Managing investments in trying times

Things have changed, we are living in a different reality to January this year. There is much media blurb about markets bottoming out and V shaped recoveries. I personally think that the repercussions of the current lockdown are going to reverberate in the market for some time.

So what to do now with the investments? I, like all the media pundits, really don’t have a clue what’s likely to happen next. There is an unprecedented amount of speculation about the macro economic impacts of the crisis. If the CEOs don’t have a clue about the future of their businesses, what hope do the analysts, pundits or I have.

I’ve been wondering how to approach this. So far I’ve done very little that differs from previously. I perhaps need to be a little more dynamic in my thinking. Persisting with buy and hold may not be enough.

I had just under 20% of the portfolio in cash so potentially I’m in a position to buy bargains. But as I’m fortunately working I’ve had no time to study the opportunities. To manage the investment better there are things I need to do:

  • Assess the current state of the portfolio
  • What will be the new normal? things are unlikely to return to the earlier status quo
    • Which shares are at risk (some businesses will not survive)
    • What sectors will benefit
    • What sectors to avoid
  • Are my trading rules still fit for purpose?
  • Re-consider the regular trading (free trades) investments
  • Make a new watchlist, the original watchlist is no longer fit for purpose

There’s much work to do to address this list. There are some decisions that I’ve already made.

I’ve upgraded my account to a frequent trader account. Previously for UK trades I’ve relied on the once a month ‘free to trade’ regular investments and paid for non-UK trades from the investing credit or cash in the account. To accommodate the current volatility I want the flexibility to average into positions via more frequent smaller trades, whether UK or International. I also might need to get shot of some shares with a broken thesis.

I’ve decided that I need to have a more geographically diverse portfolio. I had already started to add some US stocks, but I need to add to that and also look at other markets.

I’ve started new watchlists – one for Simon Thompson ‘Bargain Shares’ – one for US stocks – one for the high conviction stocks in my current holding – and one to gather new ideas or ‘dip’ opportunities.

This long weekend is an opportunity to do an assessment on the risk level for the current holdings, and start a plan for how to approach investing in the coming months.

Dividend Investing

I got dividend investing all wrong. I looked at different styles of investing. I put aside dividend investing as something to look at later when I’ve retired and need to take income from the dividends.

There appears to be two types of dividend share (at the extremes of the spectrum): steady companies with low dividends of mostly less than 4% or distressed companies offering good dividends. For the former it looked like the non-dividend shares would give a better return. For high dividend stocks may appeared to be a ‘falling knife’.

What I had missed was this. If you find a sound steadily growing business paying a reasonable dividend the later dividends are paying out a much higher percentage if the amount is considered against your original cost basis. This means that if you invest in a good dividend company, one that has a record of dividend and share price growth the dividend percentage actually received in later years will be considerably higher than the headline figure for the year.

As an example I modelled a share held for 10 years with an annual growth of 5% in share price and a dividend of 3%. With no dividend reinvestment a £1,000 investment would become £1,551, so the dividend would be equivalent to 4.5% of the original investment. With the dividend at 3% reinvested every year the Investment becomes worth £1,990, so at that point the annual dividend payout is almost 6% of the original investment. If that is continued for a further 10 years the numbers double again giving an investment worth £3,996 and an annual dividend payment at 12% of the original sum.

Through playing with the model I discovered that a reinvested dividend share when you add the dividend of 3% to an anticipated growth of 5%, it is the equivalent to a ‘growth’ stock anticipated to grow at a 8% per annum.

So in assessing a share to investing, if you assume a reinvestment of the dividend it can be considered as the equivalent of a guaranteed addition growth at that percentage.

So I will no longer discount an investment, because its a dividend stock, I will asses it along side other opportunities on the basis of the likely total return.

Is Trading Bitcoin Possible using the Mayer Multiple

bitcoin logo

The MayerMultiple is the current Bitcoin price divided by the 200 day moving average. Based upon statistical analysis of the multiple over the life of Bitcoin, Travis Mayer determined that the optimal time to buy Bitcoin would be when the multiple is below 2.4.

There is an article on The Investors Podcast website explaining how this number has been derived and showing both the historic Bitcoin value and Mayer Multiple graphically: https://www.theinvestorspodcast.com/bitcoin-mayer-multiple/

As this Mayer Multiple analysis is based upon historical information it will only work going forwards if the future dynamics of Bitcoin prices are consistent with the past. So as for all back-tested trading formulae there are no guarantees here that this will work going forward.

If I understand the article correctly, if regularly buying Bitcoin waiting until the Mayer Multiple is much lower than 2.4 would not be as profitable as piling in when its at 2.4. The theory being that over time there will be an underlying increase in value due to the network effect of increasing numbers of investors generating an increasing value.

