How’s the investing going?

When Warren Buffett, the investor I’ve learned from the most, introduced the rules to his investment partnership, Buffett Associates, Ltd., in 1956, he told his investors that they should not measure his performance over the short term. He could not control how his investments were doing day by day, month by month, or even year by year. It would be better if the investors measured his performance over three years. Five years would be even better.

I’ve not shared the following with my readers earlier, but I thought I’d share with you how the total development of my stock market investments is doing. Not just The Philosophers’ Legacy portfolio, which is a group of stocks that I’ve picked carefully on certain investment criteria. The total performance includes some investments where you can add a lot more in my favorite company, Berkshire Hathaway, as well as two other companies that I thought would be more speculative. Turns out, the competitive advantage of the holding that I’ve excluded in The Philosophers’ Legacy portfolio is quite strong. But it’s in a type of business that I’d imagine Berkshire would not be investing in. Nevertheless, it’s a strong franchise.

I’ll be sharing with you what these holdings are eventually.

The reason I’ve been less active here on this blog is that I’m focusing most of my time on another one. And I’ll also share that site with you later, when we’ve stopped being anonymous there.

My total returns over the past five years measured in NOK are as follows:

Using the CAGR calculator that I’ve written about here, you can calculate that the total compounded annual growth rate of my investments are now 24.4%.

I’m pretty happy about the development if I can continue do perform as high in the next five years. Not to mention the next few decades.

I’m also pretty happy about that the majority of the holdings in my investments are positions where I think I will lose the least. My largest holdings are the safest holdings I have found. One exception is the stock that I’ve excluded from The Philosophers’ Legacy. That stock may lose its market cap on the short term, but it is building a lot of value over the long term.

In other words, if I don’t look at the stock prices and the movement of the prices that together form the development of my total portfolio, I rest assured that the earnings and value of the holdings will keep increasing as a group.

Do you want to learn how to do it on your own?

If you can get the same returns as I have above, you can triple your money invested every five years.

I’ve put together a web platform for you where you can learn how I think and go about investing. The theme of the site is to become a better investor. There’s a lot of content for you to browse for free, and you can also get access to short courses and content where I take you through the most important things to know, if you want to have a chance of beating the market.

I’ll share it with you here probably during the next few months.

Until then, stay pragmatic!

Portfolio update – still beating the market

It’s been a while since I’ve posted anything on this blog. I’ve spent the last year blogging on another website, and I’ll share the news with you soon so that you can follow that site also if you like.

It’s time for a review of the portfolio results again. Last time I updated you was during the midst of the pandemic outbreak, where I shared that the Philosophers’ Legacy Portfolio didn’t fall notably during the crisis. The companies that it holds withstood the market fears and I didn’t see much change. The market fell a lot in March 2020 and I did some buying in March throughout the year. Unluckily I wasn’t able to get much bargains in the US market, since the dollar was really strong vs the Norwegian Krone at the time the US stocks were the cheapest.

Nevertheless, the portfolio has done pretty well. Since April 2020 the portfolio has gained almost 20%. The market beat me during that period, but as you will see in the next picture, that was just due to a higher variation, and a larger fall in March 2020. As you can see over a three-year-period, I’ve beaten the market by a large margin.

My holdings in the Philosophers’ Legacy Portfolio have gained almost 94% over the last three years.

In other news, I’ve also invested a meaningful amount in some stocks that I previously thought to be more of a speculative position during the last two years. One of the holdings that you will be able to read about when I release the link to the second blog that I’m writing, turned out to be a multibagger over the last two years. You can see my total track record with what I call the “fun money” in the picture below.

All in all I’ve outperformed the market and have gained roughly 22% annually over the previous five years.

A substantial percentage of my holdings is the Costco stock. When I bought it back in 2019 I thought to myself that it was so expensive that I would probably not earn any money for the next 2-3 years on it. But I thought that after the wait my yield would grow to around 15%. While the stock has only moved from about $300 to $360 since I bought it, the earnings have grown by 15% annually more or less.

Most of my stock are mostly priced fair to say the least. I’d say they are so expensive that I wouldn’t buy at these prices. One of my bigger holdings however which is Berkshire Hathaway is still quite undervalued. If I’m going to guess where my portfolio will get its upwards push the next three years, I’d bet it is from the Berkshire stock. While my portfolio has gained roughly 22% annually in total, the Berkshire holding has only contributed with about 10% annually so far.

See my total performance here below.

I’m looking forward to share the news with you about where else I’m writing, and I hope you will follow that site as well. I’ll share now that is also an educational website about investing, and that the ideas I’ve had about creating a membership will be sold through that site in the close future.

