Testing My Patience: The Brown Bag Portfolio December Review

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Includes: ABBV, APLE, ARCC, D, EPD, EPR, IRM, KEY, MAIN, PEGI, T
by: Michael Hesse
Summary

Share prices have fallen dramatically since October.

As a relatively new investor the market's current crazzieness has tested my nerves.

A look at three of my biggest losers and why I'm still holding them.

Where the Brown Bag Portfolio is today and what the plan is going forward.

Unless you’ve been living under a rock, not checked your brokerage statement or 401k balance, or blissfully ignored television, radio, and the internet, you’re more than aware that Mr. Market has suffered a beat-down since October. Personally my 401k is down 5% and the Brown Bag Portfolio is either down 8% or 2% depending upon how you look at things. All in all it’s not a great way to end 2018. However this wasn’t a personal catastrophe as I have approximately fifteen more years before I can effectively retire. I don’t need the money right now and the market is providing a smorgasbord of well-priced offerings.

I expect that over the next week we’ll all read a flurry of articles about author’s favorite picks and recommendations as well as reflections on the past year. CNBC & Fox Business will be wall to wall with analysts, thought-leaders, and brokers’ spin. I’m not going to do that. I don’t have the expertise and honestly I frequently question those talking heads that wrap themselves in the mantle of expert.

My gut-level feeling is that the Market is too complex for simplistic explanations. Yes the increasing use of algorithm-based trading has an effect on volatility, ETF’s elevate poor companies and depress good ones, growing interest rates provide viable alternatives for investment outside of the market, and tweets and tariffs undoubtedly have an effect as well. The truth is that there are thousands of little factors that come together and produce the results we see each day, millions of bits of data seemingly insignificant when isolated and examined, but providing the fulcrum upon which the market shifts.

We cannot predict the future. Lord knows we try. We’ve been trying since the dawn of history and I think there’s a convincing argument to be made that our attempts to predict the future may lie at the root of what has made us such a successful animal. Successful pattern recognition and projection may make the difference in whether or not you eat today or starve. At least it did when we were tramping through forests hunting elusive game. But figuring out where the deer are most likely to be is significantly easier than being a successful investor. I’m not saying that it’s easy, but only noting that the factors that determine where a herd of animals is moving and likely to encamp is significantly smaller than the factors that shift the market on any given day.

So what can we do? Well the first thing is DON’T PANIC. This message should flash up every time you log into your brokerage account, it should be emblazoned on prospectuses, and part of the disclaimer that flashes on the screen after each stock-prognosticator’s show. Panic only guarantees loss. Sometimes you need to take a loss, move out of something that isn’t working and redeploy. That’s different. If you’re going to sell at a loss make sure it’s because the investment thesis you used when you made your initial investment didn’t work or something went wrong with the company itself. Don’t jump ship just because an unexpected low tide arrived. Tides lift and sink all boats.

You cannot outthink the market. You cannot protect yourself against every conceivable eventuality. The Huns are always just over the next hill and ready to sweep down and decimate your village. They always have been and they always will be. What you can do? The only thing you can do really is make investments in good companies with strong fundamentals. Regardless or perhaps despite all the fluff and chaff thrown around in the long run those companies should succeed. Will they? Not always. The Visigoths may pour through the city gates, a hedge fund may short that company into smoking ruins. It happens. But more often than not good companies with strong fundamentals will continue to prosper and your investment in them will as well.

The trick is, of course, finding good companies. And this is where I would suggest that you turn to some experts, experts with good track records, experts that understand specific industries and companies. If you’re looking at REITs Brad Thomas here on SA is an excellent source, for CEFs and a completely different perspective Steven Bavaria is your man. Dividend Sensei writes some excellent articles about the health of the overall economy and there are many other incredible writers here on Seeking Alpha, but those are three that I frequently read.

Does this mean that the decisions I make with my portfolio are good? Nope. I make mistakes and over the past fifty four years I’ve made a ton of them (including first wives, fatherly advice, and personal health and financial decisions that were ruinous), but I’m honest about them and try and learn from my mistakes. My articles here on SA are an attempt to do that, to honestly report what worked, what didn’t, and why (as far as I can tell).

