Nintendo reported, in my view, excellent results for the Fiscal Year (FY) 2021 and it is a real pleasure to be a business owner (and customer) in this fantastic business.
My core investment thesis for Nintendo remains the same: Nintendo Switch is a sustainable gaming platform because it is anchored by Nintendo’s world-class games and supported by a mix of long life-cycle games and new games by both Nintendo and third-party game developers. Nintendo Switch is in a positive feedback loop now where its large install base is attracting more third-party game developers which in turn attract more Switch buyers. If my assumption that the Switch gaming platform would defy the previous console lifecycle of peaking in year 5 and ending in year 7, then I assess Nintendo’s intrinsic value with the following factors: 1) Switch install base, 2) software revenue per install base, and 3) gamer engagement with Switch platform. Continue reading
Investment Action: Sold all Avanza shares @ SEK 304 which is roughly a 3% position now
Despite a set of very strong Q1 2021 results, I am going to sell Avanza shares and very unfortunately no longer be part of Avanza’s growth journey from here. I sold a large chunk of the Avanza investment in Oct 2020 at around SEK 185 and clearly my ability to time the market is terrible because Avanza shares trade around SEK 300.
The main reason for selling is the same as before: Avanza’s earning is cyclically high due to higher than usual trading activity from its customers (mostly retail customers). Continue reading
CD Projekt released a strategy update on its website on 30th Mar 2021.
In this strategy update, CD Projekt confirmed that its flywheel strategy to build game franchises – anchored in rich single-player AAA games and then create incremental game content and expansion into broader entertainment format. Continue reading
What a year! Despite being stuck at home for most of 2020, it has been a very eventful year.
The portfolio delivered a net return of 15.6% in 2020 while FTSE Global All Cap index’s return is 16.8% during the same period. Our portfolio’s cumulative return since 2016 is 100% while the above-mentioned index’s cumulative return is 81.9%. Cash is 32% of the portfolio.
I prefer to show the investment return net of imaginary fees because any aspiring investment manager should be able to generate excess return net of fees.
 Assuming a fee structure of 1) no management fee, and 2) a 20% performance fee above 5% threshold i.e. 18.3% – (18.3%-5%)*(20%) = 15.6%
Live Portfolio’s 2020 Investment Return
Live Portfolio Investment Positions as of 31 Dec 2020
The 5-year milestone
During Warren Buffett’s early years operating his investment partnerships, he encouraged his partners to evaluate his investment performance on a 5-year basis and “preferably with tests of relative results in both strong and weak markets”. And so at this 5-year mark, it is time to take stock and reflect.
I am very pleased to generate an annualised return 15.6% over the last five years which has a respectable 2.2% advantage relative to our performance yardstick, FTSE Global All Cap Index, with an annualised return of 12.7%.
Our high cash level, fluctuating around 20-40%, has been a significant drag on investment performance for the last 5 years. Due to a combination of high market valuation and the relatively limited scope of my circle of competence, I have not being able to find enough attractively priced new ideas. While there is nothing I can do about the high market valuation, I am steadily expanding my circle of competence which should ultimately translate into more investment ideas and lower cash level.
This investment return is generated against the backdrop of a generally rising stock market over the last five years. The portfolio did experience a violent but short bear market in March 2020 where we fared better against the general market’s 30% decline with 15+% decline. By and large, I do not believe that I have experienced a full market cycle of bull and bear market to pass Warren Buffett’s test of “relative results in both strong and weak markets”.
Our investment journey has, so far, been very pleasant as we have not suffered a loss in any year so far. But I would like to make a prediction – this investment operation is almost guaranteed to suffer a loss in at least one of out the next 10 years but I just don’t know when the losses would occur. As Charlies Munger said:
“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.”
While I would rather avoid any losses, especially the 50% decline ones, it is better to be mentally prepared for it. Unfortunately, I am confident that my prediction would come true. Better to accept it as a fact of life.
While we are on the topic of making predictions, I believe you are entitled to know my expectations for future investment return even if it is largely based on my simple estimates. You should note that my expectations are in fact more like aspirational goals and risk of disappointment is quite high.
Over the last 100 years, the annual return for US equities averages around ~7.5% while the Chinese equity market generated ~9% average annualised return for the last 20 years. So in the long run, we should expect equity returns to be in the range of 6-9%. For our chosen benchmark of FTSE Global All Cap, it generated 7.5% annualised return since its inception in 2002 which falls exactly in the range of 6-9%. Since the goal of this investment operation is to generate above average return, it is reasonable to expect 6-9% return as the lower end of our future return expectation.
While beating 6-9% might not seem like a very ambitious goal, vast majority (90+%) of fund managers are not able to beat the market consistently after accounting for management fees. This is true globally including US and China. Said in another way, only truly exceptional investors can generate better than average return in the long run. If you do not find an exceptional investor, you are better off with index investing.
