December portfolio update

I finished 2019 on something of a low note, down 3.88% in December. The benchmark fared better, dropping only 2.17%.

	August 3, 2017	December 31, 2019	Since July 1, 2019	Since Inception	Annualised
G&W Portfolio*	1.0000	1.4264	0.22%	42.64%	15.87%
Benchmark (SPAX2F0)	61,250.80	81,712.72	4.65%	36.36%	12.70%

*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.

Performance review

Here's how the portfolio has performed to date:

• 2019: 21.33%

• 2018: 10.13%

• August 3, 2017 - December 31, 2017: 6.75% 

The benchmark I use is the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt). Here's how it fared over the same period.

• 2019: 25.29%

• 2018: (1.07%) 

• August 2017 - December 31, 2017: 7.62% 

Considering the bumper 2019 experienced by many investors, I can't help but feel my year has been pedestrian. An investment in an index fund tracking the S&P500 gained about 30% in 2019; my benchmark — which is a proxy for the before-fee returns (including franking credits) of an ASX200 index fund — was up more than 25%. One of my fund managers returned an astounding 73% before fees between February and December, and stories abound on Twitter and elsewhere of 50+% returns.

One year is an arbitrary time frame to judge investment results. What matters is results over the long term. Nevertheless, reading about how others have done, and feeling underwhelmed by my "paltry" 21%, has made me reflect on where we are in the market cycle. Making money seems pretty effortless right now, and stocks seem to be the only game in town. (There was an interesting discussion about this on a recent episode of Tobias Carlisle's podcast.) 

To be clear, I'm near fully invested and plan to keep putting my money to work in the market. My point is simply that investors are optimistic and seem focused on maximising returns rather than protecting their capital. My portfolio is designed to minimise the risk of losing money permanently. While it's not the most fashionable approach for the time being, I'm confident it will serve me well over the long run.

My biggest mistakes

Perhaps another reason I'm left feeling somewhat underwhelmed by my 2019 performance is that I made a number of unforced errors. Here are a few particularly egregious ones.

Nzuri Copper (ASX:NZC)

Nzuri Copper is a ASX-listed company with a mine in Congo. I bought a position in the company in July, after a Chinese company, Chengtun Mining, announced a takeover offer. The spread was large, and it seemed likely the deal would go through, so I put about 2 per cent of the portfolio into NZC. Since then, the takeover has been plagued by delays and lack of communication from the Chinese acquirer. The deal may well go through, but I sold my position in December after it became clear I had no real insight into the Chinese legal/regulatory issues on which the outcome depends This was a simple case of investing in something outside my circle of competence. On the plus side, NZC was a very small position, which limited my losses. I lost 13.56% on my NZC investment over a 153 day holding period, which works out to -32.34% annualised.

OneMarket (ASX:OMN)

I have written quite a bit about OneMarket in previous blogs, most recently in September. While I managed to eke out a small gain on OMN overall, I made a number of mistakes along the way. Initially, I underestimated the downside risk of OMN. Secondly, I underestimated the company's cash burn. Third, I made a number of errors in terms of portfolio sizing. I can only hope I learn from my mistakes.

Vical/Brickell (NASDAQ:BBL)

Perhaps the most regrettable mistake of the year concerns Vical/Brickell. I detailed the situation and my mistakes in my blog in August. I lost 30% on my investment in about 230 days, for a roughly 50% annualised loss. One small consolation is that I could have lost a lot more. At the time I sold my Brickell shares, they were trading at $4.34; today, they're trading at $1.52.

Canadian net-nets

I bought two Canadian net-nets early last year, knowing full well the management of the two companies were sketchy. As I have mentioned previously, when investing in the net-nets, I try to focus on quantitative data — like NCAV/Price — rather than qualitative data like business or management quality. Using a basket approach, this is a good way to invest in these types of stocks because often the ugliest ones provide the highest gains. Nevertheless, I should have updated my thesis to fit with new information, such as when management issued shares at prices below NCAV. I'm still not entirely sure the best approach to handle these situations, and had these stocks gone up in price, I might be celebrating them as wins instead. I currently still hold these two stocks, which may be another mistake. Overall, my portfolio of net-nets worked out well in 2019. My Interactive Brokers account where I hold the net-nets and a few other stocks was up 40% over the year. Lately, I have been finding it harder to find net-nets for the portfolio using my criteria, which again might have something to do with the bull market.

I hope you had a profitable 2019, hopefully with fewer mistakes than me.

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.