November portfolio update

Since the last update, which covered the month of August, my portfolio and the broader market have both delivered strong returns. My portfolio gained 0.26% in September, 3.54% in October and 7.98% in November, for a total gain of 12.1%. The S&P/ASX 200 Franking Credit Adjusted Total Return Index (Tax-Exempt) meanwhile returned -3.66% in September, 1.93% in October and 10.21% in November, for a total gain of 8.22%.

My returns over the three months were largely driven by Naked Wines and one of my newer Japanese stocks, Joban Kaihatsu. When I bought Joban in late July, it was selling at a bargain price compared to both its asset value and recent earnings. It wasn't just me who noticed: around the same time, management started working on a MBO plan, which culminated in a 7,800Y per share offer in November. The price is extremely opportunistic, considering it's below the company's net asset value, which is comprised of largely of cash and marketable investments. Consequently, the stock was bid up substantially above the offer. I may have left some money on the table, but I decided to sell my holding at 9000Y in mid-November, about 70% above the price I paid. 

It will be interesting to see what happens with the bid. Japanese takeovers are not an area of expertise for me, and in this case all of the documents are in Japanese, which presents an additional challenge.

Besides Joban, I also sold some smaller, lower-conviction positions. With the proceeds, I added to some existing positions and bought three new names: Shinoken (8909.T), Analogue Holdings (1977.HK) and ScS Group PLC (SCS.LON). Shinoken and Analogue Holdings both trade on single digit P/Es, with solid asset backing and strong track records of growth. ScS Group trades at a low multiple of normalised earnings, has a strong business model and cash in excess of its market cap on its balance sheet.

The portfolio is still very cheap so I'm sleeping well despite the froth in the market of late.

Finally, you may have noticed I haven't been updating the blog as much as usual. I've recently moved, and have been busy with work. On top of that, there hasn't been too much to write about lately. I plan to write an end of year post in early January, and I'll re-assess posting frequency after that.

My results since inception are summarised in the table below. 

Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The SPAX2F0 is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

	August 3, 2017	November 30, 2020	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	1.7649	14.53%	76.49%	18.61%
Benchmark (SPAX2F0)	61,250.80	82,914.52	13.28%	35.37%	9.52%

August portfolio update

In August there was quite a bit of chopping and changing in the bottom end of the portfolio. I sold my small holdings of the Hong Kong Economic Times Group (HK:229) and North Energy ASA (OMXNO:NORTH), and trimmed my position in KG Intelligence CO (2408.T). All of these positions were bought because they were statistically cheap. All three stocks are still cheap, but I decided to redeploy the money into Raymond Industrial Ltd (HK:229) and Guillemot Corporation (EPA:GUI).

Raymond is an OEM manufacturer of air purifiers and electric shavers based in Hong Kong. It trades at about NCAV, but has been consistently profitable, and pays most of its earnings out to shareholders as dividends. Guillemot manufactures joysticks and steering wheels for gamers, and audio equipment under its Hercules brand. I think both stocks have good prospects in coming years.

As an aside, I'm planning to update my portfolio's performance each quarter rather than each month in future. I'm hoping that will give me some time to write up some interesting investment ideas on the blog. 

My results are summarised in the table below. The portfolio ended the month up 2.92%, while my benchmark — the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) — rose 2.83%, 

Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The SPAX2F0 is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

	August 3, 2017	August 31, 2020	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	1.5745	2.17%	57.45%	15.88%
Benchmark (SPAX2F0)	61,250.80	76,613.90	4.67%	25.08%	7.54%

July portfolio update

We're in August now, which means it's time for another portfolio update.

I added one new position in July, which was Joban Kaihatsu (1782.T), a Japanese civil engineering firm. Joban has a negative enterprise value and earned about 4,600Y per share in the three years to March 31, 2020. (For reference, the shares last traded at 5,310Y.) I don't have any particular insights into the company besides the fact that it is extraordinarily cheap. I investigated the company after reading about it on Jacob McDonough's blog, which I can thoroughly recommend to people interested in cheap Japanese stocks.

Naked Wines, one of my larger holdings, released another positive trading update in July after YOY sales growth of 67% in June. Last week, they announced that July sales were even stronger, and that retention and margins had improved. Naked has been a clear beneficiary of social distancing restrictions and the proposition for customers should only become stronger as the company scales. The stock has been running hard, and ended July slightly below where it started.

