept based on my own risk appetite and my investment runway—my time horizon.
🏃♂️In Running. 80–90% on low heart rate training and 10–20% on maximum heart rate training.
💼Work life. 90% of your time is spent on your day job, with the remaining 10% spent on your passion work to eventually transition to your own business or self-employment.
The 90% would protect you if the 10% endeavour fails. The best thing about failing with our 5–10% venture is that we give ourselves the space to learn what has not worked well, to start from scratch, and to change our hypothesis and approach.
The possibility of failure, protection from the irreversible harm of failure, and the ability to learn from failure.
The barbell technique transforms our present failure into future success. It’s through taking smart risks that the 5–10% eventually turns into our 100%.
The fact that most people think that they always need to go all in with their resources on a new endeavour is just absurd.
This reminds me of Jeff Bezos and Amazon, where he invests only a small amount of money relative to the company’s total cash flow in some of their high-risk business ventures. If it fails, it won’t even hurt Amazon at all, but if it works, he will double down and invest in it.
One of Amazon’s best failures was its Fire Phone product launch in 2014. It was a complete flop, but it didn’t hurt Amazon at all. Whereas their greatest success was with Amazon Web Services (Amazon Cloud), they made a small bet at first, but it worked magnificently; hence, they invested a substantial amount of money to scale that part of Amazon’s business. Amazon Web Services is currently more than 15% of the company’s total revenue in fiscal year 2022; it is up by approximately 7% since 2015.
If you want to learn more about the barbell technique of Nassim Taleb, read his book titled “Antifragile: Things That Gain from Disorder.”
Bitcoin
When people ask me why I still even bother investing a small portion of my hard-earned money in Bitcoin, I always answer, “Because of these two words: blockchain technology.” Then, I’ll know if a person is interested or not depending on their next response, which is either they do not engage anymore about the topic or ask about what blockchain is. Or what will be the price of Bitcoin in the future?
If the person drops the topic, then that’s the end of our cryptocurrency conversation. If they ask about the price in the future, I just give a straight-up answer: I don’t know because I don’t have any idea or basis where I can attach a projection for Bitcoin prices, and I’m not focused on cryptocurrencies and not a fortune-teller to even have a strong opinion about its future prices.
The discussion lengthens, though, when the person I talk to engages with the blockchain technology concept. on its utility for the possible improvement of human lives, such as the following below:
- Decentralization: Blockchain operates on a decentralized network of computers, eliminating the need for a central authority. This decentralization reduces the risk of a single point of failure and enhances transparency.
- Security: The use of cryptographic techniques ensures the security of data on the blockchain. Each block is linked to the previous one through a secure hash, creating a tamper-resistant and secure system.
- Transparency: All transactions on the blockchain are visible to participants in the network. This transparency can enhance trust among users and stakeholders, especially in scenarios where trust is crucial.
- Immutability: Once data is recorded on the blockchain, it is extremely difficult to alter. This immutability makes blockchain suitable for applications where data integrity is critical.
- Smart Contracts: Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automatically execute and enforce the terms when predefined conditions are met, reducing the need for intermediaries.
- Supply Chain Management: Blockchain can be used to trace the origin and journey of products in a supply chain. This transparency helps in reducing fraud, ensuring the authenticity of products, and improving overall supply chain efficiency.
- Cryptocurrencies: Blockchain is the underlying technology for cryptocurrencies like Bitcoin and Ethereum. It enables secure and decentralized peer-to-peer transactions without the need for intermediaries like banks.
- Identity Management: Blockchain can be used for secure and verifiable identity management. Individuals can have more control over their personal information, and this can be particularly useful in applications like digital identity verification.
- Healthcare: Blockchain can improve the security and interoperability of health records. Patients can have more control over their medical data, and healthcare providers can access accurate and up-to-date information.
- Voting Systems: Blockchain can enhance the transparency and security of voting systems. It has the potential to reduce fraud and ensure the integrity of the electoral process.
My investment in Bitcoin is solely based on blockchain technology. I think of it as a venture capitalist (VC) style of investment where they invest in the ideas and technologies of small start-ups. In the world of venture capitalists (VCs), the focus is not solely on established companies with a proven track record; VCs actively seek out innovative and promising start-ups with high growth potential.
Venture capital is considered a high-risk type of investing because start-ups, by nature, have a higher risk of failure compared to established businesses. VCs carefully evaluate the business model, market potential, and competence of the start-up’s leadership, including the CEO. The compelling story of the CEO and the start-up’s growth prospects are crucial factors that influence a VC’s decision to invest.
The success of blockchain depends on the number of users. The more individuals use and trust the technology, the more secure and valuable it will be—this is “the network effect.”
Lego Sets
Most people find it surprising that I have this in my overall portfolio. They’re like, toys? really? They would understand about cryptocurrencies because of the hype and market talk about them, but rarely would they hear about Lego sets as investments.
And every time I find myself smiling at those comments, mainly because this means that the market is not saturated yet.
