November portfolio update

The portfolio rose 5.96% in November while the benchmark gained 3.28%.

	August 3, 2017	November 30, 2019	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.4840	4.27%	48.40%	18.50%
Benchmark (SPAX2F0)	61,250.80	83,521.68	6.97%	36.36%	14.26%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (although I am nearly always close to fully invested). I unitised the portfolio to assist in calculating performance.

I added three new positions this month. 

• Boustead Projects (SGX:AVM) is a Singaporean property developer. 
• Tomita Electric Co. Ltd (TYO:6898) is a Japanese manufacturer of soft ferrite cores trading below NCAV. 
• I also bought a minuscule position in RFM Poultry (NSX:RFP), an NSX-listed poultry producer which is subject to corporate action.

While I'm very happy with the month's gain, it could have been much better. Shortly after I purchased my position in Tomita, the stock spiked up about 60% on no news. Instead of selling — which in hindsight would have been advantageous — I held on and the stock came crashing to Earth. While this appears to be a classic pump and dump, I can't be sure exactly what caused the price action — which is one of the difficulties of investing in overseas stocks with a language barrier. 

While the best course of action is rarely clear in these moments, my feeling is that I should have been prepared to take the gain and move on. Japanese stocks can languish well below their asset value for years, and these spikes are few and far between.

At the time, there were a few factors that caused me not to sell my stake. Firstly, I was concerned there was some information in the market that I wasn't aware of. (There was no official announcement from the company, and I couldn't find anything searching through Google or social media.) The other risk was that I would be leaving some money on the table by selling too early. (Many of these net-nets trade at such low valuations that they can rise far more than 60 per cent.)

On top of that, there were two other things I was thinking about. Firstly, because my net-net strategy is based around a one-year holding period, I was reluctant to sell a stock I'd held less than a month; the second reason is that had I sold, I would not get the long-term capital gains tax discount. (Like David Dodd, I often tell people not to let tax factor into their selling decisions but I don't always take my own advice.)

My feelings about these events are obviously coloured by what happened subsequently. Had the stock continued to rise, or if it remained elevated rather than falling back, I would likely be patting myself on the back in this month's blog. Nevertheless, I think at least sometimes, especially with some of these Japanese stocks, I'd be better off to sell on the spikes — especially when, like Tomita, they happen without any apparent reason.

Finally, I recently stumbled across this fascinating YouTube video showing some of the excesses in the US stock market in 1997. We're told how Sharon, a retail investor, has put the majority of her family's net worth into a stock that she doesn't know the name of. It's a small reminder of some of the crazy things that happen in markets and how we can be our own worst enemies.

October portfolio update

The G&W portfolio fell 1.74% in October; the benchmark fell 0.35%.

	August 3, 2017	October 31, 2019	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.4005	-1.60%	40.10%	16.20%
Benchmark (SPAX2F0)	61,250.80	80,871.57	3.57%	32.03%	13.18%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

In October, I added two new names to the portfolio. The first, Yotai Refractories (TYO:5357), is a statistically cheap Japanese stock which is also held by Michael Burry's Scion Asset Management. The second is a company in Singapore which I won't disclose as I may purchase more shares.

There was very little movement otherwise. Some of my Australian holdings reported their full-year results, and the news was overwhelmingly positive. Many of the stocks I hold are exceptionally cheap at current prices, which puts me in good stead for the coming months.

September portfolio update

The G&W portfolio gained 2.77% in September, while the benchmark gained 2.67%.

	August 3, 2017	September 30, 2019	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.4253	0.14%	42.53%	17.84%
Benchmark (SPAX2F0)	61,250.80	81,159.48	3.94%	32.50%	13.92%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

This month I sold two stocks: Brickell Biotech and OneMarket. I discussed my unpleasant experience with Brickell in last month's report. I sold my holding early in September at the price of 4.34 because a) I'm not confident valuing the business; b) I felt there were other opportunities for me to deploy the capital. I lost about 31% on the position in about 230 days for an annualised return of roughly -50 per cent. It's not an outcome I'm proud of but I did learn some valuable lessons from the experience. I can only hope I avoid making a similar mistake again in future. 