I’m still not really convinced in Bitcoin as a store of value worthy of investment (see Bitcoin, is it here to stay?). However there has been profit made that has been missed by not being in Bitcoin, so if you are to trade (or god forbid invest) in bitcoin this might be a better indicator of when to buy than gut feel of guess work.

Resources
@TIPMayerMultiple twitter account tweets out the current Mayer Multiple value
https://mayermultiple.info/ provides charts of the Mayer Multiple
https://www.theinvestorspodcast.com/episodes/trace-mayer-bitcoin/ TIP interview with Travis Meyer

Why Tesla can do car insurance for less

Elon Musk recently announced that Tesla will be offering Tesla Car insurance. This could be more than just another step in the relentless drive toward vertical integration of all things to do with Tesla vehicles.

The notion of a car maker selling insurance has faced derision from analysts and observers as prominent as Warren Buffett, but Musk has said that Tesla can offer insurance “much more compelling than everything else out there.”

Jeremy C. Owens www.marketwatch.com

What the analysts and critics appear to have missed, is that all these Tesla cars have 360 degree cameras and accelerometers constantly recording the state of the car and its situation. In the event of an accident this data would be available to Tesla Insurance to defend against paying out. Add in sentry mode then it not only covers damage to the vehicles whilst being driven, but also records incidents when parked.

The evidence provided by these cars would make resolution of liability very cost effective for Tesla, reducing the major cost of providing vehicle insurance. This gives Tesla a massive advantage over other insurance providers.

With the vehicle telemetry being constantly available to the insurer, there is an opportunity to have dynamic pricing of insurance based upon the vehicle location and the driving style. Once autonomous driving is proven and legalised, there will be another step change, where potentially manually driven miles would incur a surcharge on the insurance premium.

Although promised within a month back at the end of April Tesla insurance is still not out of the blocks, apparently waiting for the completion of a “small acquisition that we need to complete and a bit of software to write”. I suspect that insurance will be offered to the US market, and Europe and the UK may not be addressed in the short term.

New technology will disrupt, but it seems the US insurance business and the analysts are not really joining the dots and coming to grips with the new reality.

I Dropped the DRIP

This is the week that I turned off all the DRIP (Dividend Reinvestment Plan) settings on my SIPP (Self Invested Personal Pension) account.

All the investing primers will talk about compounding interest over the years being a key factor in maximising your returns. To increase the returns add dividend re-investment into that equation and it looks even better. However the automatic dividend reinvestment offered on your trading platform may not be the best option to do that. If like me you do not have large holdings of any particular share.

The way the DRIP feature works is it will take the dividend received for a share then attempt to buy shares with the amount, then charge a £1 fee. None of my dividend paying holdings return a dividend of more than £50, so whilst £1 seems a small amount to pay to trade, I am mostly breaking my trading rule to not spend more than 2% on a trade.

This doesn’t mean that I am not going to reinvest the dividend. I will allow dividend payments to accumulate, then add that to the regular pension contributions. The dividends will then be invested alongside the normal regular investments. This is going to reduce the costs of running the SIPP by about £35 a year (it all helps). This is also going to reduce the amount of effort involved in tracking the trades.

Why I invested in Alibaba

Until recently I have invested mainly in UK shares. I want to diversify my portfolio to be less UK centric so last year I started considering more international opportunities. Since then I’ve bought about 10 different international shares. Economic growth in China is an opportunity that is not being addressed in my current holdings, so I was looking for opportunities to invest in that region.

During 2018 I tracked the news on a number of companies including Alibaba. Alibaba has many online businesses (see the logos above), somewhat analogous to Amazon, eBay and Google. This company has a massive market and steady growth. Despite current concerns of the impact of the Trump trade wars impacting growth in China potentially reducing the near term growth, the long term prospects still look very good.

Alibaba are listed on the US market so can be bought through the trading platform I use. I finally took the plunge to buy, during the recent dip in price, I bought two tranches one this May, then another recently in June. I buy in tranches to attempt to even out the volatility and avoid buying in at an inopportune price. The second tranche has enabled me to reduce the average cost per share. I will look to buy again in 6 weeks. Currently I’m down just over 4%, but I’m only two months in and I’m looking for an investment that will be in place for 5 to 10 years. I don’t intend to buy more than 2% of my total portfolio in this share though.

What I could have done better is to spend more time looking into the detail of the accounts and gain a better understanding of the business, but I have limited time and have been swayed by the coverage in financial media. Time will tell if this was wise.

Tesla – buy on this dip?

Tesla’s share price is down, why should anyone invest in Tesla?

Red Tesla Model 3

Elon Musk’s strategy has been to vertically integrate wherever possible. This gives Tesla closer control of their value chain and an ability to have their own proprietary technology. For instance the recent custom processor development that reduces dependence upon Nvidia for autonomous driving compute resource.

