FFJ Portfolio – July 2020 Report

This is my August 2020 FFJ Portfolio report. The portfolio was created in January 2017 for the purpose of demonstrating how investing in high quality companies with competitive advantages and with a record of consistently increasing dividends can assist investors in reaching their long-term financial goals without the need to speculate or to chase dividend yield.

In several previous articles I have expressed my frustration with the dramatic increase in valuation levels subsequent to the broad market pullback we experienced in March/April 2020. As an investor seeking to invest in good quality companies and with no intent of selling in the foreseeable future, the dramatic run-up in the share price of companies which appeal to me is somewhat disheartening because lower share prices allow me to acquire a greater number of shares.

Although my primary focus is to generate an ever increasing stream of dividend income, this does not imply I am chasing dividend yield. In fact, the top 5 holdings I disclosed in my recent portfolio holdings review currently have sub 1.50% dividend yields and 3 of the top 5 currently have sub 1.00% dividend yields. Furthermore, some of my top 11 – 20 holdings also have razor thin dividend yields and one (Berkshire Hathaway) distributes no dividend.

My thought process is that if I own a sufficient number of shares in high quality companies with razor thin dividend yields where the dividend growth has a strong likelihood of increasing at a rate which exceeds the rate of inflation, the dividend income will be sufficient for our long-term needs. I also envision that if these high quality companies continue to perform well over the long-term, their respective share price will likely appreciate in value; I have no issue with rising share prices but I do have an issue with unrealistic valuations.

In my opinion, many companies currently have unrealistic valuations. Typically, investors make investment decisions relative to a risk free rate; a risk free rate is essentially the safest way to make money and is what the US government pays via US bonds or other securities that have zero default risk.

If we look back to the dot.com bubble in 1999 – 2000 the 10 year risk free rate was ~6%. That bubble burst because, to some extent, investors could earn a risk free return of ~6% from the US government.

In today’s environment, the 10 year risk free rate is ~0.7%. This is a far cry from 1999 – 2000.

Now, when you have extremely high quality companies (eg. V, MA, AAPL, MSFT) where the risk of default is extremely low, investors become increasingly likely to use pricing models based on cash flows over 3/4/5+ year timeframes. When risk free rates were higher, however, investors were more likely to use pricing models based on 2/3 year projections.

Personally, I don’t feel I have the ability to reasonably determine a company’s potential return based on cash flows 3/4/5+ years into the future. The world in which we live is far too unpredictable!

We also have an environment in which the Federal Reserve and the European Central Bank have been aggressively injecting liquidity into the market to combat the COVID-19 crisis. Add in the fact that investors have increased their appetite to employ the use of debt for investment purposes (FINRA margin statistics), it is not surprising the valuation of many companies has reached extreme levels.

While the Fed has indicated it will permit interest rates to remain low for the time being, which should offer some support to equity prices, I choose to remain cautious and will patiently wait until the valuation level of high quality companies retrace to levels I deem to be ‘reasonable’.

FFJ Portfolio

The list of holdings within the FFJ Portfolio’s ‘Core’ and ‘Side’ accounts can be found here and the monthly FFJ Portfolio dividend income reports can be accessed here.

Other than the automatic reinvestment of dividends I have not acquired any shares within the FFJ Portfolio. I did, however, initiate a new position in Intercontinental Exchange, Inc. (ICE) but these shares are held in an account for which I do not disclose details; I disclosed this purchase in this article.

There are multiple companies on my ‘shopping list’ but two companies I encourage you to look at are Brookfield Asset Management Inc. (BAM-a.TO) and Berkshire Hathaway Inc. (BRK-b).

BAM-a.TO has access to sizable pools of capital, the leadership team consists of extremely savvy investors, and they are opportunistic. Although I have exposure to the entities within the group, my intent is to increase my exposure at the ‘top of the house’. By increasing my stake in BAM-a.TO I will have exposure to the underlying entities AND Oaktree Capital Management which is not publicly traded.

When BAM completed the acquisition of a 61.2% stake in Oaktree on September 30, 2019, it did so because Oaktree is a leader among global investment managers specializing in alternative investments; it emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in credit, private equity, real assets and listed equities.

If you are unfamiliar with Oaktree Capital I highly recommend you watch the videos in which you will learn about Oaktree’s strategies and learn about the perspectives of Oaktree’s Portfolio Managers.

Although Berkshire Hathaway Inc.’s (BRK-b) share price has recovered from mid-March to mid-June lows I consider it to be a core investment in which I will periodically acquire shares. BRK-b appeals to me for a number of reasons, one of which is that it has exposure to so many segments of the economy. In addition to owning several subsidiary companies, it also has exposure to several high quality companies. Most recently, it was disclosed that BRK-b had acquired over a roughly 12-month period through regular purchases on the Tokyo Stock Exchange a ~5% stake in each of the five leading Japanese trading companies: Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp.. Through my stake in BRK-b I have indirect exposure to a lengthy list of profitable companies in various economic sectors that I could not possibly acquire on my own.

Final Thoughts

I have significantly reduced the number of articles I write as a growing percentage of my time is being devoted toward taking care of an aging father-in-law and an aging mother. One lives ~330 kilometres from me and the other ~700 kilometres from me. They live in opposite directions!

Publishing this article is also a few days later than the norm in that I was in Montreal helping our friends move one of their sons from one McGill University off-campus residence to another. This move coincided with some work which needed to be completed in order for us to list for sale our last investment property. While our real estate investments have not required much of our time, having no more rental properties will be one less thing to deal with!!

The lofty equity valuations we have witnessed in recent months has also resulted in me spending far less time looking to deploy funds. I am cautiously optimistic the pullbacks we have witnessed in the last couple of days will become more of a regular occurrence. Until such time as valuations become more reasonable, however, I will continue to patiently bide my time.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.