I was also able to sell my holding in OneMarket (which was also discussed in last month's report) for 0.97 late in September. At this price, I felt the stock roughly reflected the price of OMN's net assets adjusted for dilution of all RSUs. My experience with OMN has been up and down, but thanks to this positive last transaction, my total return was a modest ~8% on an annualised basis. My thinking on OMN turned out to be pretty accurate, but I could have traded this one a bit better along the way. 

I have some money to deploy in coming weeks, so it's likely I'll be adding some new names to the portfolio in October, which is exciting.

August portfolio update

The G&W portfolio fell 3.23% in August, while the benchmark fell 2.36%.

	August 3, 2017	August 31, 2019	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3869	-2.56%	38.69%	17.06%
Benchmark (SPAX2F0)	61,250.80	79,692.68	2.06%	30.11%	13.51%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

August wasn't a great month for my stocks, particularly my basket of net-nets: they fell by more than 5 per cent for no apparent reason. Generally speaking, these stocks continue to be priced extremely attractively and short-term price movements like those this month amount to little more than noise.

In August, I sold two of my smallest holdings. One, P5 Capital Holdings, was a net-net stock I was interested in some months ago. I was never able to get a full-sized position, so I took the opportunity of a recent price rise to sell my minuscule holding. I also sold my shares in Merchant House International (MHI:ASX) in late August for 7c. I bought MHI in February at 0.09. At the time of my purchase, MHI was selling for significantly less than its net current asset value -- at least according to its most recent financials (for the period ending the previous September). In May, MHI filed its full year financials, which showed the company had spent about $14m in cap-ex, mainly on boosting its American production facilities. As the company no longer trades under NCAV, and I don't feel equipped to judge the likelihood of success of MHI's expansion in the US, I decided to sell my shares. MHI shareholders may end up doing very well as it remains very cheap on a net asset basis, but I felt there were better opportunities available. 

It is painful to lose 22% on a stock in a such a short period of time, especially when the loss could so easily have been avoided. (In this case, I should have clearly waited to review more recent financials before my purchase.) Thankfully my position in MHI was less than half my usual sizing for net-nets, simply because there weren't many shares available at my time of purchase.

Unfortunately for me, it's not the only mistake I have made recently. Another of my net-nets, Vical Inc (NASDAQ:VICL), recently merged with another biotech firm in the US called Brickell (the new ticker is BBI). I purchased VICL in January when the shares were trading at 0.93. At the time of my purchase, VICL had no products and was running research programs for two drugs. It had recently announced a review of strategic alternatives, and had retained MTS Health Partners to help with the process. My reason for buying VICL was straightforward enough: at that time, the company had about $45m in cash and other net current assets compared to a market cap of $23.3m. I figured that annual cash burn was about $18m, which meant that even if the company ploughed ahead for another year at the current burn -- which seemed unlikely considering the review -- it would still have cash in excess of its market cap. I figured there was a fair chance that liquidation or some other corporate action could give me a chance to exit before then. About a month later, there was some movement: the company announced it was cancelling its most expensive research program and cutting jobs to conserve cash while it considered "near-term" strategic alternatives. The stock traded higher, but still below its NCAV, so I decided to hold on, hoping for a liquidation or similar event. 

In June, the outcome of the strategic review was announced. Management proposed a merger with Brickell, a dermatology drug developer. Brickell's main asset is a drug called sofpironium bromide, which is used to treat excessive armpit sweating. While the drug seems promising, it is still yet to undergo phase-3 trials, which are both costly and complicated. More importantly, I didn't feel confident that I could confidently analyse Brickell's prospects. Following the announcement, VICL was quickly sold down. In hindsight, the best thing I could have done has to have sold the shares on open that day. Instead, I decided to hold on for a more opportune time to sell, which was a mistake.

