Three main types of assets to manage: Part 2 of 3

Three main types of assets to manage: Part 2 of 3

The second of three asset types you need to manage are liquid assets that are part of your personal balance sheet. As mentioned in the first part of this series, the main point of the series is that each asset has a net present value, and that the balance between them shifts throughout life as you use one type of asset to gain another. Long term success depends on an understanding of the three asset types and how to balance them.

What are liquid assets anyway?

Liquid asset are those asset that you can easily convert from one form to another. Cash, stocks with high trading volumes, exchange traded funds, and bonds etc. As a rule of thumb, if it takes less than a day or two to convert the asset from one type to another, it is a liquid asset.

I will not go in depth into each type of liquid asset, but in sum:

• Stocks are very volatile and their price more often reflects underlying market sentiment than their "real" value (by that I mean their ability to generate and return capital to shareholders over the company's lifetime).
• Bonds are risky in low interest rate environments and are generally not a good protection against inflation. Besides, your salary is your fixed income. Only buy bonds if you are in need of a mental cushioning.
• Cash is shit. Absolutely useless to hold. Get it working for you as soon as possible (either through rent generation or experience generation (aka having fun)).

How should you invest in liquid assets?

I am a big fan of ETFs and low cost funds for one simple reason: to generate an alpha has an alternative cost. It costs both time and money to do research on stocks and trying to find market beating performers. Let us ignore the fact that most professional investors fail to beat the market over time and that most average investors fail to generate a positive alpha. 

Back to the alternative cost ... say that you start with a portfolio of KSEK 100 (which is the median net worth of a 35 year old Avanza customer). Assume that you generate a Peter Lynch level alpha of 15% (compared with SP500 dividends reinvested), which you won't. Let us compare this with boosting your annual income with KSEK 50 and 100 respectively (numbers are inflation adjusted).

Using the 1977-1990 numbers, it would have taken you 13 years of Lynch performance (i.e., his entire investment career at Fidelity) to beat a strategy where you simply worked for KSEK 50 more annually and invested that money into a simple index fund. I would argue that it is a lot easier to earn KSEK 50 more annually than it is to be Peter Lynch. 

Another way to phrase the above, is to say that you would need a portfolio size of KSEK 423 before you should consider attempting Peter Lynch level returns (at that level you are growing your portfolio with KSEK 97) over simply trying to earn an extra KSEK 50 over the SP500 return. At KSEK 100 extra annually, you should not attempt to be Peter Lynch until you have at least KSEK 1'187 in your investment portfolio. And if we consider that the median 50 year old Swede at Avanza had KSEK 173 in their stock accounts, you are not very likely to ever have stock holdings at a size that would justify you attempting to become one of the greatest market investors of all time.

The idea to work extra and move that income into stocks is effectively equivalent with you transferring your human capital into liquid assets.

Next time, I will explain what the third asset type is and why I prefer to invest in it.

Månadsrapport juli och utveckling sedan start

Sedan start

Vi börjar med en tillbakablick.

Start: 2017-03-27
AvanzaKF: +28.82%
NordnetKF: +51%
NordnetISK: +38.07%

Jag är nöjd givet bolagen jag har valt att investera i (bolag med riktigt tråkiga produkter).

Juni månads utdelningar

CNI  23
BPY 1049
BEP 744
BIP 436
O    85
VGWL 6
VFEM 469
SPHD 143
HEMF 180
SUM 3135

Affärer

SCA   175
SGINV 22
SELV 20
Kind -138
JNJ   4
Entra 65
Elkem 35
Bets  470
BNS 6
AOS   9
NDA -470
VZLD  20
SHB 50

Som planerat köptes en del norska innehav in. Följer upp och ökar allt eftersom. Den stora affären vad BETS och skiftet från KIND till BETS precis innan KIND tappade 20+%. BETS är en risk, men den får bli kryddan. God utdelning som väl täcks av kassaflödet och den starkaste spelaren i en krisande bransch. Givet blankningen lägger jag ingen stop loss på den. Ett säljbeslut får motiveras av ändrade fundamenta.

Nordea såldes ut efter en usel rapport. Byte till SHB. Avvaktar en del i bank nu och inväntar lägre priser.

Köpte även in realtillgångar via SCA, Entra och VZLD.