All in all, the portfolio ended the month down 0.73%. My results and those of my benchmark — the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) — are summarised in the table below.

Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The SPAX2F0 is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. I have unitised my portfolio to assist in calculating performance. 

	August 3, 2017	July 31, 2020	Since July 1, 2020	Since Inception	Annualised
G&W Portfolio	1.0000	1.5298	-0.73%	52.98%	15.25%
Benchmark (SPAX2F0)	61,250.80	74,504.02	1.79%	21.64%	6.76%

June portfolio update

From humble beginnings in August 2017, three years ago next month, the portfolio has gained about 54.1% on a time-weighted basis, which works out to 16.02% annualised. While I'm happy with these results, I'm conscious I've had a lot of good luck. I also have plenty of room to improve.

The table below summarises my portfolio's performance and that of my benchmark, the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt). I have unitised my portfolio to assist in calculating performance. 

Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The SPAX2F0 is simply the pre-tax total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. 

For the month of June, the portfolio fell 1.91% while the benchmark gained 2.61%.

	August 3, 2017	June 30, 2020	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio	1.0000	1.5410	8.27%	54.10%	16.02%
Benchmark (SPAX2F0)	61,250.80	73,194.42	-6.26%	19.50%	6.31%

We have now entered a new financial year, the fourth since the portfolio was initiated. Below is a summary of the returns of the portfolio and the benchmark since then.

Date	Portfolio	%	SPAX2F0	%
August 3, 2017	1.00		61,250.80
June 30, 2018	1.0642	6.42%	69,053.50	12.74%
June 30, 2019	1.4233	33.75%	78,082.47	13.08%
June 30, 2020	1.5410	8.27%	73,194.42	-6.26%

The last two years have been kind. From a personal perspective, I am most satisfied with how the portfolio performed in recent months. (Again, I've had a lot of luck.)

June, however, threw up a few challenges. First, I had an opportunity to purchase more of one of my unlisted holdings at an attractive price. It was a large parcel: roughly 10 per cent of the assets in the portfolio. As I didn't have the necessary cash on hand, I made arrangements with the seller and raised funds by selling some of my existing holdings. I then found out another buyer had beat me to settlement, which was a disappointing outcome.

Most of the funds were raised from trimming positions in Boustead Projects (SGX:AVM) and Million Hope (HKEX:1897). Under normal circumstances I wouldn't have sold these positions, and I fear my sales, which were made at depressed prices, will be revealed to be a mistake. As of the end of June, Boustead was a 5.42% position and Million Hope is a 5.61% position.

I also sold Katsuragawa Electric Co (TSE:6416) earlier in the month. Katsuragawa is a net-net which I have held for more than one year. I sold it to reinvest in more attractive opportunities and realise a tax loss.

I added a number of new stocks to the portfolio: North Energy ASA (NORTH.OL), Kikukawa Enterprises (TSE:6346), Charle Co (TSE:9885), Hong Kong Economic Times (HK:1897) and Left Field Printing (HK:1540). These are all small positions > 4% and were bought because they are statistically cheap.

To sell or not to sell

In previous updates, I discussed a dilemma I had with two Canadian stocks, Aberdeen International (TSXV:AAB) and Sulliden Mining (TSX:SMC). I bought these stocks as net-nets, despite concerns about management, who issued shares at prices well below NAV after my purchases. 

These stocks were emotionally difficult to own; I felt like an idiot for holding them. This combined with the ability to realise tax losses led to my decision to sell. At the time of my sales, both were still net-nets, though there were cheaper stocks appearing on my screen.

Aberdeen last traded at 8.5c, 240% higher than my 2.5c sale price on March 31. Sulliden last traded at 7c, 27% higher than my 5.5c sale price in May. Even writing this down feels painful.

I'm not always going to pick the tops or the bottoms with net-nets. But I do think this has been another lesson that I should be more patient. Part of net-net investing is learning to accept feeling uncomfortable and trusting the numbers. It is easy to rationalise ex post, and I may be doing that here, but selling a net-net when it's still a net-net does not seem like a good idea. 

What is perhaps interesting is I basically rehashed the situation in June with Katsuragawa and Nippecraft (SGX:N32). I have held Nippecraft for over a year. Nippecraft is statistically cheap but there are major governance concerns and minority shareholders, in my view, are unlikely to see any of the assets on the balance sheet. 