The Brown Bag Portfolio is barely a toddler (just two and a half years old) and is being built with the money I can scrape together each month. I’m hardly a wealthy man, but I’m frugal (some might say cheap) and I save at a rate much higher than average. It helps (considerably) that all my children are out of college and are mostly self-sustaining, but this is a process. As I mentioned last month I’ve curtailed my investments until my credit card is completely paid off (okay, everyone slips now and then), but this should be complete by the end of January.

Now in respect to that honesty that I so recently touted I must admit that the recent sell-off in the market has made me nervous. No one likes to see his or her portfolio turn into a sea of red. But as I peruse my meager holdings I generally like what I own. That’s not to say that I don’t have some concerns or that some of my investments aren’t risky. In order to reach my investment goals I need to take on a bit more risk than I would if I had twenty or thirty more years of investment ahead. Still with approximately fifteen years before retirement I have some time to let the themes play out.

Am I concerned that AT&T (T) carries more debt than some small nations? You bet! Okay that may have been a slight bit of exaggeration, but you get the point. AT&T carries a mountain of debt right now. It’s precisely because of that debt that I’m unwilling to pull additional money out of my pocket and purchase more shares. I want to see how things play out. I have time to see how they work that debt. Will I kick myself if the share price jumps up above my cost basis in a few months? No. In fact I’ll be quite happy about that. If at the same time AT&T has paid off some of its monstrous debt I may even consider adding a few more shares on a dip. Right now I’m cautious and I’ll reinvest the dividends through my DRIP (dividend reinvestment program) and bring my cost basis down a little bit. In my mind AT&T needs to prove itself before I increase my position substantially.

I’m also concerned with Apple Hospitality (APLE), which is my third largest position and is currently sitting at 18% below my cost-basis which I thought was pretty good in the high 17s. In fact for most of the time I’ve held it, Apple Hospitality had been trading in the $18-$20 range. My concerns with Apple Hospitality are almost a 180 from AT&T. This hotel REIT has one of the lowest levels of debt in the industry and yet shares have tanked. It makes me concerned that there’s a problem at the heart of the company of which I’m not aware. I need to do more investigation before I’m ready to pull the trigger and add to my position even though several analysts have indicated that it’s a screaming buy at these levels. As with AT&T I haven’t held it long enough to hold my nose and buy. I need to see how this one plays out.

Enterprise Partners (EPD) on the other hand is also underwater (for me), by just over 8%. I’ve seen this story before with Enterprise Partners however and if I had cash on hand I’d be backing up the truck. I have full faith and confidence in this mid-stream company and its management. A year ago in August its shares dropped into the low 23s and I held off purchasing more. I waited and was rewarded as a few months later as the share price rose beyond my cost-basis and my patience was rewarded. All along I DRIP’d the units (shares) and I have never looked back. A year ago August I didn’t add shares because Enterprise Partners made up nearly 40% of my portfolio. Right now I can’t add more shares because of my decision to pay down personal debt. But if it stays in the 24’s by the time I’ve built some cash I’m definitely adding to my position. If not, I’ve learned to hold some cash and wait for the next market tantrum to drive the price down again.

If I’ve learned anything over the past year I’ve learned some patience even when a sea of red makes this difficult. I have two things working for me that help buoy up my patience. The first (and perhaps most important) is that I have a fairly long time horizon. I don’t need my money for approximately fifteen years. If I needed the money within the next two I’d probably have set stop-losses on my holdings and taken the small hits, but preserved most of my cash. The second reason is that each and every one of my holdings pays a dividend (for you sticklers Enterprise Partners pays a distribution, but for all intents and purposes it’s the same thing) and I’ve set up a dividend reinvestment program for each. DRIP’d dividends/distributions automatically purchase additional shares/units without incurring commission charges. When the share price is below my cost-basis the additional shares slowly bring that cost-basis down. This also allows for compounding growth that over my time horizon will result in significant growth even if I don’t actively add additional shares.

Now don’t get me wrong and think that I’ll never sell a holding. I sold three positions in 2018. I sold Ares Capital (ARCC) at $15.96 (after counting dividends this sale was a wash), KeyBank (KEY) at $20.55 (my cost basis was around $14 so this worked out quite well), and Pattern Energy (PEGI) at $20.5 (again a slight loss, but after counting dividends this one was almost a wash). I had different reasons for selling each of these, but in general I’d lost faith with the company overall. In retrospect each of these Sells has turned out to have been right for me as each is trading below where I sold it (Keybank about 26% below my sale price), but ten years from now I might feel quite differently.

