Value Investment Fund, second year performance
Value Investment Fund, INC. annual Letter
Quito, Ecuador.
10/9/2021
To the friends and investors of Value Investing Fund, INC.:
In our second year, ending September 1, 2021, the fund has generated 51.46% in profits for a cumulative return of 257.19% since inception.
Ney Torres,
Portfolio Manager
Value Investing Fund, INC.
Attachments
Here is more information that some may find important:
Attachment A – What you should know about the fund
Attachment B – Statistical details of last year
Attachment C – Description of positions
Attachment D – Thoughts on various issues
Attachment E – Other notes
Attachment A
What you should know about the fund
In each annual letter, I will try to honestly assess the fund’s performance, reiterate my core investment philosophy, and share my thoughts on various issues.
I share some of the fund’s holdings this year and explain my thoughts behind each one. This way you can get a better idea of where, why, and how we invest, and why I am very confident about the prospects of the fund. However, there will be times I do not mention some positions. Nor do I mention the size of the position. When more people find these (mostly small) companies, the price of the stock can move abruptly.
To entertain/educate friends, family, and investors, I have created a podcast and a blog, which you can find at neytorres.com. I hope you like it.
Performance targets
My main objective is to obtain a compound annual return of 10% to 15%, measured in a horizon of one to three years.
It is worth mentioning two landmarks that describe the environment today:
The average rate of US savings is 0.45% per year.
The US stock market, based on historical evidence, is positioned to deliver an average annualized return of -2.9%.
There will be good years and bad years.
“In due course, great long-term performing managers will fall to the bottom half of peer groups over multiple three and five-year periods. In order to generate strong long-term results, investors must stay invested through the lulls. Moving to a passively managed strategy during difficult periods often does not work either, and switching between the two based on trailing returns can be counterproductive. No matter what path an investor takes, patience continues to be a prerequisite for success.”
“…You know I had spectacular returns, but I couldn’t raise any money. Because every time I would go out and talk to people, people basically said, ‘What the hell are you talking about? I want a monthly, I want a two-weekly; I want a weekly return. I want you to go up in a down market. That is what I want. I want you to be the bank except that I want you to yield better.’ … The biggest mistake I made is not how much money I lost, it’s how much money I forgot.” – Greenwald Li Lu
This fund focuses on long-term absolute returns. In my opinion, this makes it less risky, even if in the future it turns out to be more volatile.
Most of the results of any fund come from a few decisions
Winners tend to keep winning. Google is successful in part because it has cheap capital, and it has cheap capital because it is successful, it attracts the best talent, etc.
In capitalism and life in general, wealth, power, and fame accumulate only for a few. The same happens in investments. One conclusion from this is that not all our ideas will work. At any given time, our gains or losses will surely depend on a few positions, while most do not have much movement.
We will not be oblivious to dips of 30% to 50% at times. Neither will any other fund. It is the nature of the stock market.
“Even those long-term shareholders who were rewarded with the greatest cumulative returns endured large price declines over shorter intervals. I study shareholder wealth creation for all publicly-listed U.S. common stocks during each of the seven decades since 1950. Focusing on the 100 most successful stock/decades in terms of shareholder wealth creation, I document that even within the highly successful decade, shareholders experienced draw-downs that lasted an average of 10 months and involved an average loss of 32.5%. During the immediately preceding decade, draw-downs for these highly successful stocks lasted an average of 22 months and involved an average cumulative loss of 51.6%.”
“…I guess no one will be too surprised that even the big winners deliver something of a bumpy ride – what surprised me was the extent. Apple has delivered drawdowns over 70% three separate times! Even if one today purchased a stock that will turn out to be the big winner over the next decade or two, most likely there would be periods where the value drops 50% or more. And, as the fourth report in the series shows, it is very hard to identify tomorrow's winners based on characteristics that are objectively observable today.”
What does the fund do?
We value public companies around the world to buy their shares, and when we are convinced that we have found something at a discount, we invest.