In August, I was given a good opportunity to sell: the stock traded up close to my purchase price as the merger vote approached. And what did I do? I didn't sell. Currently, I have lost about 40 per cent. (The merger vote was successful and the stock dropped again once the merger was consummated.) It's impossible to get every stock pick right, and I think my initial thinking on VICL was sound. It's disappointing I didn't take either to the two opportunities I had to reduce my loss. I am currently reviewing the position, but it's highly likely I will take my medicine and sell. I can only hope the lessons from the experience can help me in the future.

In other news, at OneMarket's annual meeting, it was announced the board "has been reviewing options to maximise value for shareholders and to proactively manage the discount to cash backing at which OneMarket trades". The stock traded up on the announcement, but is still trading slightly below net asset value. OneMarket (ASX:OMN) has a complex two-tiered capital structure. The assets are held in OneMarket Holdings, Inc. At the time of its demerger from Westfield, OneMarket Limited (the company I have shares in) had a 90% stake in OneMarket Holdings with Westfield owning the rest. Management are incentivised with RSUs that dilute at the OneMarket Holdings level. Consequently, OMN's share in the net assets continue to be diluted as the RSUs vest. At March 31, OMN's share of OMN Holdings had fallen to 89.2% and there has been further dilution since then. 

There was approximately $US100m in net assets in OneMarket Holdings at June 30. Assuming monthly cash burn of $3 million, net assets should be about $US90.8m by the end of September. If we take into account all of the RSUs, including those that haven't yet vested, OneMarket Limited's share of those assets is 76.46%. On that basis, OneMarket Limited's net assets are about $US70m or $102.3m AUD at current rates. OMN's current market cap is $86.78m: a discount of about 18 per cent. It's not a great discount, especially considering the burn and dilution, but if it is maintained about this level, I suspect I will continue to hold the stock until the outcome of the review is announced. If you are interested in OMN, I suggest you read this post from the Hidden Value blog. 

July portfolio update

The G&W portfolio rose 0.70% in July, while the benchmark rose 4.52%.

	August 3, 2017	July 31, 2019	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.4332	0.70%	43.32%	19.81%
Benchmark (SPAX2F0)	61,250.80	81,614.76	4.52%	33.25%	15.50%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

There was quite a bit of buying and selling in the portfolio this month, but no other real news to report. I added three net-nets to the portfolio, all of which are listed in Japan: NKK Switches (6943), Sanko Sangyo (7922) and Fujix Ltd (3600). I also added to my largest holding, which is undisclosed. At my most recent purchase price, this stock sold at half the value of its net tangible assets, which consist of largely cash and real estate, a trailing gross dividend yield of 15.05% and a P/E of 4.29 despite a record of consistent profits. While this stock has peculiarities, and is difficult to purchase, the price is simply ridiculous, which is why it accounts for slightly more than 20% of the portfolio.

In part, these purchases were enabled by the consideration received from the sale of Spicers (ASX:SRS) to Japan's Kokusai Pulp & Paper Co. This old-world paper business has been one of my most successful investments to date, thanks to the hard work of the shareholder-aligned board that has run the company since 2017. As a final surprise, we received a little bit more in consideration than was initially promised. In July, I also sold my shares in Yowie (ASX:YOW), which I bought some months ago as a net-net. There has been an awful lot of drama involving Yowie recently as I detailed in my March update. My sense is that shareholders will be dudded one way or another, given the cast of unsavoury characters involved. I bought the stock in March when it was trading at 7.3c and was able to exit on July 5 at 8.6c, largely due to good fortune. I have little to no skill as a trader, so despite the satisfactory result I won't be seeking to repeat the experience soon.

Late in the month, I also bought a small merger arb position in Nzuri Copper (ASX:NZC) after reading this post on the Alpha Vulture blog. 

June portfolio update

The G&W portfolio rose 6.07% in June, while the benchmark gained 3.7%.

