Saturday, May 2, 2015

Fundamental analysis of the Greedy Dragon portfolio

Hey, I hope you guys are ready to tear shit up because it’s portfolio analysis time! To be a badass mofo in investing, I think it’s important to think of your portfolio as a holding company and your positions as businesses. That’s why you should know if your holding company/portfolio has a big enough war chest and healthy cash flow to pursue opportunities when they arise. Having an idea of the industries and countries where the businesses in your portfolio earn their profits is also important.   

Update on the Greedy Dragon Portfolio: I recently sold my entire position in Biostime. I also increased my stake in Northern Oil & Gas and Natural Resource Partners. Please do your own research before investing in anything.

Let’s start analyzing the fundamentals of the Greedy Dragon portfolio by looking at concentration risk. The following tables illustrate the exposures of the portfolio:

Natural resources (specifically fossil fuels)
Real estate

United States
Latin America

While my portfolio’s exposure to natural resources may seem high, I’m actually alright staying around this level or maybe even increasing my exposure to the sector by a little more. However, natural resource stocks have to drop drastically from here before I will consider allocating more than 50% of the portfolio to the sector. I know I’m taking a big risk here. In fact, I think that most people should not have a portfolio with so much exposure to one sector. But I’m confident in my ability and I’m prepared to take the losses if the “shit hits the fan” or the “condom breaks” or whatever metaphor for being fucked that you care to use happens. I will attempt to reduce my exposure to the natural resource sector when it recovers and move into other stuff like consumer goods or industrials to reduce the portfolio’s concentration risk. Assuming that no sector is significantly undervalued, I would rather not have more than 30% of my portfolio exposed to any one sector.

In terms of geographic concentration, I think the portfolio is less risky than it looks. Yes, 56.38% of my portfolio consists of companies that operate in the United States. However, I don’t think my portfolio’s foreign exchange risk is high as a large portion of my U.S. investments are natural resource companies that tend to be more profitable when the dollar declines. Because commodities are priced in dollars, they tend to go up when the value of the dollar weakens. Despite the damage done by all the leftist and socialist bullshit, U.S.’s country risk is low as it still respects property rights and is one of the most politically stable countries in the world. America: Fuck Yeah!

I really would like to get more exposure to Europe and Asia if I can find good companies there at attractive prices. Although it may look like the portfolio has decent exposure to Asia, about half of the portfolio’s Asian assets are cash. One of the long-term goals of the portfolio is to generate a significant amount of profits (whether its paid out as dividends or reinvested for shareholders’ benefit) from each of the following regions: Asia, North America, Europe and Latin America. This would mitigate the impact a devastating event in one of the regions would have on the portfolio. I also think that there’s a lot of growth potential in Asia and Latin America over the long-term, and I want to profit from that growth by investing in companies with a presence there.

Cash made up 11.5% of my portfolio. I used up a significant amount of cash recently to invest in natural resource stocks. While my cash position isn’t too bad, I want to increase it to at least 20% of the portfolio or I just won’t feel comfortable. However, that could be a challenge as I might want to buy more stocks for the portfolio. I guess that I could exit/trim some of my positions to increase my cash buffer and make new investments. But that’s a short-term fix. My long-term goal is to increase the dividends generated by the portfolio so that I don’t find myself in the position of having to sell good stocks in order to buy other good stocks so often. Being in that position results in you paying a fuck load of fees to your broker, which is not optimal. It’s also not fun selling a stock only to see it go up 100% in less than a year. Especially if you wouldn’t have sold it if you had enough cash on hand or could build up enough cash from your income streams. Every time I look up Monster Beverage’s stock price, I feel like bitch slapping myself for selling the stock the day before Coca-Cola took a stake in the company.

Disclaimer: I’m not recommending any of the stocks mentioned in this article.

After roughly taking into account taxes, the portfolio should have a dividend yield of about 1.79%, assuming no further dividend cuts (less if you include fees). This is indeed quite low and I aim to boost the portfolio’s dividend yield to around 4% over time by investing in quality dividend paying companies if the opportunities present themselves. Another way that the cash generated by the portfolio could increase is if my current positions initiated or increased their dividends. It’s important for the income from your portfolio to 1) grow at a faster rate than inflation over the long-term and 2) have some resiliency during tough times. A good source of income is asset light companies with pricing power like a Hershey or a Nestle or some other badass company. These companies are able to maintain healthy dividends as they don’t have to keep plowing back a large portion of their profits in capital expenditures. As these companies are able to raise prices, they are more likely to maintain if not increase their dividends in real terms over time. If you don’t get hard/wet at the thought of cash streams that can keep up with inflation (and possibly grow even faster than inflation), then value investing is probably not your thing. There’s no reason to limit your passive income sources to stocks. Bonds, real estate or private businesses could also be good cash generators, assuming that you understand those asset classes.            

Note: When calculating my portfolio’s after tax dividend yield, I exclude income from positions where all I can buy with the dividend payments are happy meals. This is a result of the stock having a low dividend payout, me owning too few shares and high fees relative to the dividend charged by my brokerage firm.

Well, it looks like we’ve come to the end of this analysis. It certainly was longer than I expected. Anyway, I hope you guys found some useful stuff in this article. Thank you for reading. Take care and stay rational.

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