2017 is officially over and once again it’s time to be honest with ourselves and give a grade. Coming off a stupendous 2016 meant that 2017 would be a challenge. Yet, once again, this last year will go down as one of the best years we have ever had. I post this as an early “retiree” who has transitioned from a labor-for-pay model to a capital-return life model. That’s an important distinction to understand. Let’s once again break the year down into the major components for a thorough vetting:
In 2016 our overall net worth increased by 14% and in 2017 it increased by 15.7%. This happy outcome was despite sending our son off to college and being hit with some large expenses. As a reminder, for net worth I count all investment accounts, all savings accounts, and the value of our home equity. Our home’s market value increased once again in 2017 and now exceeds our purchase price by about $45k. Due to several significant issues in our local area (a new building boom etc) I do not expect much more of an increase in home equity and the headwinds are gaining steam. Breaking things down to the individual components for 2017 the portfolio looked like this:
INVESTMENT ACCOUNTS – 2017
Berkshire Hathaway – started the year at about 63% of portfolio. It helps when 63% of the portfolio again beats the market to the tune of a 21.9% gain for the year which followed a nifty 23.41% last year. By comparison, for 2017 the S&P500 was up 21.83% (with dividends reinvested) and returned 12.25% in 2016 (dividends reinvested). As we approached the passage of the GOP Tax Bill and odds of passage increased I began to buy more Berkshire with gusto. There is no company in the country which will benefit more from a lower corporate tax. Berkshire dutifully paid most of the 35% tax rate for decades and with the rate now at 21% it results in a massive windfall for Berkshire shareholders – to the tune of about $37 billion and that’s not even factoring in things like an improved economy. I LOVE to make big bets on high probability outcomes so the decision to back up the truck and buy more wasn’t that difficult. Berkshire is now 87% of the portfolio. The stock is already up another 5% to start the year. Even better, Berkshire is now sitting on a massive $109 billion in cash. That cash will eventually be deployed either with the purchase of a nice growing whole business or perhaps in a massive one time dividend. The company is generating over $2 billion per month in profit which adds to this nice little “problem”. My own best guess is if Berkshire gets to a cash pile of about $125 billion then Buffett will likely issue a one-time dividend of about $25 billion – call it $15,000 per A share. And better still, Buffett can keep doing that every 2 years until a great business opportunity presents itself. When I break out the numbers and the profits I concluded that Berkshire’s value should be priced at about $350,000 per A share ($233 per B share). In late December the shares were trading for $297,000 per A share and about $198 per B – a far more compelling value than the S&P500 overall so I made my move and bought more.
VFIAX (Vanguard S&P500 index fund). We still retain an 8.25% position in Vanguard’s great, low-cost Admiral S&P500 index fund. I did decrease our percentage to buy more Berkshire.
VHDYX – This is Vanguard’s high dividend stock index fund. We ended 2016 with VHDYX comprising 12% of the portfolio. It is now 0.00% not because I changed my opinion of the fund but because Berkshire offered a more compelling value.
WFCPRL (Wells Fargo non-callable preferred) – Started the year at 7.2% of the portfolio. I sold out of the position to help pay for son’s college costs. Now 0.00%
VFISX (Vanguard short term Treasury) – VFISX was our emergency fund and provided a cushion to withdrawal from in case of a huge market crash so I don’t have to sell stocks at fire sale prices. At the end of 2016 VFISX was at 2.3% of the portfolio. I sold out and transitioned our emergency fund to Vanguard’s short-term TIPS fund (see VTAPX).
VTAPX – Say hello to our new emergency fund. It’s a short-term inflation protected bond index fund. This is a Vanguard Admiral fund so our expense ratio is wicked low. Since the duration of the bonds are all short-term there is far lower downside risk than most bond funds and the TIPS are a form of protecting against inflation which I anticipate being a bigger problem in the years ahead. VTAPX ended the year at 2.75% of the portfolio.
Technology stock basket – I decided to participate in the booming technology sector which is a big break from my past. I’ve always subscribed to the mantra that technology is prone to disruption and competition and therefore it’s hard to value earnings that are inherently unstable. Yet, I’m not blind either. The performance across the board of low capital intensive businesses that get huge returns on invested capital is irrefutable. If Artificial Intelligence grows exponentially as is assumed (always a dangerous notion) then it will lead to a massive boom across the sector. That’s a risk I’m willing to take with a small percentage of my portfolio. Call it just over a 1% weighting. I bought Nvidia, Amazon, Alibaba, Intel, Square, and the Chinese electric car and battery manufacturer BYD. I won’t go into my reasons for each but the initial results have been stupendous.