Don’t fish in a crowded pond; seek waters with plenty of fish and few fishermen. And that’s indeed how I perceive Lego sets as an investment.
I’ve discussed its potential as a medium- to long-term hold investment, its history, and investment metrics in the following blog links below.
📣 https://elmads.com/?p=5732 — Are LEGO Sets an Investment?
📣 https://elmads.com/?p=5719 — LEGO Investing
📣 https://elmads.com/?p=6058 — LEGO Investment Metrics
2023 Lego Holdings and Price Performance
Like any collectible, one of its values lies in being in mint condition. Meaning, don’t open the box; leave it as you bought it in a store. It’s the same with Lego sets.
Evan, what if I want to collect and build Lego sets and make them as a form of buy-and-sell medium- to long-term hold investment? Is that possible?
My answer is yes. That said, you have to do it in two ways: segregate the Lego sets for your recreational activities and investments. This is what I practice too.
📝 Take note: built Lego sets automatically lose almost half of their value.
The image above shows my current Lego holdings. Some of it has an x2 indicator, which means I bought two of the same set, one for each building and one for investment purposes.
The first column is my Lego sets, while the second, third, and fourth columns are the price I paid, the current value, and the growth rate since I bought them, respectively.
I only own Star Wars sets, specifically the subthemes of Helmet Collection and BrickHeadz. There’s one outlier, the Orchid, which is an icon Lego theme that is a subtheme of the Botanical collection. It’s a long story why I included it, but the main purpose is as an additional design at home. 😂
I officially started this endeavour in 2021. My total investment price appreciation since inception is 67.66%, as per Brickeconomy. Selling fees on the secondary online markets are not yet included in the estimated return.
If you’re planning to do Lego investing or trading, I’ll share with you the database I utilise to track the price of my Lego sets in secondary online markets (such as Bricklink, Amazon, eBay, and StockX). This website shows the projected retirement date and forecasts price performance, including an analysis of your set collection—that’s where I took the image above. See the link below.
BrickEconomy – LEGO Set Pricing and Market Values
Lego Pieces Capitalize on its Other Utility
Built Lego sets can be sold in the secondary market, but there is very low demand for them, and if there are any, the buyers’ asking price is frustratingly low relative to the initial amount you paid for the set.
But there’s another way—a tedious path. It’s selling Lego pieces. Think of it as selling parts of a car instead of the whole car. Do you realise now why I said this would be an arduous investing or trading endeavour in the Lego space? This requires in-depth Lego market understanding and analysis.
There are millions of different types of Lego pieces, and you must understand, as much as possible, every one of them. That’s where your competitive advantage lies.
Each piece has a value required for a specific endeavour. Outside of the traditional purpose of play, Lego pieces are also used in engineering and experimental endeavours.
One example is David Aguilar Amphoux.
“He was born with a creative spirit and Poland Syndrome, a condition that prevented the development of his right arm and pectoral muscle. The 22-year-old Andorran holds the Guinness World Record for being the first person to self-build his own fully functioning prosthetic arm using LEGO® bricks. David is on a mission to make affordable prosthetics widely available and to raise awareness about disability (different abilities), working to help other young people believe that “dreams are possible if you fight for them.”
“Several infrastructure experiments have used LEGO sets to model structural engineering projects. For instance, engineers have used LEGO projects to model the pitfalls of structures during earthquakes, helping them to understand the impact a building structure can withstand.”
There are small independent businesses nowadays that specifically operate by buying and selling Lego pieces, capitalizing on their increasing demand for other uses, such as the above examples I cited.
Do I plan to enter this? nope. This is not my cup of tea. I personally prefer to put my time and effort into active equity investing.
This doesn’t mean that this is not a serious investment path or even a potential small business for others.
Alternative Investments: Always Understand the Market First
There are a lot of other collectible investments, other than Lego, that have been experiencing strong market growth.
Pokemon cards, baseball and basketball cards, artwork, comic books, and even song albums, to name a few.
Times are changing as well, where there are online platforms now that serve as a middleman for individuals to become share owners of expensive collectibles. One example is Masterworks; have you heard about it?
Masterworks is an online platform that allows investors to buy shares in works of art. The platform securitizes valuable artworks, allowing individuals to invest in a specific piece or a collection of artworks. Investors can buy shares in these artworks, and if the value of the artwork increases over time, they can potentially profit when the art is sold.
Here’s how it generally works:
- Art Selection: Masterworks acquires valuable artworks by well-known artists. These can include paintings, sculptures, and other forms of art.
- Securitization: The platform creates a “public offering” for each artwork, dividing it into shares. Investors can then buy shares in the artwork, effectively owning a portion of it.
- Investment: Investors can purchase shares in artworks through the Masterworks platform. The minimum investment amount may vary depending on the specific offering.
- Potential Returns: If the value of the artwork increases over time, investors may realize a profit when the artwork is sold. Masterworks aims to sell the artwork within a few years to provide returns to its investors.
