Fun Fund: Q4 2021

Update on the fun fund investing account for the fourth quarter and full year 2021

This post is about my “Fun Fund.” I am going to discuss the performance of this actively managed investment account in the fourth quarter of 2021 (and for the whole year) 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 tracking more closely than my other investments) are located on this page.

The fourth quarter of 2021 wrapped up over a month ago. Based on my visitor statistics, a fair number of you were checking the site for updates (or more likely, bots were looking to spam my comments). I apologize for not posting anything. Oddly, this whole COVID period has been very busy for me.

In addition, I think going to a quarterly schedule of the “update posts” (journal my personal finances/savings) has gotten me out of the habit of putting together posts. I am going to try and publish more frequently in 2022 just to sort of “break the seal.”

Q4 2021

In Q4, this account was up 5.32%. For the entirety of 2021, the account was up 25.79%. As I discussed in my last post in this series: Fun Fund: Q3 2021: The Trident of Destiny, I bought some stocks and ended the year with only about 10% in cash. I had been carrying a pretty large (~25%) cash balance most of the year, so this was a drag on returns.

This performance was worse than the SPY, and QVAL, which were up 30.60% and 34.81%, respectively. RPV was up 35.95%. QQQ was up 29.34%%. The Gotham Enhanced 500 ETF (GSPY) was up 29.20% and Toby Carlisle’s fund ZIG was up 36.86% (winner winner growth boi dinner!). All those figures are from Koyfin and are 01/01/21 through 12/31/21 total returns.

“Attribution”

What’s that? You want to know how I was able to assemble a portfolio that was so mediocre? Well, you’re likely to regret asking that, because here’s a chart with all my holdings and their performance last year:

The largest position is WFC at ~15%. BAC is also at ~10%. I also have moar banks. In 2022, I have been buying a little more CMCSA and EBAY.

People said, “Fuck it, I want to garden!”

That quote if from Jim Hadedorn, CEO of SMG concerning the resiliency the business showed during the depths of the covid-19 shutdown in 2020. SMG is a new addition to the portfolio. I have been buying some more SMG. I’m probably going to run it up to a 10% position (~7% currently). I wrote about it briefly in my Trident of Destiny section of the Q3 2021 update.

Since that post, a good twitter friend (Phillip@WealthOrDie on Twitter, go follow him if you don’t) highlighted a podcast interview with SMG’s Hagedorn on the Boyar Value podcast (the amazing quote above came from this interview). Here’s part of our Twitter discussion:

As might deduce from the Twitter thread, the interview increased my enthusiasm. Hagedorn said he long aimed to build “the Proctor and Gamble of lawn and garden”, which is exactly what I was trying to describe, without finding the great analogy, in my prior post when I discussed that business.

I also thought his discussion of the cannabis arm, Hawthorne, was interesting. I’m still not 100% sold on that business and how they’re approaching it. I mean supplying lighting and inputs to commercial growers seems like it could be a brutal business. That is in contrast to consumer CPG with a little nice technical I.P. (e.g., pro-vista seed and sod). They also have scale advantages to bolster it (they have people walking around in Home Depot and Lowes on the weekends during season, bolstering the retailer sales force…how are you going to compete with that?). So the brands are great, but that’s not all they have.

I also liked/buy what he said about younger people wanting to garden. I think household formation will be a big tailwind for them and that he’s right they just have direct their marketing to different channels to sustain their brands with younger people. Once they transition that spend, they will still be able to out scale/bury the new “craft” brands (I think that’s how it is going to play out across CPG, BTW). You’re not going to get into lawn and garden stuff until you get a home (or hit a certain age). But once you get a SFH, it is much more likely to become a thing.

I noticed Hagedorn made a passing reference to Seagram’s when talking about the cannabis business. Another Seagram’s is basically what I’ve been dreaming about finding for the potential end of prohibition of cannabis in the U.S. I mean the mere fact that we’ve found a guy who gets the Seagram’s example and is in a strong position to try to replicate it, is probably most of what I can do to try and participate as a passive minority shareholder.

As you likely know, Seagram’s built up its position during U.S. alcohol prohibition and has been enjoying the benefits of that for about 100 years. I definitely want to generally own companies that are organized so that management can take that shot if they believe it is right (when they also have a ton of skin in the game).