Money market funds and savings accounts – These short-term-parking vehicles comprise the rest at about 1% of the overall portfolio and I continue to wind down my failed Prosper.com peer-to-peer lending experiment which ended the year with a minuscule $700 balance. Why did it fail? Part of the failure is my fault in over-estimating the odds of certain account types to pay their bills and over-weighting them. And part of it was what I deem to be a flaw in Prosper’s mathematical modeling. I’m through with them but it will take a few years to unwind the rest unfortunately. One can no longer sell your positions.
Overall for the year, our “book value” (net worth) increased by 15.7% which is slightly ahead of last year’s 13.97%. Consolidating all investment accounts, we were in line with the market and I think did it with lower risk. We managed all of this despite paying two semesters of college costs which makes the result splendidly satisfactory.
BRUTALLY HONEST LOOK IN THE MIRROR
So when it comes to purely stock investing and stripping out all the cash/treasuries to get to an apples-vs-apples comparison how am I faring vs. the S&P index? My benchmark? I like to use rolling 5 year time periods to gauge whether or not I’m personally adding any value whatsoever to the equation. If I’m not? Then I should be brutally honest with myself, sell all holdings and put it into the S&P500 Vanguard index. If I am adding value? Then continue what I’m doing. Here’s the latest 5 year snapshot:
– S&P 500 32.4%
– GO4ITUSA. 29.24%
– S&P 500 13.7%
– GO4ITUSA. 24.48%
– S&P 500 1.4%
– GO4ITUAA. (-)10.96%
– S&P 500 11.97%
– GO4ITUSA. 20.66%
– S&P 500. 21.83%
– GO4ITUSA 22.66%
Compounded over 5 years $10,000 would now be worth $20,822 had I stuck it in the S&P 500. Doing it myself, $10,000 became $21,202. Which means!? I’m still adding value and will continue to invest a good chunk of our money myself. That means I’m personally beating over 80% of “professional” money managers. Is that a great feeling? Damn right it is. I don’t get charged a damn fee to manage my own money and I control the taxes. Those two things give individuals a huge advantage over management professionals.
This is usually a boring category and 2017 was… boring. Unlike 2016 we didn’t have a huge BREXIT panic which drove interest rates into the dirt. We had already re-financed after BREXIT and locked in a 15 year fixed rate mortgage at 3%. 2017 was the first full year of paying it off and increasing home equity by a lot more than a 30 year mortgage. This “forced savings” will add nice little annual chunks to our book value for the next 13.5 years unless of course I decide to pay it off early. When would I do that? If the stock market became wildly over-valued and I had no great ideas for new cash. But it would be HARD to do that – similar to what Buffett must be going through in deciding whether to issue a big dividend. You always want to be prepared to act in case an opportunity comes along and paying down a mortgage robs flexibility, I’ll again post Charlie Munger’s quip:
“Really good investment opportunities aren’t going to come along too often and won’t last too long, so you’ve got to be ready to act. Have a prepared mind.” Charlie Munger
Tour Guide in Colonial Williamsburg – A great year overall! My responsibilities vastly increased and I did a lot of escort work in addition to being a tour guide. An Incredible amount of fun. All of this fun pulled in about $5500 and I expect that to increase in 2018. Being a guide is a keeper and is the perfect thing for my new life.
Area Relocation Specialist Tidewater Virginia – At the end of 2016 the jury was still out on whether this gig will work out and it still is. I didn’t have a lot of work and completed one tour. I do expect it to expand in 2018 but it’s hard to say just how much work will roll my way.
Uber – I started driving for Uber and thoroughly enjoyed the app and the experience. I do it totally part-time and only when I feel like it. This gig netted me about $1,000 for about 4 months of “work.” I may ramp this up in 2018. We’ll see. But driving for Uber is a keeper.
Amazon – I also signed on to be a private contractor delivering packages for an Amazon warehouse. It’s a wonderful app and I had a ton of fun learning it. The 4 hour delivery blocks are real work and I sweated (the horror!). Amazon switched to using a professional delivery company late in the year for a good chunk of their deliveries which significantly impacted available delivery slots. I’d deem this one to be inconsistent and jury is still out.
Hacking gigs. In this category I include credit card rewards points, filling out surveys for cash, EBates, and cash-back shopping apps like the one Wal Mart provides. For the year we’ve made $500 so it’s not significant and really not worth my time. I’ve lessened the priority of this as the above gigs began to take more of my time.
So that’s it for 2017. A very very good year indeed and it gives us a lot to look forward to going forward. All the best in 2018!