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Summary The V20 Portfolio aims to generate annual returns of over 20% over the long term. This portfolio is highly volatile due to concentration. If you have a long-term horizon, the V20 portfolio may be for you. After multiple requests from readers and much deliberation, I’ve decided to reveal a portion of my portfolio which I’ve dubbed “V20.” A rather uncreative name, but I’ll get to that later. This sub-portfolio represents the core holdings (~70%) of my entire portfolio. If you are interested in the performance of my entire portfolio, you can view it at any time using the link beside my name. The main reason why I hesitated to disclose my holdings was because I do not want readers to blindly follow them without understanding the associated risks and goals. But with the recent market downturn, I believe that analyzing my portfolio right now could provide a lot of value. That being said, I must reiterate that you must understand the goals and risks of this portfolio and judge them yourself before taking any positions. Thus far I’ve been analyzing specific companies. With this series, I hope to shine a light on my portfolio construction strategies, as well as analyzing performance from a top-down perspective (looking at the portfolio as a whole). The weekly updates will identify whether there have been any significant events that could have impacted the portfolio and whether our original thesis remains intact. New or closed positions (if any) will also be announced. What Is The V20 Portfolio? The V20 Portfolio consists of stocks that I believe to have asymmetrical returns. In aggregate, the goal of the portfolio is to generate 20%+ return per year over the long term. The V stands for value, the style of investing that I abide by personally. What’s so special about the V20 portfolio? How does it differentiate itself from many other funds/portfolios that you see out there? I would say that one of the major differences is the return expectation. I am not aware of any mutual fund that aims for a return of 20% per year. These type of returns are typically only expected of alternative investment vehicles such as hedge funds and private equity funds. However, I believe that this performance goal is very achievable as a retail investor, if you can stomach the following risks. Risks First there is the volatility. To maximize expected returns of the portfolio, the holdings are not diversified (in the traditional sense anyways). There are typically 5 to 15 stocks at any given time, with skewed weights. Stocks with the largest upside will typically get the biggest share of the portfolio. Because of this set-up, volatility (defined as standard deviation of returns) will likely be much higher than an index such as the S&P 500 over any period of time. You must also accept price risk in the short and medium term. Price risk is the risk that holdings may be undervalued for an extended period of time even though there is still substantial upside. Because the portfolio holds many stocks that are out of favor, you must be willing to grit your teeth while the stock awaits a recovery. Risk In Action (click to enlarge) Here we have a graph illustrating the performance of the S&P 500 and the V20 Portfolio. As you can see, the portfolio has significantly outperformed the index this year. However, it wasn’t rosy all the time. At the beginning of the year, you can see that the portfolio drastically underperformed the index, almost losing 20% in a matter of weeks. To tie this back to the aforementioned risks, had you sold the portfolio then, you would’ve missed out on all of the subsequent gains. This is why I cannot stress enough that you must hold a long-term view if you want to invest in this portfolio. Who Is This Portfolio Suitable For? That answer to that question is ultimately for you to decide, but I do have a few suggestions. There are two general categories: investors who are building towards retirement and retirees who wish to pass on assets to family members. They may look different to you, but they are united by a common factor: a long-term investment horizon. In my mind, this is the critical success factor. By holding a long-term view, the aforementioned risks become irrelevant. To be invested in this portfolio, you must have no plans to withdraw the funds over the next five years at a minimum. This means that if you want to turn $40,000 into $50,000 by next year for a down payment on a house, this portfolio is not for you. If your child is going to college next year and needs tuition, then this portfolio is not for you. On the other hand, if you have excess income every month that you stow away at the bank earning 1% a year, then this portfolio may be suitable for you to create wealth over the long term. Portfolio Overview (click to enlarge) ACCO Brands (NYSE: ACCO ) You can read my previous analysis here . This company makes office supplies. Although there has been a shift away from paper-based products due to technological advancement and green initiatives, the company has delivered good results over the past couple of quarters. I admit that society is becoming increasingly reliant on electronics, however, I believe that things like binders (one of the products that the company makes) will remain prevalent in school and offices. To protect myself from a potential secular decline, I’ve allocated only a modest portion of the total portfolio to this stock. magicJack (NASDAQ: CALL ) As you can see, magicJack constitutes a significant portion of the current portfolio. You can read my analysis on the company here . Since I wrote the article in April, the stock has appreciated by around 25%. I think most people would be happy with a 25% return in less than six months, and may even sell the stock after a nice run. However, I believe that there remains substantial upside to this company, so I will keep the current allocation until fair value is reached or close to being reached. Due to the large amount of cash on the company’s balance sheet (which cushions its downside), I believe that the stock is relatively safe; hence, I’ve allocated a