	August 3, 2017	June 30, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.4233	33.74%	42.33%	20.34%
Benchmark (SPAX2F0)	61,250.80	78,082.47	13.08%	27.48%	13.58%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

In June, I did some trimming around the edges of the portfolio. I sold down about 40 per cent of my position in OneMarket (ASX:OMN) at 80.5c and sold my small holding in Capral (ASX:CAA) at 11.5c. In the case of OneMarket, I felt the position size did not reflect my view of risk/reward on offer. In the case of Capral, I felt there were better opportunities to deploy the capital. It is always much harder to sell stocks than buy them, and time will tell if my thinking is correct. I made a small addition to one of my largest holdings, which is undisclosed. It was my only purchase this month.

The good performance was nearly entirely due to the extraordinary performance of Open Orphan (AIM:ORPH), a stock I bought as Venn Life Sciences in January. Open Orphan reversed into Venn in June, which drove the share price to 6.8p from 2.65p at the end of May. My friend Chris brought Venn to my attention when it was trading around 1.5p. Needless to say, I am very grateful.

May portfolio update

The G&W portfolio fell 0.51% in May, while the benchmark gained 1.71%.

	August 3, 2017	May 31, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3346	25.41%	33.46%	17.14%
Benchmark (SPAX2F0)	61,250.80	75,296.36	9.04%	22.93%	11.98%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

In May, I purchased one new stock for the portfolio, Nippecraft. Nippecraft is a paper products company listed in Singapore. It is the owner of the Collins and Debden brands, which you might be familiar with if you've recently purchased a diary. Nippecraft has been troubled in recent years, recording a number of years of losses and delisting from the main board of the Singapore stock exchange. (It is now listed on Singapore's second-tier Catalist board with the ticker N32.) Despite its woeful performance, Nippecraft has net current assets and leasehold properties well in excess of its market cap. While it is currently unclear whether the value of these assets will be realised in the near future, Nippecraft is a welcome addition to my basket of net-nets.

During the month, another one of my net-nets -- Vical Inc (VICL:NASDAQ) -- announced it would seek a reverse merger with Brickell, a early-stage biotech company. While the stock initially shot up on the news, it was subsequently sold down to level below the announcement. Vical shareholders are yet to vote on the proposal, so I am continuing to hold my shares.

April portfolio update

The G&W portfolio gained 0.94% in April, while the benchmark gained 2.37%.

	August 3, 2017	April 30, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3415	26.06%	34.15%	18.40%
Benchmark (SPAX2F0)	61,250.80	74,029.72	7.21%	20.86%	11.51%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

I spent much time this month trying to purchase a new position for the portfolio. I identified two statistically cheap stocks listed in Singapore, but was unable to get a full position in either. (Thankfully, one of my orders has nearly been filled since month end.) I received a substantial fully franked dividend from my largest holding in April, which boosted the portfolio's performance. (The stock did not trade in April, so there was no ex-dividend effect.) Otherwise, the portfolio remained largely flat.

There have also been some developments in Yowie (ASX:YOW), which I discussed in last month's report. In late April, the takeover panel found Wilson Asset Management's purchase of ~27 million Yowie shares in March and Keybridge's purchases of ~1 million shares in April were unacceptable. Consequently, approximately 28 million shares — 12.92% of the company — have been vested with ASIC for sale. On April 30, Yowie also released its 4C for the quarter ending March 31. The company burned ~US$1.8m cash during the quarter, which was in line with my expectations. More concerning was the drop in receipts from customers: $2.4m for the quarter, compared to $4.2m and $4.4m for the first two quarters. Additionally, because the company's cash balance dropped below US$17 million, it triggered one of the defeating conditions for Keybridge's takeover offer. On Thursday, Keybridge announced it would not proceed with its offer, and the stock dropped sharply.