The perceived risk of the shared patents is not as significant as some state. The ability to execute on these patents is dependent upon engineering experience which Tesla has an 8 year lead on all legacy manufacturers (compare the specifications of the original 2012 Model S with the newly released Audi eTron you’ll find that oldest Tesla model wins across the board). An additional key advantage for Tesla is the millions of miles of real world telemetry from their cars, this is more valuable than the patents in enabling their product lead, particularly in safety and innovation in autonomous driving.

Graph of efficiency, showing the Telsa lead over Mercedes, Jaguar and Audi
The most efficient cars in the world – Slide from the June 2019 Tesla Shareholders meeting

Battery supply is the Achilles heal for all electric car manufacturers, and looks likely to remain so, neither Kia or Hyundai can meet demand for their new electric cars. VW the most likely European challenger, with plans to ship 200,000 electric cars. But they have significant battery supply chain issues; firstly a proposed 20GB supply agreement with Samsung was downgraded to 5GB, and then patent litigation between a chosen partner SK Innovation and LG Chem bringing supply into doubt. The legacy automotive manufacturers who are committing to electric vehicle production are having to scramble to lock in supply chain deals for batteries, with the current lack of supply that implies increased battery prices in the short term and massive investment costs in the medium term. Simultaneously they are having to invest heavily in an attempt to catch up with Tesla. Meanwhile the Model 3 rips a hole in one of their more profitable segments outselling all the competing models in the US market.

Tesla is currently better positioned than their competitors with its own battery plants and partnership with Panasonic. Tesla has been steadily improving their own battery technology both incrementally, and more recently through the recent acquisition of Maxwell. The Maxwell technology has the potential to both increase power density and perhaps more importantly to reduce the factory space required to manufacture cells. Additionally Tesla now own the Maxwell supercapacitor IP, which appears to be at the heart of the recently released active suspension system in the Model S and Model X updates.

The Tesla cars are more advanced than any mass market competitor can hope to be in the next few years. They are currently more efficient (the important how far can it go on a charge). They are more capable, the performance version of a Model 3 will out perform a BMW M3 on a track for a lower price (not particularly useful for the average driver but a commercially important flagship variant).

On the downside, I’d have to agree that Tesla finance can seem precarious and Elon Musk likes to fly at the limit of risk. Tesla at this point is highly dependant upon his ruthless drive. Elon seems to exhibit a confluence of being both a shrewd operator along with occasional naivety, for instance announcing the closure of all showrooms, bating the SEC etc.. Like Steve Jobs with Apple, there is an undeniable dependence on a singular personality, which is definitely a risk to any investment. However Apple has continued, so I think would Tesla, although not with the same ruthless pace.

The dip in share price last quarter was due to the confluence of a number of factors over the three months; the reduction in US electric car tax credits, the China import papers debacle, impact of European industrial action on imports, the logistics of export to Europe (built cars sitting on ships), the Shanghai battery fire, the showroom go/no-go decisions. Although I expected that to be a temporary blip the share price continued down to around 35% from its peak price. This drop was due to a combination of Trump trade war related tech stock price hits and the fact that Q2 is not likely to deliver a profit, delighting the Tesla bears and short sellers. What they are missing is that the lack of profit is due to ongoing capital investment in new plant (a gIgafactory in China) new model development (the Model Y, the pickup truck and the truck). Value here in the medium term will not be from dividends it will be from growth.

On balance I’m seeing more good than bad in the overall picture, this low point is buying opportunity if you have the risk appetite. I’ve topped up last week to reduce my average buy-in price. Although the volatility of Tesla shares is appealing to traders I’m holding my handful of Tesla shares as a long term investment.

Secure Shell

If you work in IT sooner or later, if not every day, you will use secure shell as part of your every day work. You may even be using a secure shell connection without even being aware, such is its ubiquity. It’s an essential piece of the 21st century operation and interaction between computer systems, one which even IT professionals sometimes take for granted.

SSH is the protocol used for secure shell and provides secure (encrypted) connections to remote machines. It is most commonly evoked with the ssh command, which I had mistakenly taken to be merely a secure ‘telnet’ remote connection. However the secure shell protocol is much more capable than just providing a remote shell console.

Once established, the secure shell connection can operate more like a tunnel allowing multiple channels connecting services simultaneously to ports on the remote machine. The most obvious example of this is when you ssh connect to a machine and include a connection with X Windows. Your connection will present the command shell in the terminal window (or equivalent putty, for instance, if on Windows) and also create a channel to connect your X Windows server for the remote machine to display windowed applications on your local machine.

For a clear explanation I can recommend this YouTube video ‘How Secure Shell Works’ from the Computerphile channel where Dr Steve Bagley walks through how it all works.