But there are a few exceptional investors who has been able to outperform the market very consistently for a very long period of time. So it would be illuminating to evaluate their investment track record and use their track record to form the upper limit of our future investment returns.
Below are my best estimates of some of the world’s greatest investors returns based on publicly available information and I tried to use after-fees net return as much as possible.
World-class investors’ track record
These world-class investors generate long-term annualised return in the range of 15-30% and averaging around 20%. These are truly impressive performance as every one percentage point of outperformance when compounded over long period of time can lead to massive difference in cumulative return. For example, the difference in cumulative return between 10% and 9% annualised return over 10 years is 22.6%. Only world-class investors can sustain the advantage of 10-20 points above the long run equity returns of 6-9% for a long period of time.
In general, I believe it is fair to conclude that any investor who can compound at a rate of 20% net of fee for more than 10 years should be considered a highly competent one. Said in another way, any investor’s achievement of 80% return in any single year is clearly not representative of that investor’s long term performance. While 20% return may not sound like a lot, the power of compounding guarantees a very wonderful result over the long term. Just look at Warren Buffett, 99% of his wealth came only after his 50th birthday!
While I have every ambition to become the best investor that I can be, it is hubris to compare myself against the greatest of investors of all time. So I would consider myself doing a great job if I can achieve 15% annualised return net of all fees for the next 10 years. This is going to be no mean feat considering the current valuation is at alarmingly high levels.
Increased conviction in their Australia growth prospects where they literally don’t have any serious competition because a lot of the Australian retirement village operators are really property developers who are hesitant to take on age care operational risk in the scandal-prone Australia age care sector.
Ryman is hence very uniquely positioned to grow in a huge market for a long period of time. And Ryman charges 20% deferred management fee while competitors charge north of 30%.
How often do you find the lowest cost operator who is also the highest quality operator in a sector with VERY VERY long growth runways.
I am re-evaluating how much Dart Group (DTG) could be worth coming out of this crisis. In considering the reasonable price to buy DTG under the current conditions, one would evaluate the following factors – 1) chance of DTG survival (liquidity analysis); 2) loss incurred during this crisis, 3) competitive landscape, and finally 4) the normalised earning power coming out of this crisis.
1. Chance of survival
Based on GBP 1.5bn of cash and roughly GBP 800m of the annual fixed cost base, I estimate the following chances of survival. In theory, DTG can sustain itself for an entire year based on the current liquidity profile. However, there are a few catches. DTG customers pay upfront for their summer holiday. Typically Jan and Feb account for a bulk of the summer holiday bookings. If the current lockdown extends into the summer months, customers would want their refunds. This could severely impact the liquidity situation if it so happens. Many UK travel companies are issuing Refund Credit Notes (RCN) that is backed by the UK package holiday regulator, ABTA, to avert the liquidity crunch. In the case of travel company failure, consumers can buy another holiday using the RCN. ABTA’s backing ends on 31 July 2020 after which customer can demand cash repayment if they have not used the RCN to book another holiday. On the hotel side, DTG typically buys up some capacity to guarantee supply quality. DTG would have to balance the long term commercial relationship and the short term need for cash. Given the level of unprecedented fiscal and monetary policies that are announced, the government’s willingness to intervene is strong. While I would not count on that necessarily, it is a factor in considering the chance of survival.
Length of lockdown
Chance of survival
The main point here is that on balance DTG’s chance of survival is very high even in extreme scenarios.
2. The loss incurred during this crisis
The first step to estimating the possible range of loss sustained in this crisis is to estimate the revenue decline. I used Jet2’s monthly traffic in 2018 and 2019 to approximate the amount of volume decline and layer on price declines.The table below shows the weight of each month traffic as % of the full-year traffic. So if we assume a three-month lockdown, there would be zero revenue in Apr / May / Jun which meant a loss of ~30% of full-year traffic. The actual traffic loss is going to be greater than 30% because the process of demand recovery is going to take time. For simplicity sake, I will use 5% to account for the volume loss during the demand recovery process.
Length of lockdown
The assumption of the price decline of 20% might be too generous but it does not really matter. Because the point of this analysis here is to show that the revenue decline is close to 100% as long as the summer months are lost.
Assuming 3-6 month of lockdown and a fixed annual cost base of GBP 800m, the loss incurred is likely in the range of GBP 400-800m.
3. Competitive landscape
On the supply side, the materially higher debt level will limit growth capex in the next 2-3 years. This would provide a favourable backdrop to medium term (2-3 years) ticket price recovery. However, it also provides an opportunity for new entrants with a clean balance sheet to compete against the incumbents as they don’t have to carry the cost of debt. On the other side, many smaller competitors will probably go out of business and free up more demand.It is not clear what this means for Easyjet’s venture into the package holiday. Maybe they are less committed to a large marketing budget to support the new business. Or maybe it doesn’t cost that much to push the packaged holiday business.For Tui, I think DTG is likely to come out of this in a stronger position relative to Tui as DTG’s balance sheet is stronger and a lot less asset-heavy versus Tui. Tui’s offline distribution network is going to be massive cost drag while DTG relies on more nimble independent travel agents.Generally, I do expect DTG to come out stronger relative to its core competitors.