It is clear that there is still some story to play out with Yowie. However, these developments reinforced that — due to the forces at play, and antagonism between Keybridge and Yowie's board  — there is a substantial risk that smaller holders like myself could be left holding the bag. Nevertheless, there appears to be value in Yowie's assets, at least at the current price. With 217,748,987 shares outstanding, the company's market cap is $15.46m at the current price of 7.1c. At March 30, the company had a cash balance of US$16.982m — A$24.2m at current exchange rates. The March 4C doesn't give us an up-to-date picture of the company's liabilities, so we have to make an educated guess. At December 30, Yowie's had total liabilities of US$2.90m, largely comprising trade payables. If we err on the side of caution and assume that Yowie's liabilities have increased to $US4m, we would be left with approximately US$12m (A$17.1m) in net cash — equal to 7.85c per share. If we add in value for Yowie's inventory (discounted by 50%) and receivables (discounted by 25%) at December 30, we are left with net current assets of 10.14c per share. 

In terms of risks, there is the possibility the directors run the company into the ground. (Indeed, it seems they would rather do that then sell the company to KBC.) There is a risk that cash burn increases substantially. There is the risk that KBC or another party makes an even more opportunistic takeover offer in future that would lead to me losing capital permanently. Yowie is also involved in a legal matter, which is discussed is the December half yearly and elsewhere. Considering all of this, it may turn out that Yowie is priced fairly. While Yowie deserves to be discounted, my sense — which may well turn out to be unfounded — is that the stock is too cheap. I do not have plan to add to my position (currently 4.77% of the portfolio), but I will continue to hold the stock while it remains at depressed prices.

March portfolio update

The G&W portfolio gained 0.07% in March, while the benchmark gained 0.73%.

	August 3, 2017	March 31, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3290	24.88%	32.90%	18.72%
Benchmark (SPAX2F0)	61,250.80	72,316.67	4.73%	18.07%	10.54%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

March was a quiet month in terms of activity. I bought one new stock, Yowie Group (ASX:YOW), early in the month. At my purchase price of 7.3 cents, Yowie was a classic net-net with a decent margin of safety. At that price, the company's market cap was approximately $16m. The most recently half-yearly reported showed NCAV of approximately $26m. (This calculation was based on the prevailing USD/AUD exchange rate and included haircuts of 50 per cent for inventory and 25 per cent for receivables.) Shortly after my purchase, Keybridge Capital — one of Yowie's major shareholders — announced it intended to make an off-market takeover bid for all of the company's shares. The consideration is 9.2 cents: the first $9 million will be paid in cash, the rest in junk bonds. 

The bid is highly opportunistic, considering that Yowie had about 11.8 cents in net current assets as of December 31 (of which the majority was cash). It appears I am not alone in my view: Geoff Wilson, a vocal critic of KBC and its associates, bought 25 million Yowie's shares in March, bringing his voting stake to 13 per cent. In response, KBC's lawyers referred Wilson's purchases to the takeover panel, alleging they were in contravention of s606 of the Corporations Act. Due to my ignorance of the finer details of Australian corporate law, I have no idea as to the merits of KBC's allegations. I will be watching keenly from the sidelines (with popcorn in hand).

Despite the boost from Yowie, which closed at 8.7 cents on Friday, the portfolio remained flat over the month. Many of my positions drifted lower on no news. I currently hold 18 stocks in the portfolio. Ten of these (including Yowie) are net-nets, and six are illiquid stocks with strong balance sheets and high dividend yields. The remaining two are ASX-listed deep value plays: Capral (ASX:CAA) and Spicers (ASX:SRS), which I have discussed in earlier blogs. I intend to add another net-net to the portfolio in April.

February portfolio update

The G&W portfolio gained 2.95% in February, while the benchmark gained 5.98%.

	August 3, 2017	February 28, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3280	24.79%	32.80%	19.77%
Benchmark (SPAX2F0)	61,250.80	71,789.85	3.96%	17.21%	10.62%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result is that my returns are somewhat overstated (though I am nearly always close to fully invested).