significant portion of assets to this stock. Conn’s (NASDAQ: CONN ) You can read my latest analysis here . Conn’s is one of my high conviction ideas. The company is a consumer retail company with a spin. Its primary customers are credit constrained (i.e. low credit) consumers. I think after the last financial crisis, investors have become automatically fearful when credit-related companies report increasing delinquencies. What they miss is that this is something that the management can easily control. Over the past couple of quarters, the management has significantly tightened credit policy in an attempt to decrease bad debt expense, all the while increasing sales. After the recent decline, I believe that there is once again significant upside for this stock, which is why I’ve put a large chunk of the portfolio in Conn’s. Dex Media (NASDAQ: DXM ) This is one of my more interesting holdings. There is a big chance that the company may go bankrupt. So why am I holding this you ask? Despite a declining business, the company is still generating a significant amount of cash ($136 million of cash form operation in H1). Given the low capex requirement ($4 million in H1), it is literally a cash cow. The only problem is that the company is saddled with debt, which stood at $2.2 billion at the end of the second quarter. Almost all of it will be due by the end of next year. There is absolutely no way that the company can afford to pay all of it out of pocket, so its future depends on whether the lenders will refinance. At the current price, the market is essentially betting that the equity holders will be completely wiped out. I, on the other hand, remain hopeful that the restructuring process will extend the bond maturities. Of course, this is a highly risky investment, as I could lose everything. For that reason, I’ve allocated only an extremely small portion of my portfolio to this stock. Intelsat (NYSE: I ) This is a satellite company. Similar to Dex Media, the company has a significant amount of debt. The difference is that the company remains profitable. There are significant barriers to entry, so I believe that the company can maintain its profitability. The problem is that it is fairly sensitive to rate increases. If the Fed raises interest rates, then it would cost more for the company to roll over its bonds. As it stands, however, I see substantial upside for this stock given the current financial profile. Nevertheless, the debt is a concern, so I’ve allocated only a modest portion of the portfolio to the stock. Perion Network (NASDAQ: PERI ) Perion Network is a technology company. Through its products, the company provides ways for software publishers to earn revenue by linking search results from major search providers such as Google and Microsoft. The products themselves are a bit dubious, with some critics calling them adwares. While the company is profitable, the stock was hit hard when Google decided to upgrade Chrome to enhance security, which prevented many of Perion’s products from being installed. However, I believe that the company’s products will continue to provide its partners (e.g. Microsoft) with search volume and are still a unique way for software publishers to monetize their content. Similar to magicJack, the company also has a large cash balance, which will protect losses in the short term. For the above reasons, I’ve decided to make it my third largest holding. How The Holdings Fit Together There is always systematic risk. This is the type of risk that I have no control over (e.g. a sector decline). However, I’ve tried to minimize this risk by diversifying my holdings into uncorrelated sectors. I believe that none of my holdings are tied to a single common factor that could influence their values. ACCO Brands manufactures office supplies, magicJack is a niche communication company, Conn’s is a sub-prime retailer, Dex Media is an advertising company, Intelsat is a satellite company, and Perion Network is a niche technology company. As you can see, none of the holdings have a clear overlap. However, I must admit that every stock will be influenced by an economic downturn. This goes back to the idea of systematic risk. Unfortunately, pretty much everything is tied to the economy, so I’ve decided to accept this risk for now. The second risk I want to talk about is a bit more elusive. I’m talking about the idea of permanent capital loss. Buffett supposedly said the following words: Over the years, a number of very smart people have learned the hard way that a long stream of impressive numbers multiplied by a single zero always equals zero. How do I apply this to my portfolio? Well, I believe that there are stocks whose potential upside is exceeding large; however, they are highly risky in the sense that it would be possible to lose everything. One such example in my portfolio is Dex Media. As mentioned earlier, there is no doubt in my mind that the company may go bankrupt over the next couple of years, which is why the company is trading at a depressed valuation in the first place. Nevertheless, I believe that the upside is extremely attractive should restructuring yield favorable results. There are a variety of factors in play here, but I will save those for another time. The bottom line is that I may lose the entire invested amount in Dex Media. Going back to Buffett’s quote, an easy way to get “impressive numbers” would be to invest your entire portfolio, so that should events transpire in your favor, you could achieve returns that would be out of this world. However, by doing so, you would be setting yourself up for the possibility of permanent capital loss if things don’t turn out the way you expect them to, and this is what I strive to eliminate from my portfolio. In the V20 Portfolio, you can see that DXM only constitutes a very minute (1.1%) portion. This means that I’ve limited my upside, but the portfolio will still enjoy a nice boost should the stock appreciate significantly, and I can sleep soundly even if the company goes bust. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Scalper1 News
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