The prospect of redeploying the capital tied up in Nippecraft into the unlisted stock opportunity (and simultaneously reducing my tax bill) seemed attractive. But again, I may well have sold out at exactly the wrong time. And, to make things worse, I didn't even get the opportunity to redeploy the money. 

Lately I have been re-reading Ed Thorp's excellent book, A Man for All Markets. There is so much to gain from Ed Thorp's insights about investing, and it has been helpful to read while reflecting about these experiences with net-nets and other cheap stocks. Going forward, I plan to be more diversified with my net-nets, and to try to avoid selling them at depressed prices, even when there are other opportunities available.

I should point out that on the whole, my net-nets have worked out well. The major contributor has been Open Orphan/Venn Life Sciences, which I bought for 1.55p and sold almost exactly one year later for 6.5p, a total gain of 344.61% including forex. Open Orphan is in the life sciences industry, and has had a boost from the COVID-19 outbreak. It last traded at 11.6p, which is more than 10x my purchase price. Nevertheless, Open Orphan was well above what I felt was fair value at the time I sold, so I don't put it in the same category as the Canadian stocks. I would have enjoyed those extra bags though!

May portfolio update

May was a quiet month for me. I only made one trade, which was to sell my shares in Sulliden Mining (TSX:SMC). I realised a 40.16% loss on the position over the 477 days I held the stock.

SMC was one my early net-net positions. I bought it because it was statistically cheap, despite the fact that management had a track record of being unfriendly to minority shareholders. While SMC could have worked out under different circumstances, I think it was a mistake to overlook the management issue. Thankfully, SMC was a small position, so the lesson has not been too costly. On the whole, my net-nets have worked out very well.

Overall, the portfolio gained 4.22 per cent in May. The main contributor was again Naked Wines, which rose roughly 17 per cent before pulling back after month-end. There were some gains in some of my smaller positions too.

The table below summarises my portfolio's performance and that of my benchmark, the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt). I have unitised my portfolio to assist in calculating performance. 

Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I tend to be fully invested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. 

	August 3, 2017	May 30, 2020	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio	1.0000	1.5710	10.37%	57.10%	17.32%
Benchmark (SPAX2F0)	61,250.80	71,335.03	-8.64%	16.46%	5.54%

April portfolio update

Hello again from isolation. It's time for another portfolio update. In April, my portfolio gained 7.82%, which slightly trailed the 8.78% gain posted by my benchmark, the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt).

The performance of my portfolio and the benchmark (SPAX2F0) are summarised in the table below. I have unitised the portfolio to assist in calculating performance. 

Please note that my returns are pre-tax, include franking credits, and assume dividends are reinvested. These figures have not been audited. Additionally, I do not account for cash in the portfolio. The net result is that my performance is likely somewhat overstated, although I endeavour to be fully invested. The SPAX2F0 is simply the total return of the S&P ASX200 Accumulation Index adjusted to include any franking credits received. 

	August 3, 2017	April 30, 2020	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio	1.0000	1.5074	5.91%	50.74%	16.14%
Benchmark (SPAX2F0)	61,250.80	68,355.71	-12.46%	11.60%	4.08%

As I wrote in my last update, I have had a fair bit of luck with my positioning leadning into the pandemic. I have not had to make any dramatic changes, and my major positions have held up relatively well. 

This month, a large part of the gain was down to Naked Wines (LSE:WINE). In April, the stock appreciated 45.6% as online wine sales surged. 

US wine sales have gone online very rapidly. Good for Naked Wines $WINE whose CEO observed that it took 20 years for UK online grocery to grab the share that US online wine has done in 21 days. pic.twitter.com/j2wRbTcCsF

— Marc Rubinstein (@MarcRuby) April 16, 2020

Naked Wines has a differentiated business model where customers pay a monthly subscription fee to become "Angels". These monthly fees are then used to fund production from winemakers around the world. Because of the subscription nature of the business, Naked should be able to realise longer lasting benefits compared to other online wine retailers. 

There were some gains in other positions, most notably Boustead Projects, which gained nearly 19% for the month. I also bought shares in a structural steel business in Asia that trades at a discount to its net current asset value. I won't reveal the name as yet, because I may buy some more shares. 

