This is my May 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.

We are certainly living in ‘interesting’ times and I am of the opinion we will very likely experience challenging market conditions over the next several months. In the long-term, however, I think business conditions (and life in general) will improve.

I recently read that major online brokers — Charles Schwab, TD Ameritrade, Etrade and Robinhood — have experienced a spike in the number of new accounts in Q1 2020, when stocks experienced a rout in March and a subsequent rebound.

While I am a strong proponent of personally taking an active interest in financial planning for one’s future, I see that many of the new accounts are being opened by individuals with no previous investment experience. Investing with no experience is tantamount to gambling and reminds me of what I witnessed during the ‘dot.com bubble’.

I strongly suspect many ‘new’ investors may walk away with an unpleasant experience when their ‘investments’ implode. In order to reduce the risk of an unpleasant investment experience it is imperative you focus on investing in high quality companies which generate strong free cash flow, have competitive advantages, solid management, investment quality credit ratings, competitive advantages, and which operate in industries with high barriers to entry.

FFJ Portfolio

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

In March 2020 I disclosed my acquisition of shares in high quality companies where I felt I was getting a ‘fair deal’. Subsequent to these March purchases, however, I have limited my purchases to the automatic reinvestment of dividend income until….I decided to acquire shares at $146.56 in 3M Company (MMM) for an account in our daughter’s name; this account is one for which I do not disclose details.

Although purchases have been extremely limited, I have written covered calls on some of my holdings where I think valuation levels are elevated. In this May 4th article I disclosed that I had written June 19th expiry covered calls on 4 companies.

On May 22nd I wrote covered calls on the Big 5 Canadian banks and provided disclosure here. Subsequent to writing these covered calls, the share price of the Canadian banks jumped even though they reported a plunge in profits and a surge in loan loss provisions (see here, here, here, and here). While the shares prices pulled back very slightly on May 29th, I think further pullback is highly likely.

Recently released Q2 results for the Big 5 only account for 1.5 months in which COVID-19 was declared a pandemic. In my opinion, the financial picture for many businesses and consumers is going to get much worse over the next few months. Many businesses will not see a return to pre-lockdown revenue levels yet significant additional costs will have been incurred to make workplaces safe so they can re-open for business.

In addition, the Big 5 are providing financial relief for qualified customers in the form of payment deferrals where financial hardship is being experienced. These deferrals will not go on in perpetuity and once the deferral period comes to an end, I think many customers will be in a predicament where they will be forced to default on their obligations and may need to declare bankruptcy.

Some argue there may be some increase in bankruptcies but it will not be as severe as in a big recession because in a big recession there is no bottom and what we are experiencing is very different because most people who have lost their job will be able to go back to it. Perhaps, but I think a great number of jobs will NOT be there as some expect. I also think income levels for those who do return to their jobs may be not necessarily be at pre-shutdown levels.

I certainly do not profess to know what will happen in the short-term so if my decision to write July 17 covered calls on the Big 5 turns out to be incorrect and the share prices rise above my strike prices come expiry I can either:

  • close my positions at a loss OR
  • roll my covered calls further out on the calendar and a high strike prices.

On May 25th I wrote covered calls (see here) on a company I deem to be richly valued.

Final Thoughts

Given my opinion on current market conditions and valuation levels of companies which appeal to me, I am not in any hurry to deploy funds sitting on the sidelines. In fact, I anticipate heightened volatility in the coming months and fully expect another broad market pullback similar to that of March 2020.

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.