2024 end-of-year portfolio review

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The performance review of 2023 is still featured on the blog’s front page, yet it’s already time to reflect on 2024. Over the past year, global stock markets marched relentlessly higher, driven by tech and AI stocks in the U.S. Despite having no exposure to AI, the portfolio not only kept pace with the MSCI All Country World Index but managed to outperform it once again. As the track record continues to grow, the power of compounding has become increasingly evident. While 2024’s performance was not significantly better than average, the absolute return was higher than the combined returns of the blog’s first six years – and those years included some of my best results! As investors, we are well-acquainted with the principles of compounding and exponential growth, yet it’s still remarkable to witness them in action.

Year Return* Benchmark** Difference
2012 18.44% 15.01% 3.43%
2013 53.38% 18.11% 35.26%
2014 30.11% 19.23% 10.88%
2015 24.23% 9.34% 14.89%
2016 64.97% 11.73% 53.24%
2017 29.04% 9.47% 19.57%
2018 13.07% -4.34% 17.41%
2019 32.34% 28.93% 2.70%
2020 19.31% 7.18% 12.13%
2021 31.31% 28.08% 3.23%
2022 11.63% -12.58% 24.21%
2023 10.47% 18.65% -8.18%
2024 31.20% 25.90% 5.30%
Cumulative 2270.45% 381.53% 1888.92%
CAGR 27.57% 12.85% 14.72%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) gross total return index in euro’s

As is visible in the performance attribution graph below, special situations were a driving force behind the performance of the portfolio. This isn’t a unique phenomenon, but this year the impact was even bigger than normal. One trade was especially successful, contributing 676bps to the overal performance. The impact of currency movements was also quite meaningful this year with a 341bps contribution, and in reality that number should be higher. I hold my investments in multiple brokerage accounts, and Interactive Brokers is the only broker that provides usable reports to determine the impact of currency movements. As a result, some positions include currency gains, while others don’t. And then there are some brokers that have such horrible reporting that contributing performance to individual positions is not feasible. That’s why last year I introduced the “misc. positions” item to deal with that. It is not a sneaky way to hide positions I’d prefer not to disclose, although I can’t guarantee I won’t use it for that purpose in the future.

Performance attribution graph 2024Another name at the top of the chart is United Development Funding IV. I’ve written about this fund before, and its story is far too complex to summarize briefly. However, with four former executives in jail and the SEC having revoked the stock’s registration statement, it’s safe to say this investment comes with some hair on it. Last year, NexPoint Advisors ran a proxy campaign to replace the current trustees, who remain tied to the jailed executives. Just before the first annual meeting in a decade, the company announced a deal to be acquired by Ready Capital (NYSE:RC) for up to $5.89 per share. While the timing of this deal raises questions – and it’s likely more favorable to insiders than it should – it still represents a substantial improvement over the previous status quo. Before the deal’s announcement, the stock last traded at $2.22 on ctt-auctions.com. Its most recent trade was at $3.75, and if the merger with Ready Capital closes
in 2025, there could be additional upside.

Although the final chapter of United Development Funding IV story has yet to be written, this appears to be another case of the old adage: good things come to those who buy (very) cheap. I began buying the stock in 2019 and 2020. Back then, I estimated the book value to be around $13 per share, though with considerable uncertainty since the company hadn’t published financials since 2015. Since my initial investment, the fund has distributed $1.50/share in dividends, reducing my cost basis to almost nothing. While the deal with Ready Capital values the fund at a steep discount to its current book value of $9.47/share, it’s clear this will result in a more than satisfactory internal rate of return.

I hope my readers had a good 2024 as well, and I would like to wish everybody a happy, healthy and prosperous 2025!

Disclosure

Author is long most of the stuff mentioned in the performance attribution graph

Sio Gene Therapies announces first liquidation distribution

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Almost a year ago I wrote about the pending liquidation of Sio Gene Therapies (OTCMKTS:SIOX) with the expectation that a first liquidation distribution would be made in a couple of months. It took a lot more time than initially estimated, apparently because it was more time consuming than expected to liquidate some of the foreign subsidiaries. But the long wait was worth it, because today we finally got a press release with a small surprise to the upside. The initial liquidation distribution will be $0.435/share while the company originally provided a range between $0.38 and $0.42/share. My guess is that we can thank the current interest rate environment for this bump in combination with the delay.

