This post is about the performance of my “Fun Fund.” I am going to discuss the performance of this actively managed investment account in the recently ended third quarter of 2020 and share some thoughts on a few positions.
As a reminder, most of the prior posts about this account (which is really just a small Roth IRA that I am messing around with) are located on this page.
The third quarter of 2020 just wrapped up. It looks like I stunk it up pretty badly. My performance last quarter in the Fun Fund was (2.24%). That’s a minus! I’ve still got about 20% in cash, so the actual stonk positions were a little bit worse than the (horrible) headline figure.
This performance was worse than the SPY, RPV, and QVAL (and pretty much any other benchmark you want to pick):
The S&P 500 put up an 8.28% gain. Note that QVAL actually beat the SPY!?! [Most of the other value factor type funds that I track did not do the same.]
This is what the stocks I have in this account did:
Comments on Some of My Stocks
Obviously COTY continues to be a disas-trophy. I wrote about how I was/am planing to sell it back when they phantom cut the dividend and Bart Becht bailed and JAB decided to raise outside money. This was before covid hit and really hammered the business. My intentions haven’t changed but I am not going to dump it until and unless I think I get a decent price and the narrative is ok. Hopefully, I don’t get cashiered before then (by a filing or otherwise…I already got diluted by KKR).
If you’re paying very close attention (which I do NOT recommend…hah) you will notice that I’ve added a few more bank names. I’ve not got about 25% of the portfolio into U.S. banks. I am still thinking about the rules under which I am going to operate this account. However, I am currently limiting myself to 10% of the account, at cost, for position sizes.
Because of this rule, I am “full up” on WFC. Partially due to this limitation, I have bought a few other banks. As I discussed last time, I prefer the big U.S. (North America, really but Canada needs to have a darned RE recession before I can get enthused) banks that have smaller exposure to trading and investment banking.
To me, investment banking and prop trading are great businesses…for the traders and investment bankers. They are probably better suited to private entities. It seems like a lot of that business is flowing to those entities and other non-bank competitors, but some of the big banks have “whale-sized” exposure in this area.
MOAR Banks
As for the other banks I own, I bought some USB back during March. It has done pretty well. I could buy a little more, but I decided to buy some BAC to spread the bets. This is also currently the favorite sector “horse” of Warren Buffett, Li Lu, and other investors upon whom I keep tabs.
I think I get why they chose BAC. It seems like BAC has nearly as much upside as WFC with a lot lower risk. Just kind of a tighter range of probable outcomes if you will. They are also seemingly in a much better position to really press their advantages right now.
Based on my monkeying around with the FDIC database, it looks to me like BAC and JPM might be picking up some deposit share versus smaller banks and WFC is just forced basically to tread water and try to deal with legacy problems. (Doesn’t seem like they are losing deposit share but the other biggies are taking it from the smaller banks…this also jibes with Shrewsberry’s (WFC CFO) most recent speaking appearance).
If I just take the 2021 FactSet consensus earnings (EPS) for BAC and WFC, I have an estimated earnings yield of 8.48% and 8.06% for BAC and WFC, respectively. WFC’s earnings are probably depressed right now because of inefficiency and TONS of money going out the door for government relations, fines, legal fees, etc… But there’s definitely some risk that those do not go away in the near (foreseeable?) future.
Turning to the 2022 consensus estimates, BAC has an earnings yield of 10.60% and WFC yields 14.07%. Clearly the WFC estimates reflect some anticipated snap back, but the BAC estimates reflect some (believable) upside as well. With BAC the downside range of potential outcomes also seems a lot more narrow.
Why not just add more USB? It is similar to the BAC as far as EPS estimated earnings yields.
I do “like” USB better than BAC. It is smaller, with more room to grow, but big enough to have the scale advantages for tech spending and regulatory capture and the like. It also has a neat cost culture (they have historically been great tightwads…they maintain a plan at any time to cut costs by…I think…25%).
I also like the mix of businesses at USB (and WFC) better than BAC. I am not a fan of the old Merrill Lynch business. I think account-churning sales/brokers are dinosaurs. As I’ve already said, I don’t like investment banking or prop trading, as the passive-investor/silent partner taking most of the risk and getting very little of the rewards.
BAC and Wells do have the dominant deposit franchises. Also, perhaps the best bank investor in history seems to like BAC better, so I’ma equal weight BAC and USB (haha). I’ve got about 5% positions in each.
