The 15% rule

The rule I try to follow the most in investment is the 15% rule.

It means: try to find a stock with a growth rate approaching 15% per year (which is hard and very often expensive) and a ROE of 15%. 

The stock market offers new stocks every year and some rookie stocks seduce a lot of people. Some people say "things have changed, it's not like before, we now must value stocks in a different way!".

Well, some people said that in 1999-2000, just before the mega Internet bubble bursted. And probably that some people said that in 1929 too. But I don't remember exactly. It's too far for my memory to be accurate. 

My portfolio is based on that 15%  rule. I try to be rational but a bit agressive. Once again, it's just my method and it may not be the best in the world. But that method implies that I buy stocks that offer a good growth, but not a crazy growth that would bring too much competition or that would be very hard to manage. 

First and foremost, I understand what I do with that method. It should always be the first thing to consider: do you understand what you're doing with the savings of your life? 

The Darkest Hour

I just finish watching "The Darkest Hour" on Netflix. It's a movie based on the beginning of World War II and the struggle of Winston Churchill to remain at the reins of the government while some political opponents made pressure upon him to negociate with Mussolini for some kind of peace treaty. 

It's very good. Of course, there's some flaws in the movie, but, mostly, it's a great story about a great character. 

Do you realize how hard it may have been to see all of Europe fall to the hands of Nazi Germany and be the only free country on the entire continent (except from some small neutral countries)? Seeing how strong are the german armies and how easy it is for them to defeat everybody, including Poland, France and Russia... And seeing the Luftwaffe bombing London for many weeks. 

The movie ends with what is probably the greatest speech in the history of mankind: the famous speech where Churchill says that England will fight on the streets, on the fields, everywhere, and they will never surrender. That speech has been heard by millions of people and is even sampled in some songs like "Fool's Overture" by Supertramp.  

That's very inspiring to see Churchill in action. He may have been an alcoholic and, to some extent, a white supremacist (who would not have been in the 30's and 40's?) and an angry person, he saved Europe more than anybody else. To me, he's the ultimate symbol of resistance. 

I recommend you this movie. As I recommend "Greatest events of World War II in colour" which is also on Netflix and probably even better than "The Darkest Hour". 

The big thing with Berkshire and Barrick Gold

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Slow and steady

Here I am: 41 years old and at a point where I could leave my job for something else, drop my income by 50% and live relatively well (I couldn't travel as much as today and I couldn't have that much latitude, but I could be OK and my savings would be OK for the future). 

You probably know it: there's a lot of ways to invest on the market. There's also some different ways to get richer on the market. But there isn't that much ways to get rich in my opinion. Because the gambler way isn't viable on the long term and the cyclical way always hits a wall. 

I think that my way is a good way to get richer. In my humble opinion, buying 20-25 great companies that are a bit expensive but that have proven that they were very solid will help you to beat the market. You won't make 50% during a specific year, but if the market does 10%, you'll probably do 12-15%, if you picked well. 

Why playing with your money? You've worked hard for that money. You've made sacrifices for that money (you didn't buy a porsche... you saved your money and ate carrots). This isn't a casino or a poker game. 

What's the goal? Getting rich as soon as possible or getting richer slowly but surely? By slowly, I don't mean starting to invest at 18 and being rich at 80. I mean doing about 12-15% per year. 

When you aim too high, worries are not too far. You take more risks, you don't sleep well. You think too much about your investmens. 

To me, a portfolio is a partner. It will follow you all your life and you have the entire control on it, contrary to most of the things in your life. You don't even have the control on your health. You have even less control on people around you. 

And when life gets tougher with you, your portfolio is a comforting aspect of your life. And the future, on that aspect, looks bright. Even if you have 3 fucking months to live. Well... I don't know. 

I won't leave my job tomorrow. Actually, I plan to work at least until I'm 50 and keep my good income until then. But I may get another crazy boss one day or another and my plan might change. Who knows? One thing is sure, I won't work for 20 more years. The maximum I see is 55 years old. 

Anyone's got a philosophy different than that? You won't convince me to change mine, but you can share it in the comment section.  

Akre Capital + Giverny Capital latest transactions

A few years ago, I had the worst boss I've ever had in my life. I hated my job. The guy was mean. He acted like a cool guy in public, but we saw how mean he was when he started to intimidate a lot of people by various methods and even fired some people. 

Recently, I learned that he has cancer. It was such great news! It may sound cruel to be happy with that kind of news. But to me, it would have been much more cruel if people being intimidated or fired by him would have got cancer before him. I've felt like shit for months and one of my friends was basically destroyed by that boss. I also know some other people who slept badly while they were under the orders of that boss. So, that's good for him. 

I don't know exactly what kind of cancer he has but I wouldn't give a fuck if he had pancreas cancer. 

**************

OK, now that I've written another of these things that will keep me for many more years from being publicly praised by anybody with some notoriety, let's talk about the lastest transactions of two of the only firms that deserve respect: Akre Capital Management and Giverny Capital. 

First, for Akre, the two only "conviction" transactions made during the last quarter ended on june 30th were Costar Group (CSGP) where he added 117% to his position (the stake represents 5,11% of the portfolio) and Ansys (ANSS) where he added 30% (1,34% of the portfolio). 

Akre is usually not that active. I like that. To me, it means that  he stays focussed, which lacks to a lot of investors. 