Givet inköpen sänks årsutdelningen med 912 SEK främst via försäljningen av Nordea. Får kompensera för detta på annat håll :).

Plan

Ingen direkt. Kanadensiska banker börjar bli intressanta igen. Fast bank är en krisande industri nu och värre kommer det bli ifall långa räntan fortsätter ner. Banker + realtillgångar kan fungera bra. Norge fortfarande aktuellt.

Rent generation throughout economic cycles

Key takeaway 

When the stock market seems expensive and valuations are "crazy", your ability to earn an income is increased and you have more to spend on buying rent generating assets. When the stock market is cheap and valuations are attractive, your ability to earn money is reduced but the rent generating assets you buy are worth so much more.

On stock market valuations and income

Valuations are rather lofty today using most indicators. Normally, such an "overpriced" market leads people to question wether or not they should hold off any equity investments and put their capital somewhere safer (where ever that is).

The above is, in my view, a limited perspective. You should not blindly fixate on your stock portfolio's potential returns/decline but instead look at the possibilities that are available to you as a whole. Let us look at two scenarios:

1. Market valuations are high, inflation is low, interest rates are abyssal and there are few options for rent generation outside of already highly valued stock markets, which continuously attract more and more risky capital from investors chasing a yield.
2. Market valuations are low, rates are at zero and there is massive QE being started to prop up the economy. Wide spread pessimism and unemployment rates are sky high.

Both scenarios present both challenges and opportunities. Both have happened in the past. Both will happen in the future. So, how do we navigate these two scenarios? In Scenario 1 you should not expect stellar long term stock returns. In fact, with a Shiller PE of 30.5 and a 1-year PE of 22.25 we should expect a long term yield that is far below the average 7.35% that the SP500 has returned in the past. In fact, yields are at a record low of 4.49% and dividends are at 1.88% (note that it is important to take into account the risk free rate, today's numbers are not particularly bad compared to historical numbers, but the yield is nevertheless low). 

Does these low yields mean that we should expect lower total returns going forward? The simple answer is no. First of all, noone has any idea of what the future will bring. There is good reason to believe that several productivity enhancing technologies will be introduced within the next decade as companies are exploring the data economy and revolutions in energy technology are made on a seemingly yearly basis. But let's stay pessimistic and assume that the yield will stay that low. Here it is important to remember that equity returns is just one source of wealth accumulation. During a Scenario 1 period, it is far easier to supplement income, e.g., run a low risk business such as consulting. Capital is abundant and companies seem to have an endless smorgasbord of new technologies to invest in; the appetite for investments into potential future business areas is at an all time high. 

Let's run the math. I'd argue that it is rather trivial for any profession with a desired knowledge base (e.g., engineer/programmer) to boost their income through a side job or by starting their own company. I argue also that one can easily bill KEUR 10 annually in a Scenario 1 climate (for comparison, that is about 10 days work with going rates in major European cities). Now, the corporate taxes hover around 10-25% in the EU, so we will use a 20% rate. That leaves you with KEUR 8 to invest into stocks through your company. With an average yield of 7.35%, KEUR 8 is equivalent to having a portfolio worth KEUR 109. So, in a Scenario 1 economy, you can boost your income with the equivalent of having a portfolio of KEUR 109 in an average economy. 

Let us do another comparison so that we can see how powerful this effect is. Assume you have a portfolio of KEUR 500 in an average rate environment. That would grow your assets by EUR 36'750 annually. In today's environment, KEUR 500 only boosts assets by KEUR 22'450. The difference of EUR 14'300 corresponds to about two weeks of consulting work. And keep in mind that consulting work is easy to come by in a Scenario 1 environment! For the ambitious, a Scenario 1 environment represents an opportunity to really boost incomes and accelerate long term growth; an opportunity that especially favors those who are young and without a big portfolio to begin with (and lose during a crash).

The second scenario is a bit different. Consultancy work will be scarce. This is where a stable job matters. Elsewhere, I have argued that having a stable job during the latter parts of an economic expansion is one of the wisest investment decisions you can make. As stocks come crashing down, you buy yield at a very cheap price, setting yourself up for long term performance and asset growth.