How to valuate a company with no equity? A brief case study.

Does a company without shareholder equity have value? Often, if you’re dealing with a bad or fair company, you’d have to be careful if you’re considering investing in one like that. Some companies, however, and those are often of a higher quality than other companies, can operate today without a positive shareholder equity.

If a company is gushing free cash flow, and it has no problems of servicing its debts, indeed the company can be quite valuable, even if the stock has a negative equity. There’s nothing magical about the stock equity being positive or negative says Warren Buffett in the video below in this post.

If you ask me, it would make sense to look at the company’s earning power compared to its enterprise value when valuing the company and its free cash flow. Read more on what enterprise value is here.

Look at McDonald’s for example. Its equity or book value per share is close to -$11. It started the decade with around a positive $14. As you see in the table below the company is gushing free cash flow, eventhough it has not shown a growth of revenue or operating income over the last ten years.

Take a look at the two rows highlighted in yellow. You see that the amount of shares outstanding have decreased from about 1 billion to 751 million over the decade. While still paying a growing annual dividend, the company has been buying back shares with its remaining free cash flow.

The main cash movements over the last ten years have been the following at McDonalds Corporation. You can follow by looking at the highlighted rows in the table below.

On average its management has spent about $2bn in buying new assets for its operations. That comprises of cash flow mainly for new restaurants and real estate for the restaurants to operate in, as well as maintenance of the exisiting ones.

Looking at the history from the figures below, every year the company management has issued more and more debt even though the company has been earning more operating cash flow than has been paid out for its assets aquisitions and dividends. It has used all of this increase of debt and more to do buyback of shares. It has not been building up free cash on its balance sheet.

We see from the balance statement that after the company’s capital allocation has been done; buying and maintaining new assets, paying a dividend, buying back shares and issuing new debt, the company has not been piling up any cash on the side. The cash balance has gone from about $2bn ten years ago to less than $1bn at the end of 2019.

The company has bought back over $40bn of shares in itself, while it has borrowed and extra $25bn over the decade.

The total long term debt has risen over the last decade in McDonalds Corporation. Values shown in US billions by quarter.

Does McDonald’s shares still have value?

Certainly the stock market thinks so. It has been bidding the share price up quite consitently over the last ten years. The current negative book value per share of -$11 does not seem to bother the stock market, which has been trading the stock between about $140 and $230 over the last year.

10 year stock price history of McDonalds Corporation

Points to consider when valuing the company

If I were to buy McDonalds stock these are few of the things I’d check.

  • Is it a wonderful company?
    • It has a great brand, customers love it, and it owns prime real estate with a very respectable sales per square feet (or square meters).
    • It generates a very high return on assets
      • One indicator to use is that it’s return on assets is very high, north of 10-15 percent. Return on equity would be negative here, because of the negative equity.
  • Does the company gush free cash flow?
    • As you see from the first table above, the company has been producing an average free cash flow of about $4bn per year.
  • What is the earning power of the business?
    • It seems to my knowledge that the restaurant real estate business of McDonalds is capable of returning at least 10 to 15 percent on its assets on the balance sheet. And its operating cash flow should be able to grow from $7-8bn now.
  • If I regard McDonald’s as a real estate company, do I have other alternatives of investing that would give me a higher return on capital?
  • Will the cash flow be able to grow the next ten years?
    • It has not been growing very much over the last years. Will that change?
  • What is the current valuation compared to its cash flow?
    • The current enterprise value of McDonald’s is $195 bn. I’d have to take a close look on what my actual free cash flow in terms of owner’s earnings would be. Let’s say for simplicity’s sake that it is about $7bn yearly. Would I be happy with the current stock price? The current stock price gives the company an enterprice value of $195 bn. That means I’d only get about 3.6% if I were to buy the whole business, when I’m comparing my owner’s earnings to the amount of cash needed to buy the whole business.
    • I’d be much more happier to buy it at an enterprise value of $120 bn in 2015 with about the same amount of owner’s earnings.

Conclusion

McDonald’s will be on my watchlist, but at the current stock price and ratio of owner’s earnings to enterprise value, I’m waiting for a fall in price before the stock would be more interesting.

Warren Buffett comments on companies with a negative shareholders equity.

How to calculate compounded annual growth rate of your portfolio (CAGR)?

The Philosophers’ Legacy Portfolio has gained more than 21% per year the last three years at the time of making this post. We call that number the CAGR.