However, despite the problems posed by the virus, there does not seem to be a great deal of bargains around in the stock market.

March portfolio update

March 2020 was an extraordinary month for investors, and it will be helpful for me to have a contemporaneous account of my thinking to reflect on in months and years to come. For that reason, this update will be a bit longer than usual.

My stocks held up relatively well, but there are some caveats to my reported results which I will discuss shortly. For the month of March, the portfolio fell 5.63%, while my benchmark (the SPAX2F0) fell 20.65%. My performance since inception is summarised in the table below.

	August 3, 2017	March 31, 2020	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.3976	-1.80%	39.76%	13.41%
Benchmark (SPAX2F0)	61,250.80	62,838.41	-19.52%	2.59%	0.97%

*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. My returns are not audited. I do not account for cash in the portfolio. The net result is that my performance is somewhat overstated, although I endeavour to be fully invested. I unitised the portfolio to assist in calculating performance. 

Investing during a pandemic

Markets plummeted in March as COVID-19 rapidly spread around the world. This week, the number of confirmed global infections surpassed 1 million. (In reality, this number is likely to be much higher, due to lapses in testing and underreporting.) In Australia, there are currently 5,635 confirmed cases and 34 deaths.

The situation has escalated rapidly, and has resulted in changes that would have seemed implausible at the start of the year. The majority of consumer-facing businesses in Australia are closed, there is a record number of people looking for work, landlords are being prevented from evicting their tenants, and the conservative Australian Government has announced an unprecedented scheme that is tantamount to a wage subsidy. 

I did not foresee the situation evolving as rapidly as it has, and I don't have a forecast or sense when it will end. What is clear is that most if not all businesses will be impacted by the downturn, and that the current social distancing measures and directives to stay at home could continue for months.

This grim outlook, coupled with uncertainty, is what has driven markets lower. While there are huge risks — particularly to industries like travel, airlines, retail and hospitality — there are incredible opportunities available to investors with the resources and temperament to focus on the long-term.

How my thinking changed throughout the month

While I was aware of COVID-19 before March, I never thought it would lead to the shutdowns or major changes to our lives. Living in Australia, I have never experienced a pandemic like this. We Australians were relatively untouched by SARS, MERS and the like. I imagined (naively, in hindsight) that COVID-19 would be similar. 

The key problem with COVID-19, of course, is its transmissibility.  Death rates appear to be relatively low, provided patients have access to quality medical care and equipment such as ventilators. The measures we have seen have the aim of decreasing the load on health systems, so as to keep as many people alive as possible. 

While I am not normally an anxious or worrisome person, I was very concerned this month. We are still staring down widespread business closures, skyrocketing unemployment and loan defaults. My fears about the situation unfolding in Australia have been allayed by the Government's Jobkeeper package, which should help prevent a complete economic meltdown. It is also as firm an indication as there is that the Government here will do whatever it takes. 

While I didn't do anything drastic with my investments, and I never entertained the thought of moving significantly to cash, I do think the current situation played with my thinking. While I kept investing, I became more risk averse, focusing on businesses with fortress-like balance sheets or quality business models that could withstand a pandemic. 

However, now might be the exact time to start taking risks. There appear to be some excellent opportunities in industries like shipping, which is both cyclical and highly leveraged. Another example is Donaco International (ASX:DNA), one of my holdings which fell significantly during the month. DNA is going to be significantly impacted by the fallout from the virus, but could be worth multiples of its current share price should it survive. My lack of risk tolerance or unfamiliarity (in the case of shipping stocks) has meant I'm staying on the sidelines, which could be a mistake. 

What I did and didn't do this month

My portfolio fell less than the market this month. There are three key reasons, and they're all a product of circumstance rather than foresight or skill.