Business valuation methods can be classified into six groups:
MAIN VALUATION METHODS
Here are my beliefs about the fund and investing:
Price is what you pay, and value is what you get. They are not the same. If you think about it, the market is a place where there is a discrepancy in valuation but an agreement in price.
The valuation depends on many factors—perspective, time, and opportunity cost (discount rate)—but in general, a company or any financial asset is worth the money it produces and will produce in the future (cash flow discounted to present value).
The market is extremely efficient, so it takes a different perspective than most to have an advantage. Ours is patience. Everyone wants to get rich quick, but our variant perspective is to go against human nature. We’re contrarian investors.
“Successful investing is about managing risk, not avoiding it.” — Benjamin Graham
Risk is not volatility; we like volatility. Risk is the permanent loss of capital by not knowing what you are doing.
There is no single strategy or valuation method. The strategy the fund uses depends a lot on recognizing the market we are in. However, most of the time, I aim to invest in things we are happy to have positions in for three to ten years. Our favorite holding time for a stock is “forever” if we find the right one.
The size of the position is a determining factor in both trading and long-term investments. The more conviction you have, the more you should focus.
If we lose money going through the vicissitudes of life, do not doubt that it is 100% my responsibility. As most of my assets are in the fund, it is within my best interest to avoid this at all costs. The further we advance, the more zeros our errors will have.
In the stock market, I do not compete against others. Rather, I compete with myself and my belief system.
My motivation to run the fund is to be able to serve those who entrust their savings to me, including family and friends.
Attachment B
Statistical details since inception
Attachment C
Description of positions
The stocks that I'm currently buying I won't mention yet. I will describe them once they are sold.
I can tell you that we own a copper mine that we acquired at $0.5 last year, and it currently trades around $2.50. But I value it at an $8 to $11/ share range, at least. The good news is that it has more upside, and it may only take one to two years to get to those prices.
We also hold another two new positions that are amazing companies that few people know about. They are solving real problems, one in real estate and the other in the cybersecurity industry. They will sooner than later be worth between five to ten times today's value in my opinion. I'll tell you all about it when we sell them.
VOYAGER DIGITAL LTD - VYGR
Is impossible to ignore the market narrative about crypto at this point. However, how can you know if a crypto coin is valued or undervalued if it produces no cash flow? Cryptocurrency is not even a regulated industry at this point. I differ from most value investors in that I think speculation has its place; it can be profitable, too. It's just a matter of doing it intelligently and positioning size accordingly as we have.
I compare the crypto mania to the California Gold Rush (1848–1855). I don't want to be a miner that just got to town; I want to be the store owner that sells picks and shovels to the newcomers. While there was no guarantee that a prospector would find gold, the companies that sold picks and shovels were earning revenue and thus were good investments. Voyager is the low-cost provider of crypto to retail investors and traders. At the time we took a position, they were growing rapidly, and they still are. Their cost of acquisition is under $40, and their monthly revenue per account is $100. That’s the kind of business I want to be in. They are not only a trading platform but a broker-dealer, so they are allowed to create registered securities and let their customers trade them. This all means that if regulators come and determine that cryptocurrencies are now considered securities (which can be regulated), they are well-situated.
Others
As the initial shock of COVID-19 got under control, I felt more confident about how a world after COVID may look. We gradually transitioned from more predictable stocks related to gold, for example, to other stocks with bigger potential. We started to concentrate the portfolio on small unknown companies. That’s where we really thrive, where no one else wants to look. These companies have incredible potential if you know what you are doing. Then, you just need some luck. We also had our share of pain, which I’ll tell you more about later.
For now, a little recapitulation on the stocks mentioned last year that we have since sold:
Gran Colombia GOLD (GCM:TSX)
They acquired another stock that we owned called Gold X, which was an asset play. So, we took a small profit but not what we hoped for with Gold X. We sold Gran Colombia at a profit to focus on businesses with more potential. I'm still amazed to see that the prices of gold and silver have stayed so low for so long.