4. Normalised earning power
Assuming that by 2024, the traffic volume is back to 11m per pax vs 14m in 2019. And assuming a pre-coronavirus ticket yield of GBP 82 and average holiday price of GBP 680, DTG’s leisure revenue looks like GBP 2.4bn. Putting an 8% EBITDA margin on the top, DTG would be making GBP 200+m. The normalised earning power is probably ~ GBP 150m. With a 10x multiple, DTG is worth ~ GBP 1bn. There would probably be another GBP 100-200m of net debt. That leaves the equity value around GBP 800m.So given the risk-reward and the opportunity cost, I would consider buying DTG shares around GBP 300-400m market capitalisation which gives me an IRR of 25%.
Avanza reported strong results and continued to grow its customer base which is up 17% year over year from 837k to 976k in 2019 (Avanza report its customer base in terms of the number of funded customers). A growing customer base is the single most important metric for long term value creation. It demonstrates that Avanza continues to be the most attractive retail investment platform in Sweden. Avanza’s customer base is ~10% of the Swedish population but only has 4.2% market share in the Swedish savings market. Avanza announced the ambition to increase savings market share to 7% by 2025 which means a double of savings capital from SEK ~400bn to ~800bn. This should then translate into a doubling of revenue.
Stock brokerage is high switching cost business, especially for retail investors. The high switching cost works both ways – it protects Avanza existing customer base from poaching by other online stock brokers but also deters Avanza’s attack on incumbent financial institutions. Avanza is winning market share because it is the lowest cost broker in Sweden AND provides a user-friendly investment platform.
Revenue grew 14% which was mainly driven by net interest income growth. Net profit grew 28% due to lower operating cost growth of 6%. Riksbank decided to go against their peers and raise repo rates in Sweden. The repo rate in Sweden is now at 0%. This has helped to increase net interest income by 70%.
The new CEO, Rikard, is very ambitious and continues to build on the customer-focused culture that has driven Avanza’s success in the past.
My view on Avanza remains the same: the best value-for-money investment platform in Sweden that has a very user-friendly online platform. It has an incredible mind share with young professionals, and as they progress in their careers, their savings on Avanza will grow too. There are two main optionalities with Avanza:
1) interest rate sensitivity where every 1% increase in interest rate will lead to incremental interest income of SEK 300m (2019 net profit is SEK 447m). I don’t count on it for the investment case to work but I consider a very valuable;
2) Avanza might grow into an online bank and offer more services to its existing customers hence increase product per customer and then revenue per customers
Trading at 36x P/E, Avanza is not cheap. But the strong growth visibility and the long growth runway means that I can be patient. Since my initial purchase in 2017, the stock is up 55% and generated 14.5% annualised return albeit with huge volatility. Over a longer time period, I believe Avanza is a 10-15% annualised return investment with very limited downside risk. Maintain current position and will add if Mr Market presents attractive opportunities to do so.
Sold all Bitatuo shares and swapped into Yixin group shares. Believe that given the probability of success is the same for two stocks, Yixin clearly offers better risk-reward. Yixin has around 10-20% upside while also offering 15% upside. Bitauto, at current prices, has less than 3% upside but more than 30% of downside.
I am not sure if there is much benefit to broadcast my portfolio online. But it certainly sounds FUN! I was born in a small village with a very auspicious sounding name which loosely translates to mean a hundred victories. I really love that name and in honour of the village, I am calling my portfolio – Invictus. I hope it also brings me many victories in the years ahead.
I have included here is a breakdown of my portfolio as of 31 Dec 2019 and Invictus’s performance since inception in 2016.
Invictus Gross Return is the return after trading cost, admin fees and so on…
Invictus Net Return is the return after I applied an artificial fee structure of 0% fixed charge + 20% of the profit above 5% return. Unfortunately, nobody is paying me any fees now but I am determined to change this!
While I could not care less about what the index does in any month, quarter, and year, it is the best yardstick to measure performance over the long term
Here is how I will update my portfolio on this blog:
Every investment action will be updated here with at most 2-3 days of delay
I will try to explain all of my investment decisions as much as possible but no promises here
Every 6 months, I will provide a comprehensive portfolio update with performance and detail portfolio breakdown as seen above
Every 6 months, I will write a letter to explain my thinkings in more detail
Please feel free to share any feedback/comments with me! Even better if you share an investment idea with me!
Disclaimer: All information and material presented here are based on a virtual portfolio where there might or might not be actual trading activities behind it. The information contained herein is not intended to be a source of investment advice, credit analysis and trading recommendation. The sole purpose of this document is to document general investment thoughts and reflections on different businesses.