I did not love his discussion about how commuting daily from Connecticut (or wherever) to Ohio in a company private jet, which he flies himself, gives him time to think and is good for family life. haha! I mean it was kind of hilariously out of touch, but…move to Ohio or move a bunch of those people to CT.

I could just be stuck here sucking my thumb as a passive bag holder while Jim is getting his comp package and flying back and forth to Ohio in the company daily driver. I’m not too worried about agency costs though, because this is a dividend grower and he owns a ton of stock. If he just wanted to build the biggest fleet of corporate jets he probably wouldn’t have sold out to TruGreen. Interestingly, in the podcast he also mentioned his family/brothers and sisters as a factor, so it’s not like he is without any feedback. I can also tell that he cares about the street perception and valuation by his earnings calls (in fact, I was more worried he was too focused on that a few times).

I own Comcast (partially) for some similar reasons. Brian Roberts is in control. I also think he fully gets the Disney example/advantages (he opportunistically AF tried to buy DIS after all). He is just about the only human with any chance to replicate it. Roberts also has grown the dividend for minority holders and doesn’t do a lot of the tricks to benefit insiders that some of his competitors have done.

Anyways, I’m pretty bulled up on SMG and would plan to run it up to a 10% position on weakness (which we are getting due to the waning covid boom, inflation fears, and cannabis oversupply). I could see it getting slammed/cheap given this confluence of factors. I will probably buy some in other accounts too if it gets hammered.

Disney and The Trident of Destiny

So, you may have noticed DIS in the above chart showing all the positions in the fun fund. Well it’s currently only a 1% position. I’m not sure I’m going to keep it/put it in the portfolio.

As I discussed in the Q3 2020 post, I am trying to run this portfolio with a little bit of a strategy/theme. Basically, good companies, at good prices, with some mitigation of agency costs/institutional imperatives. I am not sure Disney makes it through this gauntlet.

I’m a fan of the business. I like all of these media conglomerates pretty well and think they will do well over time with exploding channels and business models for monetization of their content (for example amazon prime, pluto, or youtube key and peele clips) and booming screen and leisure time. Granted they have some fierce competition for attention from the social media sphere, but I think they will manage it well.

Disney is the best of these in my opinion. So, I like Disney’s business a lot. The price is meh, but I only bought a 1% starter position and was going to average down when price was good.

The third prong, however, is where I think Disney is not going to work. Disney doesn’t really offer anything to give me comfort that agency costs are likely to be controlled. I could easily just sit around while hired managers run the thing for their benefit with not real skin in the game. Members of the Disney family don’t seem to have sufficient stroke. They weren’t able to get the company sold or really force change back when Eisner was churning out garbage and generally sucking, while loading his pockets.

There is no other big/controlling shareholder. Steve Jobs’ stake has been diluted and his wife still shows up somewhere in the holders list but she doesn’t seem to have enough to make real noise in the boardroom. Rupert Murdoch might be the best hope but he’s really old and his stakes are likely to get diluted as well (I think Jobs and Murdoch both own less than 5%).

In the case of Disney, I also can’t use a long history of dividend growth, or special dividends, or buybacks as a signal that there is a track record or implied commitment to factor in the considerations of shareholders. I am allowing these factors to satisfy this prong in certain cases. I think there can be strong institutional and cultural biases that work in your favor as a capital owner with dividend growers or buyback cannibals in particular. In addition, lumpy buybacks and special dividends are so unusual and so rational that I decided I have to take a close look in those scenarios to make an evaluation of the likelihood agency costs will be well managed (i.e., they can satisfy my prong depending on the facts).

But Disney offers none of these. So, I think I’m going too have to decide that Disney fails that prong (and it does seem like they do have a turrible CEO at least every other one…Chapek might be one, too early to tell) and it is thus ineligible for this account/strategy.

FIN

In conclusion, I took a modest L versus the SPY last year (and the value funds I track as benchmarks kind of stunted on me). Most of the underperformance versus the SPY seemingly was due to cash drag. At least the wasted time and brain damage didn’t cost me in actual security selection underperformance as well. hah!

In reality, I’m fine with the performance of the account so far. I’m hoping I get a chance to get the portfolio set up for a long run in 2022. [Also if the banks could compound at ~50% again for a few more years that would be great…thanks.] Thanks for reading!