Do not focus so blindly on the current rates and valuations, you cannot time the market and these fluctuations are out of your control anyway. Focus instead on what you can do given the current economic environment you are in. Are valuations sky high and there are few available alternatives on the market? Great! Focus on consulting and figure out how you can leverage your skills to boost your income. There is no way you can time the market or tell what the future brings. Done right, you will be the busiest during the economic boom when everything is joyful and filled with hope, and you can relax when everyone else is panicking anyway ...

Månadsrapport Juni

Maj månads utdelningar

HDIV	14028
JNJ	179
WM	66.63
O	85.86
SPHD	143.53
Totalt	14503.02

Affärer

Datacenter REITs ignorerar jag nu. Lägger de på bevakningslista och inväntar kris i branschen. Istället började jag min granskning av Norska aktier då jag har planer på att flytta till Norge på sikt om läget i Sverige försämras. Det blev även ett byte från LFs globalfond till Avanzas. Följande köp och byten gjordes:

S. Globalfond Investmentbolag	10
BETS	45
Elkem	25
Entra	5
Selvaag Bolig	10
AUSS	20
Avanza Global	754
LF Global Ind.	(343)
AOS	9
KIND	8
SPG	1
HDIV	520
SHB	100
NDA	50

Med detta ökar årsutdelningarna med ungefär SEK 4400.

Plan nästa månad

Norge :).

Stock picking and screening of Norwegian stocks

Pick strong performers in sectors experiencing (cyclical) weakness

Today, I saw a piece of advice that keeps popping up from time to time: in sectors experiencing cyclical weakness, buy the firms who are the best performers in that sector. An interesting thought that reminds me of some observations I made during 2008; all the major banks crashed in Sweden but those not affected by the crisis quickly recovered. Here is a comparison between 070101 and 100101:

This makes a lot of sense and is fairly easy to incorporate into a strategy. Anyway, back to Norwegian stocks :). The thesis for Norway is simple: I wish to decrease my exposure to SEK + Norway is a country I can imagine moving to = Exposure to NOK through stocks is warranted.

Therefore, I will generate a list of stocks in Norway that are interesting to watch and do more research on. As always, I will focus on my investment criteria and only pick companies with a proven ability to churn out profits and dividends. I will also check if any sectors are experiencing weakness.

Norwegian dividend paying stocks (wip)

Company	Price	Div	Yield	Area
Elkem	23.8	2.6	10.9%	Metals and alloys
Ocean Yield	56.6	6.12	10.8%	Ship owner/charter
Selvaag Bolig	43.8	4.5	10.3%	Real estate developer
Sparebanken Ost	54.4	4.6	8.5%	Financial and real estate
Sandnes Sparebank	64	5.2	8.1%	Financial and real estate
Sparebank 1 BV	37.1	2.95	8.0%	Financial and real estate
Fjord1	35.5	2.7	7.6%	Public transport
Europris	25.9	1.85	7.1%	Discount variety retailer
Webstep	23.8	1.6	6.7%	IT services provider
Sparebank 1 Ostfold A.	222	14.6	6.6%	Financial and real estate
Salmar	356	23	6.5%	Seafood
Sparebanken Sor	94	6	6.4%	Financial and real estate
Sparebank 1 Nord-Norge	66.7	4	6.0%	Financial and real estate
Sparebank 1 SMN	94.8	5.1	5.4%	Financial and real estate
DNB	156	8.25	5.3%	Financial
Sparebank 1 Ringerike H.	204	10.6	5.2%	Financial and real estate
Fjordkraft	43	2.2	5.1%	Utility
Mowi	204	10.4	5.1%	Seafood
AF Gruppen	169	8.5	5.0%	Construction
Sparebanken More	320	15.5	4.8%	Financial and real estate
KID	41.6	2	4.8%	Home textile retail
Equinor	173	8.25	4.8%	Energy
B2Holding	9.57	0.45	4.7%	Debt purchasing
Sparebanken Telemark	117	5.5	4.7%	Financial and real estate
Telenor	188	8.4	4.5%	Telecom
Bouvet	297	13	4.4%	IT consultancy
Sparebank Vest	53.4	2.3	4.3%	Financial and real estate
Sparebanken SR-Bank	105	4.5	4.3%	Financial and real estate
Kitron	9.4	0.4	4.3%	Electronic equipment
Gjensidige Forsikring	173	7.1	4.1%	Insurance
Noksk Hydro	30.9	1.25	4.0%	Aluminium producer
Austevoll	88.7	3.5	3.9%	Seafood
Leröy Seafood	56.5	2	3.5%	Seafood
Grieg Seafood	117	4	3.4%	Seafood
Orkla	76.6	2.6	3.4%	Investment firm
Entra	135	4.5	3.3%	Gov real estate
Norway Royal Salmon	182	6	3.3%	Seafood
Data Respons	31.1	1	3.2%	Embedded solutions
Olav Thon	146	4.4	3.0%	Real estate developer
Infront	18.4	0.45	2.4%	Financial markets IT
Borregaard	94	2.25	2.4%	Biorefineries
Sbanken	73.2	1.75	2.4%	Financial and real estate
NTS	63	1.5	2.4%	Transport
Kongsberg Gruppen	117	2.5	2.1%	Maritime technology
AKVA	79.2	1.5	1.9%	Fishery equipment
Pareto Bank	37.5	0.7	1.9%	Financial and real estate
Bakkafrost	474	8.25	1.7%	Seafood
Medistim	134	2.25	1.7%	Medical devices
Tomra	291	4.5	1.5%	Recycling

