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!