The CAGR or Compounded Annual Growth Rate is a useful measure of performance for any investment portfolio. The higher the better. The compounded rate is different from the simple rate, which will only divide the total gain by amount of years.

How do I calculate my CAGR when I know how much my portfolio has gained over a period?

For example, The Philosophers’ Legacy portfolio gained about 78% over the last three years. How do I calculate the compounded annual growth rate?

Do the following:

Go to https://cagrcalculator.net/ and make the following inputs:

Starting Investment Value: 100 (your basis will always be 100)

Ending Investment Value: 178 (100 + your percentage point gain)

No. of periods: 3

Hit Calculate and the restult will be shown.

In this example the CAGR was 21,19%. That’s the return the portfolio has gained per year at a compounded rate.

If I know the value of my holdings at the start and now, how do I calculate CAGR? For example I start with $100.000 and now after 4 years it is $131.123.

You do the following:

Go to https://cagrcalculator.net/ and make the following inputs.

Starting Investment Value: 100.000

Ending Investment Value: 131123

No. of periods: 4

Hit Calculate.

This example would have had a CAGR of 7,01%.

Notice that the simple growth rate would be about 7,74% (31,1% / 4). You see that you need a smaller CAGR to compound with every year to get to the end value.

The value of the The Philosophers’ Legacy Portfolio kept soaring through the crisis

Last time you heard news from the portfolio was during the outbreak of the COVID-19 crisis in USA and Europe, and many stocks turned out to be close to the bottom level. It’s been rougly a half year since then, so it’s time for an update on the portfolio!

So far you’ve learned that the biggest holding of Philosophers’ Legacy was the company Costco Wholesale Corporation. I’ll share with you now that my entry price was close to $299 per share.

I had wanted to buy the stock for a long time, since reading about it, and learning from Charlie Munger and Warren Buffett who love the company. I almost bought it at the stock market correction at the end of 2018, but it turned out I was to cheap and in at a too low price. The stock didn’t fall lower than $197. However, I got another stock instead at that market low for the portfolio on the other hand, which I’ll share with you later. Buying Costco in 2018 would have been a great move in hindsight. Nevertheless the portfolio gained rougly 50% during 2019 without holding it most of the year, and the price stayed around the cost basis. Seeing the stock only climbing higher and higher, I decided that it was still worth a buy for the long term, because the value per share had climbed along with it.

Today there doesn’t seem to be anything that can stop Costco from marching forward in 2020. During the year of the crisis sales and net profits grew by close to 15%. So far in 2020 the stock has reached $380.

Currency effects

The performance of the Philosophers’ Legacy is however measured in the Norwegian currency, NOK, while most of the holdings are listed in USD. Over the last year we see large fluctuations in the ratio of USD/NOK, but the ratio is about the same today as it was 12 months ago, as you can see in the picture below.

I did add to several positions during the peak for the crisis. The prices of the companies were favorable in dollar terms compared to dollar earnings, but the purchase power of the Norwegian Krone was much lower than usual during the COVID outbreak in Europe. That meant that much of what I bought during March and April had great gains in dollars, but I added at a time of unfavorable exchange rates, so the result was poorer in NOK terms.

Despite the factor of not getting much value from the Norwegian currency when I needed it the most, the portfolio has still gained a satisfactory return over the last 12 months. The trailing 12 months have had a gain of 15.6% as of today, vs 7.8% for the DJIA index.

Happy with an overall good gain so far

With this result I consider myself lucky. Not only because every stock in the portfolio has held it’s value, but I’ve also been lucky to see a gain overall despite that the second largest holding has barely moved in price. My belief is that it’s quite undervalued now, and we might see gains in price there sooner or later. I’ve not revealed the name of that holding yet, so stay tuned!

The S&P500 has gained rougly 19% over the same period as we’ve reported now, and we aim to beat it over the long run. My broker doesn’t show the S&P500 index in my graphs, but it’s nice to have beaten the Dow Jones Index at least.

Wonderful companies withstand market fears and are seldom cheap

Benjamin Graham said that the greatest losses are made in investments in poor companies during favorable times (high markets). The Philosophers’ Legacy Portfolio core idea is that it is far better to invest in wonderful companies at fair prices. As a group they basically don’t lose money when bought cheap enough. Time is the friend of a wonderful business. I do not believe the portfolio’s current drop is a permanent capital loss. But I feel sorry for the ones who bought poor businesses at the peak. The picture shows how our portfolio has developed during the bear market.

Is it better to rent or own real estate?