I still like Wells more than either BAC or USB. It might not be able to press the advantage now, but BOY did it have an advantage coming out of the GFC. I really think the Wachovia complex was multiples better than Merrill and the banks JPM was able to roll up.
As of right now, I don’t see how JPM and BAC are able to make moves that are remotely as impactful as that move was. However, I acknowledge it has more risk right now and might not have enough greater potential upside to compensate for that risk versus all the other cheap big banks.
I also bought some First Citizens bank. It’s a nice regional bank primarily covering the Carolinas. Family controlled, the bank has put up great numbers historically. Has a high priced stonk (those can result in pricing inefficiencies…see $AAPL split for inverse) and does lumpy buybacks more than dividends. I’m actually debating moving it out of this account (it doesn’t really fit what I want, if I decide not to allow myself to sell in this account, as discussed below).
I’m also thinking about moving into the (Class B, super-voting) $FCNCB shares, which trade at a discount, as they are very illiquid, but might suit me fine as a tiny retail investor who doesn’t intend to trade the shares.
Paramount + ?
I don’t have a lot to say about the other positions this quarter. Viacom has rallied back strongly. Too bad I bought it before Covid and am still down some on the stock. I don’t totally hate their streaming strategy, but I gotta’ tell ya’ Paramount + seems like a great name…for impressing boomer Hollywood executives.
It seems to me like all the networks broadcasters should be trying to put basically their over the air product on free apps and use that as the gateway to their other offerings (maybe each cross-carries the feed from the other three networks). Like how is that a worse competitive situation than cable (or pre-cable)? They would have valuable data now and maybe get direct consumer relationships. Maybe Viacom could stick all the broadcasters on Pluto.
I also think Viacom maybe needs to consolidate Showtime and their other streaming offerings to pump up the scale and really go at the thing. It seems like Apple thinks that too. They have a bundle with the two on Apple TV. I might check that out.
But whatever, I bought it cheap so it’s not like I need to have an opinion on that stuff. They are doing a decent job mining the Star Trek universe I.P. They probably need a Trek MMORPG or something.
I think I should probably sell Natura. I don’t really have any business owning a Brazilian cosmetic company ADR. I’m not even sure half the time, what the filings mean/equate to in the U.S. or when they are coming. It looks like the just dropped a share offering on us Friday after market closing.
Now You’se Can’t Leave
The main reason I didn’t previously sell Natura was that I am thinking about rules to limit when I can sell positions in this account to try and force myself to get some of that positive skew that makes common stocks good investments.
There are some biases in most humans that conspire to make us let losers linger (and run…often to zero) and cut the gains short for fear of losing them. It’s just hard to ride a winner and it’s hard to sell a loser.
These biases are among the reasons, I have been thinking about maybe forbidding any sales of stocks. I would probably focus on dividend payers in that scenario so that I have some cash coming in to do stuff with. I think getting dividends could also help me sit tight. Dividend investing has a number of potential positive behavioral impacts if you ask me (though after observing my performance I don’t know why you would). In addition to making it easier to sit tight, it seems to take some of the narrative/focus off the price movement of the stock.
Alternatively, I was thinking maybe I will permit to selling losers if they cancel the dividend. It seems like that might help me avoid some zeros. I know it HAS happened, but it seems rare that a company continues paying a dividend and then suddenly files for bankruptcy. Cash calls many bluffs.
As for selling winners, I am thinking maybe I will be allowed to sell half of a position, following at least a double, where the valuation is high (as determined at my discretion), combined with negative price momentum (probably just a negative 1 year trailing return).
That sounds kind of complicated, but it might force me to hang in there indefinitely in most scenarios, while letting me take some capital “off the table” after a good run when things are maybe reverting. It could also help calm the lizard brain desire to “book the gains.” (assuming I have gains at some point…I kid!)
I haven’t decided on any of these rules yet. I would be happy to read any thoughts you care to share in the comments (or on Twitter).
Fin
In conclusion, I got smoked by the SPY last quarter. The ~20% cash was a drag, but not as much as my turrible stocks. I bought some BAC last quarter and a little bit of a regional bank.
I am still deciding on some rules for this account, such as limits on position sizes, and conditions under which I am allowed to sell stocks. In designing these rules, I am attempting to force myself to sit tight and at least have the chance to experience the positive skew of potential returns for common stocks. I think a potential secondary positive effect is that I might be more selective in securities I am willing to purchase.