Measuring your assets

From this moment on, I will ignore the percentage gains and losses for all my holdings. I will only focus on two metrics:

1. Yearly dividend change
2. Number of shares held.

The rationale behind this is simple: there is no point in measuring the market valuation of the assets held. Caring about the market valuation is important if once wishes to speculate on price movements; I do not. 

Our main goal with investing is to create a steady and ever growing base of rent generating assets. As such, the yearly dividend change is the metric to focus on. It is therefore more interesting to post the number of shares held and their rent generating capacity than is the valuation of the asset.

The only thing that becomes a bit more difficult with only using dividend and number of shares held is the rebalancing of the portfolio. The solution to this is 

1. While in cash position (as we are now with almost 50% of the holdings in cash), the investments are rebalanced by simply buying more of an undervalued stock/ETF.
2. Once cash position is reduced to around KSEK 100, the yearly rebalancing will take place using a net present value of future dividend payments.

The net present value of future dividend payments will result in a focus on dividend growth stocks for now, and more stable dividend payers later. To avoid a situation where everything goes into stable dividend stocks and hampers future growth, the portfolio will also take into account the amount needed to live comfortably (around KSEK 30 a month, which, today, is about MSEK 12). 

Månadsrapport Maj 2019

Maj månads utdelningar

AKEL	250
AOS	21.08
BETS	601
BNS	36.76
BURE	96
HEMF	180
INDU	632.5
INVE	1350
KIND	276.3
LATO	1612
LIFCO	46
O	86.86
SAGA	180
SPHD	140.62
Totalt	5509.12

(XACT HDIV delar ut i maj (SEK 11 304 totalt), men jag räknar det i nästkommande period då jag bryter månaden den 25:e pga. lön. Räknar vi hela maj blev utdelningen totalt SEK 16 849).

Affärer

Plan var även att kolla Data Center REITs (fortfarande ej skett). Gjorde större inköp med fruns konto för att minska exponeringen i SEK.

AOS	15
BETS	165
HEMF	300
INDU	5
KIND	130
LATO	100
LUND	50
Sampo	30
XACT HDIV	1000
Fonder
S Globalfond Invest	143
Robur Access Asien	38

Utdelningen ökar därmed med dryga SEK 9300 om allt håller sig lika.

Resultat

20190425 - 20190524

Mina konton
Avanza KF 97.17

Nordnet KF 96.18 (länk)

Nordnet ISK 97.13 (länk)

Fruns konton
Avanza KF 97.28
Nordnet KF 97.99
Nordnet ISK 96.61

Plan nästa månad

Data center REITs fortfarande intressant. Fortsätta bygga en bevakningslista över olika aktier med fokus på real assets. Finns en del blue-chips som nu tagit stryk av USA KINA --> utvärdera och köp in. Mindre slant i Nordea då nedgången känns överdriven (sista inköpet, sen blir det Sampo). Utdelningarna från HDIV bör rulla in, dessa ska investeras tillbaka in i HDIV.