1. As I mentioned last month, about 40 per cent of the portfolio is invested in a basket of statistically cheap unlisted stocks. While the intrinsic values of these shares has obviously been affected by the COVID-19 situation, they did not trade much at all during the month. In fact, as a basket, these shares were carried at higher values than February, as two stocks were bid up in the early days of the month. Just because something doesn't trade, doesn't mean it hasn't been impacted by the virus. (Something to think about for those who own property in Australia!) Nevertheless, I don't feel it is appropriate to start manually marking down the prices. For one, the stocks were already very cheap.
2. My three largest holdings, besides those in the group above, are Boustead Projects (SGX:AVM), Naked Wines (LSE:WINE) and Million Hope Industries (HK:1897). All three have very strong balance sheets, with substantial cash and limited leverage. Obviously, these types of businesses are better placed to handle the current situation. I bought more of all three stocks during the month when volatility presented opportunities. Boustead and Million Hope fell during the month, while Naked Wines actually closed higher. (Selling direct-to-consumer wine appears to be pandemic friendly, at least according to Mr Market.) 
3. Again, I had a tailwind from the weakening Australian dollar. More than half of the portfolio is denominated in foreign currencies like the JPY, SGD and HKD. Without foreign currency gains, the portfolio would have been marked down roughly 2.75% more in March. 

I added to one stock, KG Intelligence Co, which is a Japanese net-net. KG Intelligence is a true cigar butt with a lousy business. Nevertheless, it is selling below its liquidation value, and I think a basket of such stocks will perform well over time. I also bought shares in another Japanese-listed company, Taihei Machinery Works. It is trading for roughly its NCAV, after significant discounts are applied to receivables and inventory, and a trailing P/E of 4. Again, this is a relatively small position, which I have added to my basket of statistically cheap stocks.

I sold my stake in Salmat, as mentioned in last month's report, as well as my shares in KLW Holdings (SGX:504). While KLW is still cheap, I felt there were better risk/reward opportunities on offer elsewhere. I also sold a small holding in Aberdeen International, a Canadian net-net that has been amongst my worst-ever performers. Selling Aberdeen was a capitulation, because I have long held concerns about the company's management. I sold my shares at 2.5c, thinking I could put the money to work in other opportunities. Unsurprisingly, the stock quickly rallied 40% to 3.5c. I originally paid 5.5c per share for Aberdeen. My loss has been about 53%, taking into account the 10 per cent forex gain over my holding period. I have another of this type of stock in my portfolio that is causing me grief, and my experience with Aberdeen might make me hold on a bit longer. In future, my plan is to avoid buying these kinds of stocks — or at least exiting much earlier on — to help avoid the challenges they pose for decision making. 

A note about cash

As I note under my performance numbers, I have generally tried to be fully invested. There's a few reasons for this. For one, my experience thus far has shown that investing in stocks has generally provided a double-digit return. Secondly, I try to avoid making macro calls, which is lucky because I certainly wouldn't have predicted or been prepared for a pandemic. As a smarter investor than me mentioned this month, one of the risks that COVID-19 presents is that the current experience might lead us to overreact in future. The third reason I try to avoid holding cash is because of my personal circumstances. I am regularly adding to my portfolio as I get paid, so it's growing all the time. If I was managing a fund, and dealing with redemptions and additions, I would obviously need to take a different approach.

Nevertheless, the experience this month has shown there is real value in having some extra cash up your sleeve, whether to invest in good opportunities or simply to keep yourself afloat during a crisis. That said, I'm not going to be raising cash now, as I'm seeing the best opportunities since I started the portfolio. But should I ever be feeling a bit cynical, like I was in early January, I might be a bit more willing to hold onto some cash for a bit longer. 

Some notes to my future self, wondering what to do in the next crisis

• You need to have done the work on companies beforehand. There were a lot of opportunities around this month, but I stuck to buying things in my portfolio or that I was already familiar with. While I am confident that I bought well, it would have been better to have a larger list of companies to pull the trigger on.
• Things can change quickly. I was most pessimistic during the middle of the month, when the extent of the Australian Government's response was unclear. There was immense uncertainty, and I was not confident the Government would be willing to take the kind of steps it has. A few days later, we had Jobkeeper and I felt much less pessimistic.
• At the moment, it is April 5, and it feels like we are in a period of stability after the earlier turmoil. While the measures in place could last for months, I am optimistic that we will get through this period and the economy will get back on track. I am writing this now so I can refer to it later.
• The reason I performed better than the market this month was purely luck. I had no special skill or insight that helped, and it's unclear whether my portfolio will do any better than the market over the course of this thing. 
• Diversification should not be underrated. It has been helpful to have a widely diversified portfolio, not just in terms of geography but also in terms of business types and risk profiles. I felt more comfortable investing in Boustead and Million Hope this month because Hong Kong and Singapore seem to have done a better job at getting the virus under control.

