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.