A key part of the investment thesis in Sio Gene Therapies was the expectation that after the initial liquidation distribution we could expect one or more additional distributions. The company is keeping $7.2 million as a contingency reserve, and in the initial proxy statement the possibility of distributing this money to shareholders wasn’t even mentioned. This could add up to $0.10/share, and in the latest press release at least they write something about distributing excess cash (subject to uncertainties inherent in winding up the business). Might take a couple of years or more, but I expect to get something at some point.

Disclosure

Author is long Sio Gene Therapies

Latitude Uranium merger arbitrage

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As someone reminded me today on Twitter, my blog hasn’t been very active recently, so I thought I change that a little bit with a new merger arbitrage idea to start off the new year. Last month Atha Energy (CNSX:SASK) announced that it would combine in a three-way merger with Latitude Uranium (CNSX:LUR) and 92 Energy (ASX:92E) to “create a leading uranium exploration company” (not my words). While I’m not exactly a fan of exploration stage mining companies it’s a merger that piqued my interest. It is semi-complicated with three small companies combining of which two are listed on an obscure stock exchange in Canada and the third in Australia to add a cross-border element to the mix.

As of this moment of writing the spread between Atha Energy and Latitude Uranium stands at 30.90%, which I think is excessively high for a merger that should face no real hurdles in closing. Part of the reason for the large spread is presumably the fact that the stock is trading on the Canadian Securities Exchange, and is not tradable for many people. You probably need an account with a Canadian brokerage firm, and for US-based investors there might be additional complications since these companies could potentially be considered PFICs.

Interactive Brokers for example does not support opening positions, although you can sell (but not short) shares that are listed there. I initially wrote here that the listing location idea was supported by the 92 Energy merger having a lower spread, but a reader pointed out my bad math on that one. The spread on the 92 Energy merger is actually even bigger at 48%! The Latitude Uranium acquisition is expected to be completed in the first quarter of 2024 while 92 Energy is scheduled to close early in the second quarter. So if you have an unhedged long position you might see the share price of Atha Energy cratering once all the former Latitude Uranium shares hit the market. But the bigger spread might be enough compensation for that risk. Didn’t buy a position in this part of the deal, but might also be interesting.

So we get a big spread, but it is certainly not without risks. If you enter the trade unhedged you might be exposed to wild price swings given the underlying type of business, and the possible selling pressure when the deal is done might collapse the spread before you can exit. As of this moment my broker is quoting a borrow fee of 7.75% for Atha Energy, which is actually quite doable given the large spread and the short expected timeline to deal completion. But there are no guarantees that borrow will remain available or that the borrow rate doesn’t spike, and you will need a lot of margin space to set-up this trade. The latter is definitely a problem for me, so I decided to enter the position unhedged. I realize that the outcome of this trade might be all over the place, but hopefully the large spread is isolating me from negative outcomes.

Overview from the transaction presentation

Disclosure

Author is long Latitude Uranium

2023 end-of-year portfolio review

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My most popular post of the year is invariably the annual performance review. It is pointless to compare yourself to a random person on the internet, but I get it, curiosity also gets the best of me when someone else is sharing results. In 2023 the portfolio produced a return of 10.47% which in absolute sense is pretty good, but at the same time it is setting some negative records.  It’s a bit of a first-world problem when you can bitch about a double digit positive return, but besides being the lowest absolute return so far it is sadly also breaking my streak of beating the MSCI All County World Index every single year in a row. The key distinction between me and the index lies in my positive return the previous year, and if you don’t need to recover from a loss you start with a big head start. Taking 2022 as starting point the MSCI ACWI is up a meager 3.7% while my portfolio produced a 23.3% return. Like I said, first-world problems…

Year Return* Benchmark** Difference
2012 18.44% 15.01% 3.43%
2013 53.38% 18.11% 35.26%
2014 30.11% 19.23% 10.88%
2015 24.23% 9.34% 14.89%
2016 64.97% 11.73% 53.24%
2017 29.04% 9.47% 19.57%
2018 13.07% -4.34% 17.41%
2019 32.34% 28.93% 2.70%
2020 19.31% 7.18% 12.13%
2021 31.31% 28.08% 3.23%
2022 11.63% -12.58% 24.21%
2023 10.47% 18.65% -8.18%
Cumulative 1706.73% 282.47% 1424.26%
CAGR 27.27% 11.83% 15.45%

