How My Portfolio Of 7 Stocks Beat The Market

|
Includes: LIMAF, MGMXF, RAMPF, SAND, SNAP, TCEHY, WEDXF, WFC
by: Ivan K. Wu

Summary

I reintroduce myself and my portfolio to Seeking Alpha.

My biggest mistakes and what I’ve learned.

What SA readers can expect moving forward.

Introduction: A Retail Investor's Edge


1. Who am I and how did I get started?

I’m 29 years old, born in Taiwan, majored in liberal arts at a top Canadian university, and currently live in the U.S. One day, I decided that if I could get through War and Peace and six volumes of Proust, I may as well teach myself finance by reading books and 10Ks while I’m at it (my recommended books are in my bio). For four years, I consulted for Fortune 500 companies in a variety of industries. Outside of passing three CFA exams, I have no professional experience in the finance industry.

2. What's my edge as an investor?

I'm a long-only value investor with a day job outside of finance, and I'd like to think I'm more rational and patient than most retail investors. As such, I have the luxury of making 3 to 5 decisions a year, saying no to everything else, and moving on with my life. When I do have conviction in something, I allocate a significant chunk of my personal net worth and am willing to wait for longer than most people are comfortable with (3 to 5 years). When a thesis is wrong, I've learned to 'cut and run’ instead of ‘wait and hope.’ This approach has led to a lot of missed opportunities, but also fewer unforced errors.

Today, I manage a core-satellite portfolio of my family and my own money with a 60/40 breakdown between passive and active in 2018. When I first started in 2012, my active portfolio was 10%. I allocated +10% to active for each year I outperformed the S&P 500. If my active portfolio underperforms, the % stays the same the next year. If I underperform three years in a row - then I quit. I’ll follow Jack Bogle’s advice, sell my active portfolio and invest in index funds.

To date, I’ve outperformed the S&P 500 4 out of the past 6 years.

*

Why should you trust me?

You shouldn’t. I could claim whatever performance I like and you’d have no way of knowing if I’m telling the truth. But whether or not you believe in the results I’ve generated, the process of how I arrived at those ideas might still be valuable to you.

The purpose of this article is to establish a baseline of performance by showing the 7 stocks I currently hold in my portfolio. I expect SA readers to evaluate me based on my future picks and not past performance.

*

How My Portfolio of 7 Stocks Beat the Market


1. Tencent Holdings (OTCPK:TCEHY) (+253%)

My longest held position. While Tencent Holdings has contributed the lion’s share of my portfolio alpha, I arrived at it through the dumbest process possible. In 2011, an internship in China gave me the opportunity to travel across the country for six months, where I observed how everyone and their second cousin was using QQ and spending actual money on fake gaming currency (see: Bitcoin). I also witnessed the rise of WeChat during that time.
It took another two years before it occurred to me to check if Tencent was a publicly traded company. And because I happened to be reading Charlie Munger’s views on diversification at the time ("it's for idiots"), I threw position sizing out the window and committed ALL of my active capital at the time to the stock. The fact that things worked out does not stop this from being an incredibly reckless thing to do.

Full disclosure: I’m a net seller of Tencent in 2018 for reasons I'll cover in a future article.


2. Polaris Infrastructure (OTCPK:RAMPF) (+78%)

I’m a value investor, and try to find mispricing in both the jockey (management) and the horse (the business). Polaris Infrastructure (formerly Ram Power) was one such name: it was a little known geothermal company in a “risky” jurisdiction (Nicaragua) with a history of failure, but was attracting capital from exceptional but little known investors (Goodwood Inc. from Toronto). At the current 4% dividend yield, I think there’s still a lot of value here. For the full thesis, I’d recommend reading Peter Kaye’s PRO article on the stock.

3. Westaim Corporation (OTCPK:WEDXF) (+13%)

Another large holding in my portfolio and another stock that the Goodwood team is involved with, and more recently, Fairfax Financial’s (OTCPK:FRFHF) Prem Watsa. I’d highly recommend Keubiko’s thorough and entertaining long thesis on the company. He’s also an excellent follow on Twitter.

