Tuesday, October 04, 2011

Confessional - I got it very wrong

Over the last few months, I've had the distinct displeasure of watching the value of my investments take a very significant reduction in value. Not only did I not sell anything when prices were much higher, I kept convincing myself that shares were, if not cheap, at least good value in the context of a market that was trading at below its long term averages (in terms of PB, PE etc). In rather blunt terms, I got it very very wrong.

I spent a significant amount of time over the weekend crunching numbers and working out where I stand in terms of my possible retirement in early 2012. While the numbers still make sense on paper, the margin of safety has largely evaporated and, subject to finding a job when I go off contract, I will likely continue working until that margin of safety is restored.

I have also considered where we will be if I find myself dealing with an extended period of unemployment. Some back-of-the-envelope calculations suggest that I would have enough cash on hand in Q1 next year to cover about 42 months of living expenses (including mortgage payments) if I don't pay off the home mortgage or 14 months of living expenses if I do pay off the home mortgage in full. (These numbers assume no new investments made and no existing investments sold.) Given the number of variables involved, I need to put together a spreadsheet to get a more accurate picture but it is unlikely that I will have any kind of near term cash shortage.

Lastly, I have to consider whether I should keep buying shares, take the losses on some of the existing portfolio or just do nothing and let the cash build up. I have not reached any conclusions on this issue.

2 comments:

Tim said...

I have been following you some time now - and am sharing (pardon the pun) your pain.

In the interests of raising your spirits, let me remind you of your own words which are that you are investing for the long term.

Now unless I've misread your strategy, you actually positioned things such that your portfolio can generate cash without capital attrition.

So ultimately the current capital value of your portfolio is less of an issue than its potential for cash generation (when you stop earning).

Theorists would argue a lower stock price means the general expectation is lower dividends into the future - but the problem with this is that current volatility obscures the fundamentals.

Whilst there are clearly some ugly problems coming our way (c.f. alsosprachanalyst), at least we are still growing and are expected to continue growing - the argument just seems to be whether growth will be 4% or 12%!

As such, in the long term, dividends should continue to grow and therefore cash should continue to come in.

I guess what I'm trying to say is "hang in there" and stick to your original thoughts ...

traineeinvestor said...

Hi Tim

Thanks for the detailed comment and your encouragement.

So long as the dividends keep coming in, you are right in saying that capital values are less relevant to my retirement plans. Also, I'm still a net accumulator of assets (until at least Q1 2012) so lower prices are better for me.

The two major concerns I have are:

1. not all of the stocks in the portfolio were purchased because they offered a good yield. Instead some were purchased with the expectation (hope?) of capital gains which would, in due course, need to be realised. It will be a very long wait before that happens. Based on previous experience, some of them may never get back to previous highs;

2. while the dividends from the protfolio have risen this year (more companies increasing than cutting), there is a very real prospect that some of them will actually reduce their dividends going forward (or not increase them to expected levels). In particular, the toll roads and resource companies (Anhui, CNOOC etc) are suffering from government intervention or increased taxes (possibly offset by growing volumes) and the manufactuing companies are suffering from the downturn in export markets and/or inceasing domestic competition and rising costs (Perennial, Allen, Xtep etc).

Three things which give me a measure of comfort are (i) that the portfolio is well diversifed (ii) during the downturn of the last 3-4 months there were very few company specific reasons for the prices of the individual shares to decline (and most of those were, IMHO, gross overreactions (e.g. CNOOC in response to the Bohai Bay oil spill and Yanzhou Coal in response to investing in Potash) and (iii) most of the companies I invest in have strong balance sheets.

That said, while I will pay more attention to the security of the dividend stream going forward than I have in the past, my strategy of living off a combination of dividends and rents hasn't changed. It's only the timing that will be affected.

Once again, thanks for your comments.

Cheers
traineeinvestor