• Christiaan Quyn

Personal Portfolio Annual Letter 2019

Updated: Jul 13, 2021

My review of the general market (Colombo Stock Exchange) over the last 12 months along with my thoughts, actions, and personal highlights.

“In theory there’s no difference between theory and practice, but in practice there is” — Yogi Berra


The general stock market picture in 2019

The year began with some of the lowest turnover seen in 10 years and a further decline in market values. For the first time since Sri Lanka’s independence, an unconstitutional and illegal transfer of power occurred, shattering the faith of many foreign institutions in the stock market causing an outflow of capital.

As stock values kept declining, further drama and instability from the political crisis ensued. The general market as a whole seemed a bit undervalued, steadily declining year over year since 2016, this pessimism due to a decline in the index over the years along with the foreign outflow of capital kept stock prices in a depressed and declining state.

Then we witnessed the devastating Easter Sunday terrorist attack. The ASPI was at one of its lowest levels in a decade, declining an incredible 18% from a year before. Once the devastating after-effects of the Easter Sunday attack were beginning to emerge (this included billions of losses in tourism due to cancellations, defaults on loans, etc), it’s implications for the rest of the country and the economy grappled the market with fear and uncertainty.

Shortly afterward, lots of great businesses including almost all private banks in the country were selling for incredibly cheap prices. It presented the opportunity of a decade and it was time for me to turn aggressive, what I was looking for were great businesses at cheap prices. The central bank soon dropped rates to entice credit demand in the economy.

At this point, all of my capital was deployed to mostly purchase premium financial institutions at bargain prices. By the end of July, the market seemed to have recovered from its bottom and companies were starting to get more expensive.

With the presidential election announced in November, the public seems to have gotten more bullish on stocks and the general economic picture.

I make no attempt to forecast either business or the stock market; the above is simply intended to display the opportunity presented during the incredible decline of market values and that of the general market over the year.

I still consider the general market to be priced a bit more towards the low side based on long term investment value.

Portfolio Strategy

Excited by reading ‘The Intelligent Investor’, I was eager to put the Graham principles to test. I kept reading the work of many other value investors (Charlie Munger, Warren Buffett, Howard Marks, Seth Klarman, Phil Fisher, Monish Pabrai — to name just a few) to further refine my ideas and develop my skills in valuing businesses, understanding economics, and accounting.

My criteria for selecting a business to invest in was as follows:

  • Is it selling a product or service you can understand?

  • Can you understand the nature of the competition?

  • What can go wrong with the business over time?

  • Is the earning power (economics of the business) over the next 10–15 years good or getting better or poor and getting worse?

  • Are you comfortable with the people in charge?

  • What’s an appropriate price for a business with favorable answers to the above questions raised?

In terms of portfolio strategy, I compared every potential investment to the almost risk-free return of a 5 year fixed deposit. I also used my best current investments as a measuring stick to screen out companies that aren’t better than what currently have and can buy more of.

Personal Portfolio Results

For 2019 my portfolio has done much better than the general market, yielding quite satisfactory results for the year. The general market index (ASPI) has declined by about -1.12% from 6034 to 5970. Most index and mutual funds performed at about -3.81%. According to the Unit Trust Association of Sri Lanka, only 2 investment funds invested in stocks showed a gain for the year.

My portfolio with dividends re-invested amounts to a return of 27.29%. I consider myself lucky to be provided with opportunities during stock market folly to pick up great companies at attractive prices at a time when I had some funds.

Over the years, I will be quite satisfied with a performance that is 10% per year better than the Averages, so in regards to this benchmark, 2019 was a successful and better than average, year.

Restructuring of my portfolio

DFCC Bank I think I overpaid for DFCC (at an average of Rs. 82.2 per share). My analysis was partly speculative even though I did not realize it at the time. Being the biggest part of my concentrated portfolio, I felt like I overpaid for an inferior company for the following reasons:

  • Average P/E ratio (of the last six years): 7

  • A low margin of safety at about 30%

The margin of safety is the average earnings power of DFCC Bank at 13.7% taken against a 1 year fixed deposit rate (10.55%) in 2018 or slightly less against the 2018 Sri Lanka 1 year bond yield (10.8%)

Mistakes made when evaluating DFCC

I made the following mistakes (I have since changed the way I evaluate businesses)

  • A large emphasis on book value

  • A large emphasis on the fact that it was trading at a 10 year historic low, and constantly comparing it to it’s Rs. 200 per share high a few years ago. The high historic market price is no indicator of a future price and is not considered investing, rather it is speculation

  • A large emphasis placed on the fact that it was undervalued because the company’s total market capitalization traded at almost its liquid asset value (cash and short term funds)

  • More emphasis placed on the unusually good 2017 results rather than averages over the last 6–10 years

  • No emphasis placed on understanding sources of revenue, hence I did not look at future streams of cash and rates of return

  • No emphasis placed on cash flow analysis and profitability

  • Did not look into the future economics of the business

Reasons for restructuring my portfolio and a change in capital allocation My main reason for wanting to sell my stake in DFCC was because of the opportunity cost of not being able to allocate that capital into a superior business that was selling for a great price at the time.

  • Between June and July 2019, many premier financial institutions were trading at historically low multiples of earnings and at high rates of return on tangible equity

  • These financial institutions had margins of safety well above 100%, compared to DFCC’s measly 30%

  • These financial institutions are undoubtedly considered some of the most recognizable brands and businesses in the country

So looking at the facts and revisiting my reasoning in previous blog articles brings me to the conclusion (quantitatively and qualitatively) that I overpaid for an inferior company (DFCC) when compared to the other businesses available at the time. Additionally, I made some serious misjudgments when it came to evaluating DFCC that I do not hope to repeat. I hope to hold the restructured portfolio for many years to come as it has yielded quite satisfactory results at low levels of risk.

Interpretation of results

My performance this year is due to both generally lower prices and the fact that I waited to acquire great businesses with patience. My largest position comprises over 45% of my total portfolio. During an acquisition period, my primary interest is to have the stock do nothing or decline rather than advance.

Most of my time is mainly focused on managing my business and reading. This policy, while requiring patience, should maximize long term profits.

Conclusion 2019

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein

Looking back at an eventful year, my main takeaways so far include:

  • Coming to the understanding that owning stocks (which is really ownership of a business) is a permanency to wealth and is core to my net worth. My view is that I want to be holding large stakes in great businesses for the rest of my life

  • One needs to make only a few, really big bets when the odds look incredibly good in one’s favor (looking at all possible outcomes rationally)

  • I have a 20 shot financial punch-card in my lifetime, I reckon I’ve used about 5 so far

  • Learning to compare risk-free govt bonds to the rates of return on businesses

  • Having no problem watching my portfolio decline in market value as unexpected events triggered irrational short term fear in the market

  • Buying more of a great business at lower prices in a declining market after careful evaluation of each security vs the current deposit rate

  • Improving upon my valuation process and placing a large emphasis on cash flows, profitability and market/economic position

  • Continuing to read, watch and learn about better businesses and qualitative value

  • Improving my rational decision-making process by studying and checking up on my own misjudgment and psychological folly

I have tried to cover points I feel might be of interest and disclose as much of my philosophy as may be imparted without talking of individual issues. If there are any questions, I would welcome hearing from you.

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