Taking Stock

So tis’ that time of the year again. You know, the time of the year when we take stock (get it? Taking Stock? As in STOCKS? Nevermind) and make promises on resolutions we vow to not keep.

On a personal level getting over some not too ideal roadblocks this year has probably made me more resilient (but isn’t the goal to become Antifragile). On a train this year, a woman described to me her winning fight with cancer and how she in many ways feels stronger after the episode. She became Antifragile. One must allow for spontaneity in life to meet people like this.

On a philosophical level the idea of time wealth has become seared deep in me. I first came across this idea on the Tim Ferriss podcast with guest, Rolf Potts. So basically we all come into this world with an immense resource, time wealth. Some lives are unfortunately cut short but generally speaking you have considerable time wealth and you are free to do with it whatever you please but many of us end up getting on the hedonic treadmill and trade this time wealth for money wealth in order to obtain things we do not need. I’ve always known this but cannot say I actually embodied it. It is a continuous process but I am definitely better than I was on this front. Also do not worry, I understand the irony of writing this on a blog about making money wealth in the stock market.

Now to the blog & portfolio. Writing this blog has been fulfilling because it has enabled me to meet some very interesting people over the past few months. I thank some of them here. Another thing I’ve noticed is you only truly get to understand a stock after you’ve purchased it and live with it, both in your mind and your brokerage account. All else is smoke & mirrors.

Facebook has been the most contentious stock in my portfolio. After buying it I’ve been able to delve deeper into their business model. It looks like both the greatest business model ever created and a net negative to society.After speaking to a portfolio manager who has kids, unlike me, he said there is almost no price at which Facebook makes sense to him due to the some of the negative psychological effects, especially on children (time wasting, depressions, suicides due to online bullying, ad targeting that is too specific and coercive, etc). After watching former Facebook exec Chamath Palihapitiya speak at Stanford, this Guardian story, Bret Weinstein on Joe Rogan (very interesting the places you can build your investing mosaic) and the very weak rebuttal from Facebook here I officially pulled the sell button on my Facebook stock. Mind you, I still think the path to a 5 year double from these prices is still very possible but not all money is good money. There are times when businesses that are net negatives to society still do extremely well (eg. tobacco companies) but a question to ask is, is the value proposition to the user obvious? It’s easy to see how useful Google Search & Maps is to the user. For Facebook, it’s hard to see what use Facebook or Instagram has to the user although it is proving to be very useful to advertisers (who are users in some way). Now, Whatsapp is extremely useful but what happens when Facebook tries to monetize it? Also it’s no fun having to constantly debate your conscience. A more interesting question though is where should one draw the line on ethics? I had no issues doing well owning Alimentation Couche-Tard a few years ago but as a convenience store chain how much of their bottom line comes from cigarettes and lottery ticket traffic? Something to think about and maybe some hypocrisy on my end.

Also sold Cymbria, the story here is less due to an assault on my conscience (ok, maybe that is too excessive) like Facebook but more of an oversight, noticed after reassessing my thesis and sharing the idea with a portfolio manager. I am even more confident and positive about the unique culture at Edgepoint since I wrote the report but I think I made a mistake on 2 main issues, how much I think they earn and not knowing enough about the relationship between Edgepoint Wealth Management and Edgepoint Investment Group. On the latter point, Edgepoint Wealth pays a fee to Edgepoint Investment Group (owned by the 4 principals Krembil, Farmer, MacDonald, Bousada). Although I doubt any funny business is going on here I just do not have any way to discern how much of the value in Edgepoint Wealth is taken at this level before the rest gets to the bottomline. My revenue number in my Cymbria post for Edgepoint Wealth was $230M but after pulling up the financial statements from the four funds and adding up the fees I get a number closer to $100M. Some of the discrepancy could be explained by the reasoning that the Series I and O fund fees do not get charged right to the fund and that the average assets are higher than the time period of the funds’ financial statements (June 2016-June 2017). Ok, so to the $100M we know for sure if I add $10M (1% of approx $1B in Series I & O for fees) and another $10M for the higher average assets ($13.5B vs $12.5B), you get a revenue number closer to $120M. Using 40% net margins and a 20x multiple that would imply a value for Cymbria’s stake in Edgepoint (20.7%) to be worth approx $200M (not that different from the recently released revaluation of Edgepoint). Add this $200M to Q3 2017 net assets of $792M (ex Deloitte’s Edgepoint valuation) and 23.47M shares outstanding, you get a per share value of $42.26. Cymbria last traded at $52.50, a 24% premium to my new intrinsic value per share. I also got uncomfortable with owning part of an asset manager at whatever point in the cycle we find ourselves. Lesson here, I should always start with what is knowable (the fees in the funds’ financial statements, and then infer from there, not the other way around). Will keep monitoring this one since I think the operators are truly doing things the right way. Apologies if the explanation is a little convoluted, I am just assuming the older post has been read.

Entering 2018 I am long Fiat Chrysler (15%), Imvescor (15%), Google (10%), Urbana (10%), Redknee Solutions (10%), and 35% in cash. Fiat Chrysler and Redknee writeups still to come. These are not recommendations and I could sell out of my positions at any time if things change. To the very small audience that hails from a very wide range of countries (from here in Canada all the way to Indonesia), I thank you. Onwards to 2018 and growth of both ourselves and our portfolios.