February portfolio update

February saw the biggest one-month drop from the benchmark since the portfolio's inception in 2017. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) — or SPAX2F0 — dropped 7.69%. My portfolio held up well in the market ructions, dropping only 2.88%

The performance of my portfolio and the SPAX2F0 are summarised in the table below.

	August 3, 2017	February 28, 2020	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.4811	4.06%	48.11%	16.50%
Benchmark (SPAX2F0)	61,250.80	79,191.88	1.42%	29.29%	10.50%

*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. My returns are not audited. I do not account for cash in the portfolio. The net result is that my performance is somewhat overstated, although I endeavour to be fully invested. I unitised the portfolio to assist in calculating performance.

The good news

Over time, I hope to do better than the average stock market investor. The strategies I use mean that it's likely I'll do worse than the market averages during bullish markets, and (hopefully) a little better during downturns. It's pleasing that — at least for the time being — things have been going to plan.

So why did my portfolio hold up better than the market this month? There are a few reasons.

1. About 40 per cent of the portfolio is invested in a basket of statistically cheap unlisted stocks. These stocks rarely trade, and I expect to earn my returns from dividends rather than price appreciation. (Sometimes I will be lucky and get both.) These stocks were flat for the month, which insulated the portfolio from the market falls. They remain very cheap, and I would happily buy more of many of these companies at current prices.
2. More than half the portfolio is invested in overseas stocks. The three largest of these — Boustead Projects (which dropped -5.2%), Million Hope Industries (-3.94%) and Naked Wines (a recent purchase) — fell less than the benchmark. On top of that, I had a tailwind from the weakening Australian dollar, which is product of luck rather than skill.
3. My net-nets generally performed poorly, but they have become a smaller part of the portfolio in recent months.

I've done all the dumb things

Now for the bad news. I made at least three big mistakes this month. The first one was to buy Salmat (ASX:SLM). Salmat recently sold off its major assets and will distribute the proceeds to shareholders in coming months. I have been aware of Salmat for a while, because a few smart investors I know hold the stock. (In fact, I should have bought it when I first looked at it and it was trading around 55c.) I hadn't kept up with the story, but when it traded down to 80c in late February, I took another look.

At 80c, SLM's market cap was roughly ~$160m. Following the sale of its two businesses, SLM had roughly $170m in cash and other current assets. (I applied a haircut of 50% to other current assets and 25% to receivables.) 

I assumed the distribution would happen by early July, and assumed another ~$3m of expenses, which is in line with the December half-year. That left me with an estimated distribution of roughly $167.45m, or 84c per share. That would imply a return of 7.83%. Should the funds be distributed on June 30, that works out to be 22.88% annualised. On top of that, SLM has roughly 9.5c per share in franking credits. If they were able to be distributed too, the return would be quite attractive. Salmat has tax losses of ~$55m available at the corporate level, which I assumed would account for any tax arising from asset sales. 

My eyes lit up, and I put about 4% of the portfolio into SLM at 0.80. It was a mistake.

While I am no expert on corporate tax matters, it appears SLM could be liable for $11.3m in tax arising from its asset sales. (In calculating this, I assumed $93.32m gain on disposal, less tax losses of $55.6m, which leaves $37.72m net. That works out to a liability of $11.32m at the 30% corporate tax rate.) Once we subtract that, we are left with an estimated distribution of ~78.4c, which is less than my purchase price.

There's a few things to note here. First, I could be wrong in assuming SLM's tax liability. Second, there is a possibility that the distribution could be above 80c. This could happen if SLM spends less than $3m to wind up the company, or if there is some premium paid for the company shell, which is a possibility. Third, if you have a low-tax entity to invest in, such as an SMSF in pension phase, SLM could still be a very good investment due to the franking credit situation. If the proceeds are distributed soon, it could result in a very decent IRR, and the situation appears to be low risk.

My portfolio, however, is subject to personal income tax of >32.5%, which means I'm still liable for some tax from distributions franked at the 30 per cent rate. (If you'd believe, in my excitement to buy SLM, I also overlooked this pertinent fact.)

What is disappointing is that this is not the first time I've been too quick to pull the trigger on a situation like this. (See, for example, my recent discussion of Nzuri Copper.) And while SLM — like NZC — could work out, it was clearly a mistake in process. Thankfully, with the help of a fellow investor, I was able to recognise the mistake quickly. I recently sold my SLM position for 78.5c for a loss of about 2.4% in a week. While the impact on the portfolio will be limited, I'm upset by the sheer stupidity of my decision making. In future, I will use a checklist to ensure I avoid dumb mistakes in these types of situations. 