February was kind to my portfolio, but kinder to the benchmark. This is not cause for consternation. During the month, I reduced my position in OneMarket, previously one of the portfolio's largest holdings. I purchased more shares in late January, while the stock was trading at 61 cents. While the share price has improved modestly since then, the company subsequently reported increased cash burn — which considerably increases the risk of the investment. I underestimated the chance that the business would continue to deteriorate. As a consequence, I sized the position poorly. There are a number of lessons to take from the experience. Firstly, I should have waited to have an update from the business before adding further to the position (which was already above 5 per cent of the portfolio). Secondly, I suspect at least part of my overconfidence stemmed from the fact that Samuel Terry Asset Management — a fund management firm I admire greatly — was involved. As those who lost money coat-tailing Buffett into Kraft Heinz found out, following your heroes into an investment can be costly — and cloud your judgement. At the end of February, the OMN position was roughly 5 per cent. While OMN trades below net cash, it could go to zero. For that reason, a 10 per cent position is inappropriate.

During the month, I added four new net-nets to the portfolio: Aberdeen International, Katsuragawa Electric Co, HG Metal Manufacturing and Merchant House International. I was unable to get a full position in MHI, which quickly appreciated after my purchase to a price I was unwilling to pay. I also received reports from a number of holdings, which in the main have performed as expected. The portfolio now contains 17 stocks. I expect to add at least one new position in March.

On benchmarking

The recent changes to the portfolio raise questions about the adequacy of the ASX200 accumulation index as the benchmark. More than 40 per cent of the portfolio is now held in stock of companies listed outside Australia. While the portfolio in no way resembles the ASX200, it is similarly vastly different from the various international stock indexes. Considering this, I have decided to stick with the SPAX2F0, which remains a proxy for the experience of most Australian stock market participants. If you have a more elegant solution, I would love to hear from you.

January portfolio update

The G&W portfolio gained 9.73% in January, while the benchmark gained 3.87%.

	August 3, 2017	January 31, 2019	Since July 1, 2018	Since Inception	Annualised
G&W Portfolio*	1.0000	1.2900	21.22%	29.00%	18.56%
Benchmark (SPAX2F0)	61,250.80	67,739.78	-1.90%	10.59%	6.96%

*Returns are pre-tax, include franking credits, and assume dividends are reinvested. The SPAX2F0 is simply the total return of the S&P ASX200 Index adjusted to include any franking credits received. N.B. I do not account for cash in the portfolio. The net result so far is that my returns are somewhat overstated (though I am nearly always close to fully invested).

On an absolute basis, it was the portfolio's best-ever month. January was a continuation of a trend that started some months ago: many good things happened to my stocks, and nothing bad. This is unusual, has nothing to do with my abilities as a stock picker, and is unlikely to continue. During January, Spicers, one of my largest positions, announced that it had entered a scheme implementation agreement with Kokusai Pulp & Paper Co. Should the scheme proceed — which seems highly likely — Kokusai will acquire all Spicers shares at an estimated price of 7 cents each. The proposed scheme will involve a return of capital, which will attract a favourable tax treatment, and is scheduled to be implemented mid-year. My current intention is to hold my shares until then.

During the month, I received consideration from Lifull for my Mitula shares. This money was subsequently reinvested in four net-net stocks, which are all based overseas: Minco Gold Corp, Sulliden Mining Capital, Venn Life Sciences and Vical Inc. These stocks were selected on a quantitative basis: they all trade at a substantial discount to their net current assets minus total liabilities. If you are interested in learning more about net-net investing, I suggest you read this blog post from Socks and Stocks from some years back. (I am deeply indebted to Chris for writing this post and for helping me avoid some early mistakes.)

The net-net strategy has a number of attractive characteristics: it should provide exceptional returns over time; there is little to no risk of permanent capital loss; it is feasible for me to find and research companies while working full-time; it is firmly within my circle of competence; and a diversified portfolio should provide more liquidity than some of my current holdings.

I will purchase more net-nets in February, and plan to continue to add more stocks as funds become available. I intend to sell my net-net stocks after holding them for approximately one year. The early results have been promising: the four stocks I purchased have gained more than 10 per cent in aggregate since the first purchase on January 22. (Keep in mind they could have just as easily lost 10 per cent.)

There was not much movement otherwise, except for a further purchase of shares in OMN (now 10.18% of the portfolio), which is also a net-net. The portfolio now consists of 13 stocks.