4. Wells Fargo (WFC) (+33%)

This was an idea that I wrote about on Seeking Alpha. Most of investing is about tuning out the noise and the people who generate it. During the height of the fake accounts scandal, the question of whether or not the bank was full of “crooks” is not really relevant to a rational investment debate. I’ve written extensively on this in my article during the height of the outrage. It’s worked out well and sitting on a cost basis of $47 a share, I expect WFC to continue to compound at an above market rate.


5. Alterra Power Corporation (OTCPK:MGMXF) (+43%)

Another stock with Goodwood involvement (seeing a pattern?). Having gone to school in Vancouver, I also had the advantage of knowing who Ross Beaty was and his track record. Within months of publishing my PRO article, the entire company was sold to Innergex (OTCPK:INGXF) for a 60%+ premium.

6. Linamar Corp. (OTCPK:LIMAF) (+30%)

Barring a recession, this is a $100 (CAD) stock within 18 to 24 months. Linamar is trading at 4.7x EBITDA with NAFTA and peak auto fears that are way overblown. It just acquired a niche agricultural manufacturer (MacDon) for 8x EBITDA against comparable deals of 10x EBITDA. Judging by commodity prices, agriculture is set to come out of a cyclical trough. At some point, investors need to wake up to this company.

7. Sandstorm Gold (SAND) (+42%)

A misunderstood acquisition of a Turkish gold mining interest (Hot Maden) led to a significant mispricing of the stock. Management under Sandstorm CEO Nolan Watson was also one of the pioneers of the precious metals streaming model at Silver Wheaton, where he was formerly CFO. At one point last year, Sandstorm was trading at a valuation that basically fully compensated investors for taking on the additional country risk. See my comment history on this company. I plan on doing a full write-up soon.

*

Mistakes made along the way

Obviously, I wouldn’t have underperformed the S&P in 2 of the past 6 years if I hadn’t made my share of mistakes.

Here are my three major errors and lessons learned:

1. Research in Motion (now BlackBerry) (BB) (-53%)

If I ever put forward a thesis again based on my knowledge of technology, readers should probably ignore me. I’m what they call a “laggard” in terms technology adoption, which means by the time I catch onto a trend, it’s definitely too late. The obvious is obviously wrong. I’ve learned that “cheapness” in technology almost always means the idea is a value trap. BlackBerry was my biggest loss, which I made worse by becoming a bag holder well after my thesis was already broken.

2. Bombardier (OTCQX:BDRBF) (-25%)

This could have been a lot worse. Bombardier was a case where a blank sheet aircraft design (CSeries) to disrupt an established oligopoly was a far riskier proposition than I’d assumed. The obvious competitive response from Boeing and Airbus was to retrofit old models with the same fuel-saving engines. And that’s exactly what happened. This time, I took my loss promptly.

3. Snap Inc. (SNAP) (-5%)

I didn’t lose much on this position because I bought after a plunge, but I should’ve known better than to invest in an IPO. My epiphany came a month later as I was standing in the shower and realized I was on the verge of repeating the same mistake I’d made at Bombardier: young upstart with unproven product tries to take on two incumbents with a stranglehold on the global ad market (Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB)). I sold my stock that very day.

What Readers Can Expect

I've been an infrequent contributor to Seeking Alpha for the past couple of years. In 2018, I plan to publish at least one article a week. Next week, I'll publish my best idea for 2018 along with some practical advice on how to navigate an increasingly expensive market.

Quick teaser: it's related to the natural gas thesis I put forth in May of last year. If you're interested, please hit the "Follow" button to get updates sent directly to your inbox. Thanks, and I look forward to being a more active part of the SA community in 2018!

Disclosure: I am/we are long WFC, SAND, LIMAF, WEDXF, TCEHY, RAMPF, MGMXF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.