I also made two mistakes of omission in February. I had two opportunities to buy more of the unlisted stocks I described earlier in the post. Both times, I was reluctant to pay the asking price, because I didn't want to bid up the stock. Both parcels of shares were sold to other buyers who were willing to pay up. Even at these higher prices, the trailing gross yields were > 15%. I think it was a mistake to pass up on these opportunities. 

If you have thoughts on SLM, or if you think there's a mistake in my thinking outlined here, I'd be very interested to hear from you. You can find my contact details in the "get in contact" tab at the top of the page.

January portfolio update

I had a good month of performance in January despite all the calamities going around in the world. My portfolio returned 6.92% for the month, while the benchmark gained 4.98%.

	August 3, 2017	January 31, 2020	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.5251	7.16%	52.51%	18.42%
Benchmark (SPAX2F0)	61,250.80	85,785.44	9.87%	40.06%	14.45%

*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. My returns are not audited. I do not account for cash in the portfolio. The net result is that my performance is somewhat overstated, although I endeavour to be fully invested. I unitised the portfolio to assist in calculating performance.

In my post last month, I discussed selling Nzuri Copper, a merger arbitrage play. I bought a small position because I was attracted to the large spread on offer. I decided to sell my NZC position in December when it became clear that I had not properly appraised the situation. Unsurprisingly, the regulatory approvals that were holding up the merger were quickly approved shortly after I sold my position. 

The situation is interesting to me because it highlights one of the strange things about investing performance. Had I held on to the stock, I would have profited, even though my purchasing decision was a mistake. Of course, the flip side can also be true: sometimes prudent decisions to purchase stocks can result in losses because of low-probability events, etc. In these situations, the feedback we get by way of profits or losses can be harmful to our long-term financial wellbeing. It's what Annie Duke — a former pro poker play — calls "resulting". As investors, we should be constantly trying to improve, and the best way to do that in my view is to focus on whether we made the right decisions rather than outcomes.  

In Nzuri, it is clear that my initial purchasing decision was a mistake. I didn't properly research the situation for starters. On top of that, Chinese merger arbs are not in my circle of competence. I have no edge in terms of handicapping potential outcomes and have no specialist knowledge about Chinese regulatory or legal issues pertinent to mergers.

But was I right to sell it when I did? This part is less clear to me. My inclinciation in these situations has been to sell as soon as possible. For me, it's psychologically difficult to hold on to a stock purchased for the wrong reasons. But what's the rational thing to do? For starters, the decision making process should ignore prior decisions. As Buffett says, the stock never knows that you own it. It's something I should have done, but I didn't. (To be clear, I'm not sure I would have held on to NZC even if I did look at it in this way.)

So what's the takeaway? I personally have found it helpful to write down my thinking when making buy decisions to refer back to later. From now on, particularly in tricky situations, I'm going to write out my reasons for selling, too. Additionally, I think the right way to invest in stocks like Nzuri is by using a basket approach, which is not something I had done. People like Alpha Vulture — who first wrote about the idea — get paid because they can stomach risk and volatility that others can't handle. It's a good strategy in my view. Nevertheless, it is interesting to read Alpha Vulture's post-mortem on Nzuri:

While in the end I got the result I was betting on, it’s tough to say in hindsight if my thesis was correct or not. It’s quite possible that those delays were indicative of a real problem that could have blown up the merger. Or perhaps it was just some administrative issue. Who knows?

Even though we're only a month into the year, I've already made some more mistakes. Thankfully, they have been relatively small. Elsewhere in the portfolio, I have a stock that has been affected by an unforeseen, low-probability event. It is likely I will take a loss on this position, even though I believe my purchasing decision was correct. On the plus side, I received a good price when selling Open Orphan (formerly Venn Life Sciences), a net-net that ballooned 300+% since my purchase last year. It rose significantly between the start of the year and when I sold it, which accounted for some of this month's gain. In February, I'll be looking to put some of the proceeds to work.

Finally, if you got this far, you might be interested to check out this excellent blog post from Lyall Taylor, which touches on issues related to my discussion of Nzuri and "resulting".