Freddie MAC (FMCC) and FANNIE MAE (FNMA)
We sold these small positions for a profit to focus on better opportunities. As I explained last year, this thesis depends on lawmakers, so we decided to go to more predictable situations. And I’m glad we did.
Wells Fargo (WFC)
We sold WFC to focus on stocks with more profit potential. We made a small profit.
Tankers
Our tanker positions did okay. On average, we got out for a small profit to focus on smaller stocks with more potential.
Vertu Motors PLC (VTU)
Vertu Motors PLC did okay for us. We sold for a small profit even though they doubled this year.
In all of these positions, with the exception of FNMCC and FNMA, I would have had no problem with keeping them. But we have better companies to invest in now.
Other stocks that were not significant in size and have now been sold are MILC, DJCO, and AGQ.
Mistakes
"Everyone has the brainpower to make money in stocks. Not everyone has the
stomach." — Peter Lynch
I decided to add a mistake section. A mistake is not an investment where we lose money because something impossible or unlikely to have predicted happened to affect us. Mistakes, by my definition, are situations in which I should have known better, missed something important, didn’t get all the facts straight, or failed to take action.
You might think that writing about this may make me, the fund manager, look bad. However, I disagree. At the end of the day, I get paid for the results. So far, the results show that we are doing a good job. The idea of writing this report is to communicate all that I would like to know if I was an investor. I believe that showing my mistakes may help others and will be appreciated by the kind of investors, partnerships, and people I would like to attract through the decades. I can't predict where the market goes; I can, however, control how I communicate it to you.
It is impossible to avoid mistakes. Here are the biggest of this year:
We lost 7.3% of our portfolio with Optec International, Inc. Initially bought at $0.14, we sold the stock for a loss at $0.05. Currently, it is trading at $0.02. So what happened? A lot of things happened. (“There's never just one cockroach in the kitchen.”) One of the key metrics we look for is a CEO who is also very invested in the company. At first sight, that was the case here, but it turns out that they had incorrectly reported the number of shares that the CEO has. Rather than 200 million, it turns out he had only 200,000. A big difference. They did correct it, however, at this point, we already had a position in it.
In video calls posted on their web page, management expresses multiple times that they have a gigantic contract for sales with the European Union—around $2 billion. The manager even shows some paperwork on-screen (obviously the contract is not readable in a Zoom call, but they show it as proof). The issue is that, in all this time, they have never officially stated what the counterparty is. If I was the owner of a small public company and my company had a 100 million capitalization, I would definitely make it public. I don't see why not. I thought it was just a matter of time, but after nine months they still haven't done it. Since it hasn't happened, I closed the position. My conclusion is that either management is doing something unethical or they want to buy the stock at bottom prices. Either way, I don't trust Opti’s management to have their shareholders' interest at heart. The numbers on this one were (and are still) amazing for the price they are trading at. The goal of Optec’s management was to get all the profits and buy back stock to then trade on Nasdaq. To trade on Nasdaq, your stock needs to be at least $2. That's 100 times higher than its current price. So I continue to follow the company. They are doing acquisitions with stocks and have new auditors, but the numbers that they reported this year were not impressive at all. I’ll just put this one into the “too hard to figure out” bucket.
Attachment D
Thoughts on various matters
This section is written to explain some important concepts. Every year I hope to write about and explain a different topic.
"Everyone has the brainpower to make money in stocks. Not everyone has the
stomach." — Peter Lynch
Let me give you a painful, real story that happened to us this year that describes this concept in detail.
We bought 5% of the fund into a tiny stock momentarily, so small that we could buy only at different prices; we started buying at $0.20/share. I must look at more than 1,000 companies briefly each year. This one I'd study. I concluded that the company was worth a minimum of $1.2/share even if it was liquidated tomorrow. Within three months, we had doubled our money. One day I decided to call the CEO of the company. He was very kind to take the time to answer my questions—that's why I won't mention the ticker symbol.
I saw they were selling some equipment from the factory online, and I was wondering why. He explained that they had a design problem with the factory.