The Brown Bag Portfolio December 2018

BBP December 2018

Symbol

Shares

Value

Cost Basis

Return

% Return

Div/shr

Annual Div

D

40.92

$2,923.86

$2,689.18

$234.68

8.73%

$3.67

$150.16

IRM

40.00

$1,296.40

$1,308.80

-$12.40

-0.95%

$2.44

$97.60

APLE

220.67

$3,168.86

$3,894.88

-$726.02

-18.64%

$1.20

$264.81

EPD

235.78

$5,797.78

$6,313.51

-$515.73

-8.17%

$1.73

$407.90

T

105.28

$3,004.66

$3,625.07

-$620.41

-17.11%

$2.04

$214.77

EPR

61.64

$3,947.00

$4,008.64

-$61.64

-1.54%

$4.32

$266.30

MAIN

73.39

$2,481.18

$2,801.88

-$320.70

-11.45%

$2.34

$171.72

OXLC

92.06

$893.03

$937.34

-$44.31

-4.73%

$1.62

$149.14

*New Position

** Increased Position

Total

$23,512.77

$25,579.30

-$2,066.53

-8.08%

$1,722.40

Div Goal

% of Goal

BBP Yield %

$16,800

10.25%

6.73%

An alternate way of looking at the numbers and perhaps the most important is how much has come out of my pocket and gone into each of my holdings. For those interested I include the Out of Pocket chart below.

Out of Pocket

July 2016 – Dec 2018

Symbol

OOP Shares

$ OOP

Shrs frm Div

Div Rcvd

Current Value

Actual Rtrn

D

40

$2,626.60

0.916

$67.19

$2,923.86

11.32%

IRM

40

$1,308.80

0

$0.00

$1,296.40

-0.95%

APLE

205

$3,618.28

15.673

$276.23

$3,168.86

-12.42%

EPD

215

$5,766.99

20.778

$541.53

$5,797.78

0.53%

T

100

$3,453.42

5.279

$171.65

$3,004.66

-12.99%

EPR

59

$3,839.26

2.643

$169.26

$3,947.00

2.81%

MAIN

70

$2,672.20

3.386

$127.51

$2,481.18

-7.15%

OXLC

80

$810.40

12.065

$126.76

$893.03

10.20%

Total

$24,095.95

$1,480.13

$23,512.78

-2.42%

While the Q4 of 2018 was difficult, as a relatively new investor I’m glad it happened when it did. First and most importantly with the time horizon I have there is more than enough time to make up the losses. Secondly because of the shift in investing philosophy I made early on the dividends I’m collecting will slowly bring my overall cost-basis down. Thirdly, I don’t have the decades of experience some of the authors and readers on this site have. Prior to this I didn’t have much experience with my holdings experiencing a significant loss. I certainly hadn’t experienced the majority of my holdings experiencing losses. This is something that I think every investor needs to experience for themselves in order to learn how they will handle it. You can panic and lock in those losses or if you still believe in companies you own you can ride it out and add to those holdings at new lower prices.

Going forward I’ve made a shopping list of those companies I own that are now on sale. I’ve also figured out a price where I’d like to buy each of these companies. For those readers who may be interested I’d like to buy (in order) Enterprise Partners below $25, EPR Properties (EPR) below $64, Main Street Capital (MAIN) below $34, Iron Mountain (IRM) below $33, and Dominion Energy (D) below $70. As the cash becomes available I’ll be working that list. I’d also like to add Abbvie (ABBV) below $90 and initiate a position in one other company yet to be determined. I would note here that except for Dominion Energy and Iron Mountain, each of those prices is significantly below my current cost-basis. In the case of Iron Mountain the $33 price level is within a few cents of my initial purchase, but the $70 price level for Dominion is nearly $5 above my cost-basis.

Now it’s quite early in 2019 as I write this (Jan 3 to be exact), so anything may change at any time. But as I look forward that’s the plan. I fully expect 80% of the money I invest this year to go into current holdings since none are yet full positions. If readers are interested I’ll write about what I think a full position should be for each of my holdings and the thought process behind it. As it is, I think I’ve already been a little too wordy, so we’ll leave that for the future.

Happy New Year everyone and may you have a fulfilling and prosperous new year!

Disclosure: I am/we are long D, IRM, APLE, EPD, EPR, T, MAIN, OXLC. 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.