* Return in euro’s after transaction costs, net dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) gross total return index in euro’s

Long-time followers of the blog will see a familiar picture in the performance attribution graph below, with the special situations bucket being the driving force behind the portfolio. But I will admit that sometimes the lines are a bit blurry between which stock goes where. The number two position in the list is Garrett Motion, that I bought as a special situation when it entered bankruptcy proceedings, but was promoted to a long-term value pick after a successful restructuring. On the other hand, one of the major contributors in the special situation bucket is a stock that was spun-off after a successfully completed merger arbitrage, and it would certainly make sense to reclassify it to a long-term position. And sometimes the line is already blurry from the start. I think most investors would see investing in spin-offs as special situation investing, but how long can you hold it and still see it that way?

Also noteworthy is that during the year a meaningful contribution was made by interest income. Not only because interest rates went up a lot and you finally get paid something on your idle cash balance, but also because my cash balance was unusually high. We are looking to buy a house, and while that search is ongoing I want to keep my options open. That presumably incurred a significant opportunity cost, but investment results aren’t always the most important in life. Or maybe never? With that philosophical question I want to conclude this post, and wish my readers a happy, healthy and prosperous 2024.

Disclosure

Author is long most of the stuff mentioned in the performance attribution graph

Always worry about your edge

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I was reading “Stop worrying about your edge” on the excellent Turtles all the way down! blog, and couldn’t resist writing the oppositely titled post. Not because I disagree with the post. Maybe on some details, but I think he makes some good points. But the truth is that every intelligent sounding investment quote breaks down at some level. People for example love to quote Buffett – and you could certainly catch me doing it from time to time – but it is important to realize that nothing is universally true. Or some types of advice sound good, but simply don’t work in real-life.

Consider the famous poker quote, “If you can’t spot the sucker in your first half hour at the table, then you are the sucker.” Hard to disagree with, right? But the thing is, that usually, the sucker is also convinced that he has spotted some players that he can beat. Perhaps he has seen some excellent pro’s involved in a big bluf, and thinks that they are spewing money away. He is wrong of course, but without the knowledge to recognize what is going on, he doesn’t have the tools to evaluate his own position at the table. And it is not like you need to be a total fool to not recognize your own place at the table. Many mediocre poker professionals – that objectively are miles ahead of the total amateur – can’t recognize better playing professionals. Their perspective is limited to what they know, and from their vantage point, the better players seem to be making errors. So, in reality, usually only the best poker players at the table can accurately estimate the skill level of everyone else. However, merely advising people to be one of the best players at the table is not a practical tip.

But to circle back to worrying about having an edge in investing. I agree that it is incredible hard to know if you have an edge in a specific investment or in investing in general. And because it is hard to know, you should always be worried that you don’t have an edge. I think this idea should be constantly on the back of your mind, shaping your investment strategy. Everything you do should be with the assumption that you could have no edge.

So, how can you invest while holding that belief? I personally think that the following three guidelines can keep you out of trouble.

  1. Diversify: Never bet big on a single name. If you invest in a sufficiently big basket of random names your expected return should be close to the expected return of the market. If you lack an edge, this approach minimizes potential harm from an expected value perspective.
  2. Minimize costs: When your investments have a neutral expected value compared to the market, the main source of underperformance comes from frictional costs associated with your strategy. Therefore, make sure you avoid incurring excessive trading fees or unnecessarily high taxes.
  3. Stay away from risky corners: Acquiring an edge is difficult, but losing money is easy. Avoid stocks with high short interest and/or no borrow, as they are almost certain to decline. Also, be cautious with recent IPOs, SPACs, or any other investment fads.

There will be times to break the guidelines above, but I think this should be a healthy starting point for most investors. I will not claim this would have saved every investor who blew up in recent times, but it would probably have come close. The downside is, of course, that you are also not getting lucky by betting it all on one stock and making it big. To actually make money like this, you absolutely need a  consistent edge. Bet after bet. Stock after stock. You will not know in advance if you have an edge, but after enough years, you should get an idea.

So you heard it. Stop worrying about your edge, but also, always worry about your edge!