That focus seems not to be as important for the guys at Giverny. They've been hyperactive during the last quarter. It looks like the bargains of the spring made them crazy like shit. 

They initiated a shitload of small positions. However, their conviction transactions were as follow: 

Alphabet: added 6% to GOOG and 38% to GOOGL (both representing 6,4% of the portfolio

Progressive (PGR) added 6% (4,81% of the portfolio):

Facebook (FB): added 24% (4,76% of the portfolio)

Heico (HEI): added 5% (4,11% of the portfolio)

Markel (MKL): added 7% (4,05% of the portfolio)

Charles Schwab: added 7% (3,21% of the portfolio)

Five Below: added 10% (3,07% of the portfolio)

Intercontinental Exchange (ICE) (which I wrote about not so long ago!): new position (2,34% of the portfolio)

They also sold entirely their long time stakes in Mohawk and Union Pacific. 

When I take a look at Giverny Capital's stakes, there's too much financials, in my opinion. But, except for that, they buy some of the same stocks as me. 

Well, maybe I copied their approach a bit.

Another approach (part II)

 These last years, I've spent a lot of time trying to balance my portfolio the best possible way. 

Some aggressive stocks here, some defensive stocks here, many stocks with a low debt level and a few stocks with a higher debt level but with good growth prospects. 

Almost all of these stocks were highly predictable. 

But then, I realized lately that I could be more aggressive than I was. 

Of course, Be Smart Rich is responsible. But there's also Pat Dorsey. 

So, I decided to rebalance a bit my portfolio. I trimmed some less performing names and I bought 4 very aggressive stocks. All of them are very very expensive, one of them is barely profitable but growing very quickly. These 4 stocks represent about 8% of my total portfolio. 

Here's my rational: if these 4 stocks had a performance over 100% during the last year, at least one of them should continue to do very well during the next year. So, if one of them is doing 100% during the last year and the three others do nothing (negative scenario... because I don't think that 3 of them could suddenly achieve a negative performance and only one positive), the average performance for these 4 stocks would be 25% (100% divided by 4). Of course, things are not that simple. You have to believe in these stocks, not just take a look at a chart and chose randomly the stocks that performed better. 

I would never do that with 50% of my portfolio. Very expensive stocks (stocks with a forward PE of 80 or 100... and sometimes even more) are very difficult to value. But I think that I mitigate the risk by chosing 4 of these stocks instead of only one and keeping the total percentage of these stocks lower to 10% of my total portfolio. That's what I'm writing to convince myself that I'm right, at least. 

That approach is contrary to everything I've written over the last years. It's a bit like Cat Stevens leaving everything for islam in the late 70's. 

Well, not really. Let's say that it's like Cat Stevens chosing to eat halal food for a couple of months just to see if animals that suffered before dying are more delicious. 

Another approach

Yesterday, I had an interesting discussion with Be Smart Rich, the nice chinese guy from Toronto. 

First, I have to say that, since the beginning of the year, my portfolio had a performance of 12% VS 1% for the S&P500 and -5% for the TSX-S&P500. So, I beat these indexes by 11% and 17%, which is very good in my opinion. It's not just skill and intelligence, it's also a question of chance. 

But anyway, I'm going somewhere else...

Be Smart Rich told me that his performance so far in 2020 has been close to 60%. Yes, sixty percent. That's fucking crazy. How come someone gets such good returns?

Well, I don't know the whole story, but he seems very interested by Livongo Health, Sea Limited and Mercadolibre. These three companies surged by 430%, 230% and 105% since the beginning of the year. 

Plus, if you use margin, you can magnify your returns substantially. 

It looks easy and simple, but who's really comfortable to buy stocks that grow their revenues a lot but for which EPS are very low or even negative? Actually, these three stocks have negative EPS. Investors bet that the revenues will continue to grow a lot and, eventually, the break-even will be reached (or margins will be increased). 

It's contrary to all I've learned. And, you can't value your portofolio with that kind of stocks. There's a lot of unpredictability, may it be positive or negative. 

But it works. And it works much better than what I do. 

Why sell a good stock?

When I see that some fund managers that I like sell some exceptional stock, my first postulate is that they lost their mind.  Why selling a great stock that grew a lot in the past even if it grows a bit less today, but still grows more than the average stock?

Let's get specific: why did Sequoia Fund and Giverny Capital sold their O'Reilly stake some months ago? Both were very fond of that stock not so long ago and they chosed to sell it...

O'Reilly sells auto parts. That's one of the few sectors where it's not necessary to think too much before investing. Of course, there's bad businesses in the sector, but it's not a crumbling sector like clothes and computers retailing.

Earnings grew annually 20% over the last 5 years. They're expected to grow by about 15% over the next 5 years. Plus, their ROE has been over 100% since 2017!

A little more numbers:

Sales growth of 19,4% during the last quarter (in the middle of a fucking pandemic!)
EPS growth of 57% during the last quarter (in the middle of a fucking pandemic, once again!)
Performance 1 year: 25%
Performance 5 years: 100%

That stock is great. Of course, it's not Shopify. But you can value O'Reilly while you can't value Shopify. 

At 22 times next year's earnings, that stock is not overly expensive. Estimates are about 15% growth each year for the next 5 years. There's a lot of stocks that are selling for much more than that for a similar growth. And O'Reilly proved that it was able to achieve good growth, which isn't the case for all the promising stocks.