Given that the first half of the year is behind us, Heartland Boy thinks it is apt to do a half-time health check on his stock investment portfolio. Previously, Heartland Boy had not accounted for spare cash lying around in his portfolio that had not been utilised. This was a mistake that he had made in computing his stock portfolio returns. Therefore, he has amended the mistakes and updated his past investment performances. The financial metric that is used to evaluate previous performances (Year 2014, 2015 and 2016) is Internal Rate of Return (IRR). For his mid year 2017 stock investment review, the financial metric used to measure portfolio performance is XIRR instead. Here are the investment returns that Heartland Boy has chalked up since he started his investment journey in 2014.
Mid Year 2017 Stock Investment Review
The STI is a benchmark that Heartland Boy uses to evaluate his stock investment portfolio. STI was one of the top performers in the region for 1H2017. Thankfully, Heartland Boy’s portfolio was able to match up to STI’s sizzling performance. For mid year 2017, STI’s XIRR is 31.1% while Heartland Boy’s portfolio registered 33.6%. On first glance, Heartland Boy’s active stock selection strategy is still working out well. It certainly justifies the nights that he spends on analyzing equity counters.
While these are indeed headline grabbing numbers, the danger of using XIRR is that it assumes that the exact performance can be replicated in the second half of the year. That is a tall order to ask for both STI and Heartland Boy considering that the general market had already ran ahead of its fair value. Regardless, it is important to review what went right and wrong at the mid-year stage. Let’s examine in detail how a 33% XIRR was achieved by Heartland Boy for his stock investment portfolio for the first half of 2017.
Detailed Review Of Heartland Boy’s Stock Portfolio
Here is the summary of transactions that Heartland Boy did from January to June 2017. Specifically, he bought 3 stocks and sold 3 stocks. That works out to an average of 1 transaction in a month. This helps to keep the brokerage costs low. Note that the table does not capture the dividends paid out by the stocks.
Reasons For Buying
The reasons for buying Viva and ISOTeam had already been documented earlier in his initiation reports. More interestingly, Heartland Boy re-purchased Dutech after selling it in November 2016. The reasons for investing in Dutech again are:
- Gross margins for high security segment should be similar when compared to 2Q2016. That is because steel price, which is a large component of cost, are largely similar across the 2 periods in comparison.
- Increases in inventories and advances to suppliers in 1Q2017 may suggest revenue growth for the rest of the year.
- Management’s excellent track record in restructuring unprofitable companies suggests that shareholders should remain confident of a turnaround for Metric.
Reasons For Selling
DPU for RHT has been declining for several quarters due to India’s demontisation policy and a reduction in DPU payout. When Heartland Boy met the CEO of RHT at the 2017 REITS Symposium, the CEO confirmed that the demonization policy has delayed discretionary spending. Unfortunately, Heartland Boy was wrong as the share price increased after he sold. Nevertheless, Heartland Boy thinks that the valuation is too rich and the market seems happy to be paying too much premium to participate in a healthcare play.
Heartland Boy has only held Duty Free for less than a full quarter before he decided to sell it for a small profit. The holding period was so short that Heartland Boy did not even have time to produce an initiation report. Operationally, the business suffered for 2 consecutive quarters. This was due to the double whammy of heavy flooding at Kelantan and a temporary ban of alcohol sales as a result of the death of the Thai King. Furthermore, the price which Heartland Boy sold at offered little or no margin of safety. It turned out to be a right decision.
2017 Mid-Year Review Reflections
While tracking his stock portfolio, Heartland Boy realized from his analysis that he had made money in every single purchase of a REIT/Business Trust. This is slowly growing to be his circle of competence and Heartland Boy will probably spend more time in this area. After all, investing within your circle of competence is something which Warren Buffett strongly recommends.
Furthermore, he probably has to find another dividend stock now that Croesus is a subject of a takeover by Blackstone. That is definitely an ongoing assignment. Fortunately, a select group of stocks have already entered Heartland Boy’s shopping list after passing the simple FA criteria examination.
Shopping List for 2017
For readers who are keen to know, several new counters have entered Heartland Boy’s shopping list. Once their entry prices have been triggered, Heartland Boy shall purchase them assuming that their respective micro-environments remain the same and that the technical analysis is positive.
Interestingly, Sunningdale has re-entered the shopping list. Selling Sunningdale for a ~20+% gain at $1.10 back in 2016 proved to be one of Heartland Boy’s worst investment decisions. Well, there is no point crying over spilt milk. But surely, he does not want to make the same mistake twice.
Looks like you are also on annual book keeping practise to measure annual performance/xirr.
XIRR is best for measuring investment performance. If I starts including cash, or SSB like i do, it clouded the equity results due to portfolio nature. Is still good to know but maybe have separate results for it.
1. Pure Equity XIRR
2. include cash/SSB etc
Yes, likely hard maintain the XIRR performance till year end so we would expect XIRR to go down. One way I did is to have 2 sets for results.
1. XIRR with book closure today
2. XIRR with 29th Dec’17 book closure
This will give a good gauge where I am fir my P/L continues same.
Well done so far. You beats STI despite strong Banks showing into STI Index.
Thanks for dropping by. I agree it is important to track my annual performance since I have pursued an active stock selection strategy. If not, my time is better spent elsewhere.
Thanks for your feedback on the formula as well. I added cash as I imagine that if someone is to part away with $10,000 to an investment manager, he or she would expect the returns based on $10,000. If the investment manager only choose to use $2,000 and leave the $8,000 idle for the entire year, there must still be accountability to the remaining $8,000. Therefore, I decided to include idle cash in my portfolio calculation this time round.
I must say that I am helped by the privatisation of Croesus!
Li Hong says
HI Alison, Thanks for your sharing!
The part about whether to consider cash or not in record-keeping was also something I have thought about…I don’t think it is a “mistake” at all to not consider the cash portion in your performance, as long as you are not misleading yourself.
There are 2 issues which I considered:
1) How much spare cash is considered as “cash for investment” and “cash for rainy day” will affect the XIRR. Obviously cash for rainy day should not be considered, but how much to assume is quite subjective. eg, i can assume the 70k in my ocbc account as the “cash for rainy day”, or i can assume 36k (based on 2 person surviving 1 year comfortably). Will i take part of the 70k to invest? not likely, but if the market goes super undervalued, sure!
2) Including cash portion may subconciously lead you to trade more even when the whole market may be above its fair value. However, i think that the main advantage of a retail investor like u and me, is the ability to hold cash, and it is this ability to hold cash that enables us retail investors to reap the rewards. Warren Buffet’s analogy using baseball is that we can wait until the perfect ball, swing once and hit the home run, while fund managers needs to keep swinging all the time. Hence, it may be not so meaningful to compare performance over a 1 year period. You will only have a meaningful performance comparison over the longer term (5 – 10 years).
In the end, my own conclusion is that it doesn’t really matter, after trying out a few methods, I reverted to just using a simple (unrealised + realised profit earned for the year / approx capital for investing) to track – as long as we conciously review your own mistakes, constantly learn and be objective about our own decision, i think that is the most important!
Hi Li Hong,
I agree that learning from our mistakes are the most important. You are very well read, I definitely have much to learn from you!
Li Hong says
Lets learn from each other! Talk to you when you are back!
Thanks for the wonderful list.
Do you have anything to say regarding cryptocurrency?
Which one can be a good buy for 2017.
Thanks. Unfortunately, I know absolutely nothing about crpytocurrency. Since I am risk-averse by nature, I will not put money into something which I do not understand. 😀