HM1 Weekly Investor Update: 2 November

Hi everyone,
 
Well here we are, November already, US election week, Melbourne Cup, State of Origin, and a week out from the upcoming conference, where the new investment ideas of the great minds we have assembled will be pitched. We have always expected this to be a volatile time, and have tried to brace everyone for that. Who knows whether Trump will pull the proverbial rabbit out of the hat and be returned to the White House? Not me, that’s for sure! 
 
Last week saw the old market jitters return, with US and European markets suffering their worst week since the March selldown. The S&P500, the Nasdaq, and the Eurostoxx all declined by about 5.5%, as coronavirus cases surged once again, and uncertainty about just who will win between Sleepy Joe and The Don saw punters head to the sidelines. As we have always said, any equity portfolio, HM1 included, will always be affected by market sell-offs in the short term, while in the medium to longer term, we hope to deliver above market returns to our shareholders.
 
We continue to remain pretty active in the portfolio, with many of our conference managers also seeing perhaps more short-term risk than potential for further gains. As a consequence, our portfolio is now sitting with almost 22% cash, and will be higher in the next 2 weeks as we continue to liquidate the conference stocks. With most of our stocks being fairly liquid, we are seeing very little price disruption from our selling. If you are wondering what liquid means, it simply refers to the total value of the buying and selling in any one day in a stock. If $100m in value trades each day in a particular stock, it shouldn't move the share price too much if we need to sell say $10m of that stock. If only $5m trades per day, then to sell $10m worth will prove somewhat more difficult, and we will be subjected to more economic and political led market moves, as it would take literally days to execute that order. This is why HM1 likes to be invested in large liquid stocks. (In my podcast last week, I spoke about "lobster pot" investments - ones that are easy to get into, but extremely difficult to get out of - we don’t like lobster pot stocks at HM1).
 
So far we have completely exited 3 of the 12 stocks from the 2019 conference (The Trade Desk, Floor and Decor Holdings, and Wizz Air), and have reduced our exposure to a further 5 stocks. This is why our cash holding is as high as it is (22%), which means our equity exposure is not as high as it usually is, which in such times as we currently find ourselves in, will probably provide you with a fair degree of comfort. 
 
The NTA estimates we released to market this morning were $4.03 (pre tax); $3.85 (post current tax); and $3.66 (post tax), which are all up slightly for the month. Our regular monthly report will be released next week, where a more detailed update of portfolio performance will be given, but suffice to say here that a small positive investment performance for the month in light of the 2-3% declines in global indices is a pleasing outcome.
 
As I mentioned last week, we recorded a follow up podcast last Wednesday with the Equity Mates team of Bryce and Alec, where Nick Griffin, who pitched The Trade Desk to us last year (and Amazon in 2018) gives listeners his views on investing, how Munro finds the hidden gems for their own portfolio, why The Trade Desk was such a high conviction idea, and his advice to new investors looking to find their own gems. One stat that Nick mentioned, which surprised me, was how many of the 25,000 companies that have listed on the American stock exchanges in the last 90 years have gone bust - would you believe it is 14,000?!?! The podcast should be available to listeners on Thursday, so look out for it on Spotify - it’s definitely worth hearing his wise words!
 
That’ll do for this week, let’s see who wins the Election and what happens to markets, watch the Melbourne Cup and the Origin - and look forward to the exciting set of stocks that will shortly enter the HM1 portfolio in what will no doubt be a fascinating period of our history!

 

Have a good week,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

 

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