Then I told him that on the municipality web page, I had found a public document stating that the leasing contract for the land they rented, where they have this factory, was about to be void in a couple of weeks. Of course, I was wondering what the plan was to solve this. He said, “I didn't know that. Can you send me the document?” At that moment I thought, “ Uh-oh, they have some assets in a factory that is not going to work and is being liquidated into pieces. They don't know they are about to default on their lease.” He did tell me they were closing a new deal in which they would change the business model, but it was too soon to give any details.
The next day, I sold our position for a 100% profit. I knew there was still upside, but I didn't like what I saw. I just thought I couldn't value a business if I didn't know what it was going to look like in ten years. That's why I didn't add this to the mistake section. I think it was a rational decision based on what I know. However, what happened next is emotionally painful. They acquired a greenhouse to plant marihuana, and in six months, the stock went up to $8.25/share, where it sits today.
Now how much did this cost us if our initial position was 5%, and the stock went up 4,125%? The fund would have grown another 206.25% just with that position. Should I have gone more into the details and waited for the new acquisition to be described? That is only obvious in retrospect.
Is it emotionally painful? You bet. But that's where I thrive. I won't stop. This is not a sprint but a marathon. And it fills me with optimism to think that we have the opportunity to invest in these stocks. It is the second time in my life this has happened, believe it or not. Who knows—maybe the next time we’ll be lucky.
Attachment E
Other notes
Stock market returns from 1972 to 2020
Just a little reminder of how the markets have looked like in the past. If this is the first time you see this, it may give you context to create realistic expectations. As you see these numbers, keep something in mind: any investor or manager would love to have a track record like this. If you could achieve this, you would be among the best money managers in the world.
“CAPE” vs. Real Returns
The cyclically adjusted price-to-earnings ratio, also known as the CAPE ratio, was popularized by Yale University professor Robert Shiller. It is also known as the Shiller P/E ratio. The P/E ratio is a valuation metric that measures a stock's price relative to the company's earnings per share. Today we stand at a CAPE of over 38. What this all means is that if you build an index to resemble the market, you can expect to lose money if history serves as a guide.
What's the track record of the best investors in the world?:
Look for Warren Buffett in this chart. There are a lot of people with a better track record (including me—imagine that!), but the secret of Buffett and why he is considered the best (also the richest, objectively) is that he has been in the market longer than anyone at those levels! He started his first investment fund in 1956 at age 26.
Why do I always say invest for the long term and be patient?
Below is a chart in which you can see stocks, bonds, and a 50/50 portfolio.
Please focus on the returns you would have historically had by holding 1 year, 5 years, 10 years, 20 years. The longer you stay invested, the less volatile your returns and the lower your risk! If you were lucky enough to get into the market at the best time possible, you would have had an 18% profit every year, and the worst moment possible would have made you 5% a year.
I know what you are thinking: “I can make more money than those averages.” No, we can’t. Not compounded for 20+ years—that would put you directly on the dream team of the best investors in the world. The secret to investing is not timing the market but time in the market and letting compound interest work its magic:
Legal information and disclosures
This letter does not constitute, and should not be construed as, an offer of advisory services, securities, or other financial instruments, a solicitation of an offer to buy any security or other financial instrument, or a recommendation to buy, hold or sell a security or other financial instruments in any jurisdiction.
The provision of information in this letter does not constitute the provision of investment, consulting, legal, accounting, tax, or other advice.
The information presented in this letter reflects the current views of the author as of the date of the letter. As facts and circumstances change, the views of the author may also change. This letter may include forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other factors that may cause actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied in such forward-looking statements. Also, new risks and uncertainties may arise from time to time. Accordingly, all forward-looking statements should be evaluated with their inherent uncertainty in mind. The Fund does not undertake any obligation to update this letter.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS, WHICH MAY VARY.
Certain information contained in this letter, such as market and economic information, is obtained from third-party sources and may not be updated until the date of the letter. While such Sources are believed to be reliable, the Fund assumes no responsibility for the accuracy or completeness of such information.