- Liquidity: Masterworks provides a secondary market where investors can sell their shares to other investors if they want to liquidate their investment before the artwork is sold.
There is also the “Royalty Exchange” website, which dabbles with music royalties.
Royalty Exchange is a platform that facilitates the buying and selling of royalty rights. It allows investors to invest in various types of royalties, including music royalties, by purchasing a share of the income generated by those royalties.
Here’s an overview of how it works:
- Listing Royalties: Rights holders, such as musicians or composers, can list their royalty streams on the Royalty Exchange platform. This can include royalties from music sales, streaming, performance rights, and more.
- Auction Process: Royalties are auctioned on the platform. Investors can participate in these auctions by placing bids on the rights to receive a portion of the future royalty income.
- Investment: The winning bidder in the auction becomes the new owner of a portion of the royalty income. Investors can receive regular payments based on the performance of the underlying assets (e.g., music sales or streaming revenue).
- Diversification: Investors can potentially build a diversified portfolio of royalty assets by investing in different auctions across various artists and types of royalties.
- Income Stream: Royalty Exchange provides a platform for investors to earn income from the royalties generated by the underlying intellectual property, such as music compositions.
- Secondary Market: Royalty Exchange offers a secondary market where investors can sell their royalty assets to other investors if they wish to liquidate their position.
There are a lot of things that can be explored in the alternative investment world, but for it to be a fruitful investment, one must have continuous learning of the market of their chosen alternative investment.
One must carefully research it, understand the risks associated with it, and consider how it fits into their overall investment strategy.
Remember, the barbell strategy risk management of Nasim Taleb? Invest your hard-earned money in 90% conservative risk (low to medium) and 10% extreme risk.
Information wins wars. The same can be said with investments. What you learn and how you apply it can make a monumental difference in your portfolio.
Dividend Income History
The aggregate growth of the dividends received from 2013 to 2023 is 342,832%, the compounded annual growth rate is 126%, and the 2022–2023 year-on-year increase is 36%. Investing works if done consistently over a long period of time.
Invest a portion of your salary, regardless of the amount you can put in, reinvest the received earnings, and let compounding do its magic. Making a 1% improvement each day, just even the very small stuff, will do wonders in your life.
At the start of my investing journey, I put more weight on choosing dividend-paying companies. What’s great about it is that you get to receive dividends almost every month. It has a psychological impact by giving an investor motivation to keep on investing because they’re receiving income almost every month. Making money without exerting any physical effort at all and making money for you 24 hours a day, nonstop, without rest.
As time passes, I’ve realized that dividends are good to have, but they are not supposed to be my priority unless I’m already living on the income I receive from my portfolio. I no longer put a lot of weight on making investment decisions based on dividends. This is one of the major shifts in my investment philosophy since 2021.
Engaging in dividend investing proves advantageous as it offers a consistent cash flow, whether on an annual, biannual, or quarterly basis. However, the reliability of this cash flow is contingent upon the strong fundamentals of the dividend-paying company in which one has invested. A company with solid fundamentals is more likely to sustain its dividend payments over time.
To gain insights into a company’s future prospects, it is essential to comprehend its business operations, managerial decisions, and reinvestment strategies. A company led by a growth-oriented manager tends to outperform one where the management prioritizes personal perks over company growth. While external factors like politics, the economy, and competition can impact a company’s trajectory, competent and effective management can mitigate such challenges.
The decision to invest in companies that pay or do not pay dividends is a personal choice for investors. It’s crucial to recognize that dividends alone do not necessarily indicate a company’s overall performance or greatness. Companies may continue to pay dividends even in the absence of strong earnings. The key to investing lies in aligning one’s choices with their personality, lifestyle, and time constraints, aiming for a strategy that efficiently propels them toward their financial goals.
To Sum It Up
In dedicating the entirety of January 2024 to documenting my performance in fiscal year 2023, I’ve created a time capsule for my future self. A decade from now, when I look back, I’ll see not only the mistakes and lessons but also witness my growth, understand what worked, what didn’t, and how I navigated the complexities of my portfolio.
This reflection serves as a reminder that the journey is ongoing, a testament to how far I’ve come, and a testament to the potential for further improvement. Amid challenges, I tell myself to remember the initial spark that ignited this journey.
I encourage you to document your journey meticulously. There’s immense power in revisiting notes from your past self; often, they become your greatest motivator and supporter. Your own words can offer encouragement when the path seems daunting.
Investing, I’ve realized, extends beyond finances. It involves investing in yourself—your mind, body, and soul. Your greatest asset is the potential within you, often untapped and underestimated. Unearth the gifts you possess, explore new endeavours, learn continuously, build, launch, embrace failure as a stepping stone, reassess, revise, celebrate successes, and repeat the process.
In this cyclical adventure, find the beauty in exploration and the resilience in learning from both triumphs and setbacks. The journey is yours, and within you lies the capacity to turn dreams into reality.
Knowledge is my Sword and Patience is my Shield,
elmads
<—–My 2023 Year-End Portfolio Part 1
This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.
0 Comments