If you as a result of being prudent in the stock market were sitting with $2M in your stock market portfolio after 25 years, because you earned ten percent yearly and did not put your capital into real estate, would you be OK if you didn’t own your own house? Having invested during 25 years maybe you have learned a thing or two and manage to earn even more than 10%. Maybe you can earn more than $200,000 yearly from your portfolio by then. Would it be OK to rent a flat anywhere you want for a part of that income instead of owning a house outright?

It’s a question that many people have different views on. In Norway most people put the majority of their savings into their home and into their second home for recreation. You often find a 50 year old couple with a house with most of it paid down but maybe they also have a cabin in the mountains or by the sea that they have just started paying for with a large new mortgage. They might have as much as $500,000 of their net worth in real estate by then. On the other hand you rarely see a couple of their age with a stock portfolio of $2M allocated into wonderful companies that earn more than the market average. That’s mostly due to culture and education in Norway.

If people ask me, I’d say that there can be a huge advantage in learning how to do well in the stock market over the long term. Investing in yourself now and through the next years can give huge effects on your thinking about where you put your money down the line, and the effect on your net worth in many years can be dramatic. I think I have a long way to go to influence the typical Norwegian into putting less into their beloved real estate and more into wonderful companies, which as a group basically increases its value year by year more than the market. Since you’ve been reading so far, maybe you’re more curious than the average person. I’ll strive to share more good ideas with you as we go. Have a good day!

The Philosophers’ Legacy Portfolio returns since Berkshire’s AGM of 2018

Visiting the annual general meeting of Berkshire Hathaway in 2018 was a huge inspiration for me, and I’ve continued to invest in only what I’ve found to be wonderful companies at fair prices in the portfolio since. I had done my reading before the meeting; I read every annual letter that Warren Buffett has written to the shareholders of Berkshire Hathaway. More than 50 letters that grew in size by the years were devoured more than once over a long time of joyful studying.

It has paid of to follow the ideas of Warren Buffett. See how the performance has been since I saw Warren and Charlie live in Omaha below. The returns have been pretty good and have even beaten the American stock market indices since.

The Philosophers’ Legacy Portfolio returns (blue) compared to the NASDAQ Composite index (yellow).

In the previous post I shared the current top holding of The Philosophers’ Legacy Portfolio; Costco Wholesale Corporation. It has had a fenomenal return since 2018, but that upswing is not captured in the returns shown above, since it was bought as late as in 2020. If I had listened to Charlie Munger about his thoughts about Costco earlier, my portfolio would have done even better. But a 67% return in almost two years deserves a pat on the back. Even though the current price of Costco stock is pretty high in relative terms as P/E and P/B, I believe we will get a good contribution from the stock in many years to come.

More on Costco later…

Will the portfolio gain 50% this year?

The year is almost over and it’s time to have a look at the performance of the blog’s portfolio the last year. In this post we will also share some ideas about the year ahead, what the blog will aim to accomplish.

Portfolio return last 12 months: 49%. The yellow line is the Nasdaq 100 index.

Today, the portfolio, which has gotten a name: “The Philosophers’ Legacy Portfolio” has a trailing twelve months return of about 49%. It’s beaten the NASDAQ 100 index over the year by about 17%, which has had a return of 32%. Not bad for the index either.

Of course, a 49% gain must include some share of luck. It remains to see how long the duration of the out-performance will be. The longer duration of out-performance, the higher certainty there is that there is some skill involved too.

The composition of the Philosophers’ Legacy Portfolio is a reflection of what this blog is about – buying wonderful companies at fair prices. It is also a focused portfolio of about 10 stocks in total, where the top five stands for about 64% of the portfolio.

The “philosophers” are of course Warren Buffett, Charlie Munger, Benjamin Graham and Joel Greenblatt, as well as others who follow their lead.

The Philosophers’ Legacy Portfolio takes their lead and will hopefully continue to outperform the next ten years. And this blog will continue to share the ideas that will put the reader on the right path to becoming a better investor himself.

In 2020 this blog aims to share the following with you:

  • Some of the main ideas that a true investor should have.
  • Elaborate on why owning wonderful businesses at fair prices is superior to buying fair companies at wonderful prices.
  • Why it can be better and easier to be a stock market investor vs a real estate investor.

A membership area which will share specific information about:

  • Insights into which stocks are in the Philosophers’ Legacy Portfolio.
  • News about changes in ownership in the portfolio.
  • Examples of wonderful companies in monthly research reports
  • A guideline on how to identify wonderful companies
  • Valuation techniques – how to value a business

Looking forward to share insights with you in 2020, and hope you will be a happy reader!