A Little Journal of a Shameless Investor

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The Greed Syndrome Experiment

It’s been a while since I’ve posted my last update to $WCG.AX, a Net Cash = Market Cap set up that was presented to us in the Australian Market.

That post was essentially about the deals that were announced by Webcentral selling its domain name business for $165 million dollars, leaving a net cash position of AUD 65 million while the market cap was AUD 75 million when the article was written.

This article was posted last year… (I’m shaming myself for my inconsistency with my article writing), but this doesn’t mean I wasn’t doing anything in the last 6 months.

What I’ve been doing is experimenting with a new portfolio structure in a different Interactive Brokers account. I call this account the “Greed Syndrome Account.”

The idea behind this account is simple: stocks are selected as if by a greedy child who believes they can have everything in the world. For this child, the concept of trade-offs doesn’t exist. Lost in optimism, he will only buy stocks that promise high potential returns with minimal risk.

Value vs Growth…..and greed

 

As explained in various articles, just as politicians are often categorized into Conservatism and Liberalism, the investing community categorizes investors into Value vs. Growth.

Value-focused investing means buying something worth $1 for 50 cents. For instance, if I see an e-bike on Facebook Marketplace selling for $100, while its market price is $500 because the owner needs to move out of the city, a value-oriented investor would buy that bike, seeing an opportunity to extract value.

Growth-focused investing means buying something with potential future returns. For example, if I see an e-bike on Facebook Marketplace that will receive monthly software updates to substantially increase its value, overcoming the bike’s depreciation, a growth-oriented investor would pay the money to capitalize on future growth.

The child diagnosed with Greedy Syndrome, however, wants the best of both worlds. He wants to buy the e-bike with the software updates for just $100. Bad does such opportunity exist?

Let’s look at how my current portfolio looks.

Current Portfolio Recap

 

For the past couple of years, my priority has been free cash flow returns relative to the equity of the company. Because of this, I’m not sure how CNBC would categorize my investing style if they invited me to an interview.

So, I’ve categorized each of my holdings into Value or Growth:

As you can see from the above, out of my five holdings, I have two stocks that can be categorized as growth and three that are on the value side. $BABA lovers may object to my categorization, but it’s hard to call a business “growing” when its revenue Y/Y annual growth has been less than 5% for the last two years.

The biggest winners have been companies that are growing and have high operational performance. Take META, for example. Despite their heavy investment in the metaverse, which caused shareholders to sell down to $88 per share, the core business (ads on Facebook & Instagram) has a nearly indestructible moat and strong ROCE.

When I invested in stocks like META and S4E, the multiples were so low they could be considered value plays. Meta Platforms had a PE of 8 when I invested, and S4E had a PE below 5. What I want to emphasize is that value and growth should go hand in hand. We need to focus on opportunities to buy companies that promise high potential returns with minimal risk. And, as it happens, I’ve done just that with two of my holdings.

This concept became apparent when I noticed my investment returns had been stagnant. To address this, I opened a sub-account that adopts the “Greedy Kid” strategy.

The Greed Syndrome Account

 

I created this small account in June 2023, a year ago from now. As I was still experimenting, I did not disclose this in my portfolio update. However, the results have been astonishing.

This portfolio returned 109.17% in the last year, effectively doubling the account. While a year of testing is clearly inadequate in the investment world, these returns were quite surprising.

To visualize the strategy, I’ve created a risk and return quadrant for the notable super investors. The categorization may be imperfect, but it serves to illustrate where the Greed Syndrome places itself within the equity investment universe:

Criteria for Greed Syndrome Portfolio

 

The portfolio, managed by the “Greedy Kid,” selects stocks based on the following stringent criteria:

  • EV/FCF multiple of less than 15 (preferably under 10)
  • ROE of more than 25%
  • Y/Y EPS growth of over 25%
  • Net Debt is zero or negative
  • Revenue growth Y/Y must be positive

We want to be the greedy child who wants to have minimal risk and high return. The criteria will move our needle toward the 2nd quadrant on the above risk-return quadrant:

  • Low EV/FCF Multiple: The greedy child look for businesses that generate a lot of cash and have strong balance sheets with low net debt. High cash generation means high returns, while low net debt means lower risk.
  • ROE of More Than 25%: A historical record of high Return on Equity (ROE) will narrow down our investment universe to companies with high potential returns. This criterion dictates the y-axis (returns) on the risk-return chart.
  • Y/Y EPS Growth of 25%: Year-over-year Earnings Per Share (EPS) growth of 25% is a strong indicator of business growth and potential returns. It also reflects the company’s ability to preserve shareholder value by minimizing dilution. This factor further influences the y-axis of the quadrant.
  • Net Debt is Zero or Negative: The last thing we want is a business burdened by interest expenses when it is struggling. By avoiding companies with more debt than cash, we eliminate this risk, helping us move towards the left side (lower risk) on the x-axis.
  • Positive Y/Y Revenue Growth: While I place more importance on the bottom line, businesses with declining revenue and increasing profit may be cutting costs without adding long-term economic benefits. Focusing on topline growth pushes us higher on the y-axis.

These criteria significantly narrow down the universe of stock selection, often ignoring the typical risk vs. reward considerations. Additionally, the following criteria must be consistently proven over a 3 to 10-year time frame.

By sticking to these criteria, we aim to land in that sweet spot where low risk and high returns come together. When all these factors align perfectly, we achieve what I like to call the “Lollapalooza effect,” boosting our investment success.

Current Holdings & Performance

 

Below are the current holdings of this portfolio which satisfy all the criteria above:

Obviously the Greedy Kid doesn’t invest automatically in all stocks that fit these criteria. For instance, the Kid generally avoids mining and energy stocks, as well as other cyclical businesses that might be temporarily producing record profits. Most large-cap stocks owned by institutional investors won’t meet these criteria, so the Kid’s stock selection naturally leans towards smaller companies. However, this is the only area where the Greedy Kid pushes his unrealistic demands.

Conclusion

 

I’m going to keep pushing forward with this Greedy Syndrome experiment. When I first started investing, I was heavily influenced by Warren and Charlie, focusing on extracting value from businesses that produce high returns on shareholders’ equity. Over the past year, this experiment has shown me the power of growing businesses and how the combination of value and growth can coexist.

Once I gain more confidence in this approach, I might just let our imaginary greedy child take the reins. He’s always complaining that there’s no stock worth buying that fits his high standards. As the “parent” funding this child, I don’t mind him being picky.

As for the ethics of using our own child as a controlled experiment object? Let me ask you this: would you rather see the world with this experimental result or without it?

I’ll take the former.

 

Cheers,
Ritzty

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